10-Q/A 1 y39776ae10-qa.txt SLEEPMASTER L.L.C. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter ended June 30, 2000. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition from _________ to _________. Commission file number 333-81987 SLEEPMASTER L.L.C. (Exact name of registrant as it appears in its charter) New Jersey 22-3341313 (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 2001 Lower Road, Linden, New Jersey 07036-6520 (Address of principal executive offices) (Zip Code) (732) 381-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] All of the registrant's voting and nonvoting membership interests are held by affiliates of the registrant. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practical date: Class A common units, no par value - 8,000 units as of August 14, 2000 Class B common units, no par value - 0 units as of August 14, 2000 2 SLEEPMASTER L.L.C. FORM 10-Q/A FOR THE QUARTER ENDED JUNE 30, 2000 INDEX

2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SLEEPMASTER L.L.C. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) (UNAUDITED)

* Restated Refer to note 9 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 SLEEPMASTER L.L.C. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)

* Restated Refer to note 9 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 SLEEPMASTER L.L.C. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

* Restated Refer to note 9 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 SLEEPMASTER L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Sleepmaster L.L.C. ("Sleepmaster") and all majority-owned domestic and foreign subsidiaries (the "Company"). All material intercompany transactions and balances have been eliminated. The interim statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position as of June 30, 2000 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data at December 31, 1999 is derived from the audited financial statements which are included in the Company's Form 10-K/A for the year ended December 31, 1999 and which should be read in connection with these financial statements. In accordance with the rules of the Securities and Exchange Commission, these financial statements do not include all disclosures required by generally accepted accounting principles. Operating results for the three and six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2000. Certain reclassifications of previously reported financial information were made to conform to the 2000 presentation. 2. ACQUISITIONS On April 28, 2000, Sleepmaster acquired all the capital stock of Simon Mattress Manufacturing Co. ("Simon ")for approximately $42,623,000 in cash. Sleepmaster financed the acquisition using proceeds from a second amended and restated credit facility. On June 30, 2000, Sleepmaster acquired all the capital stock of Crescent Sleep Products Company ("Crescent") for approximately $118,277,000 in cash. Sleepmaster financed the acquisition using proceeds from a third amended and restated credit facility, the issuance of an additional $25,000,000 of senior subordinated notes, and $41,500,000 of equity from a group of investors and certain members of Crescent's management. Sleepmaster remitted $11,293,000 of the proceeds from the amended credit facility to the sellers of Crescent on July 5, 2000, which is classified as a current payable at June 30, 2000. These acquisitions were accounted for under the purchase method and, accordingly, Simon's and Crescent's results are included in the consolidated financial statements since their respective dates of acquisition. The assets acquired and liabilities assumed have been recorded at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill and is being amortized over 40 years. A summary of the purchase price allocations (in thousands) is as follows:

6 7 The following summarized unaudited pro forma financial information (in thousands) for the six month periods ended June 30, 2000 and 1999 assumes that the acquisitions of Simon and Crescent were consummated on January 1, 1999. This information is not necessarily indicative of the results that the Company would have achieved had these events actually occurred on such dates or of the Company's actual or future results.

The unaudited pro forma (loss) income before extraordinary items, for the six months ended June 30, 2000, includes one- time transaction related expenses for legal and investment banker fees of approximately $2,837,000. 3. INVENTORIES Inventories consist of the following (in thousands):

4. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):

5. DEBT On April 28, 2000, the Company expanded and restated its existing credit facility to provide for an aggregate amount of borrowings of up to $103,875,000, comprising a $33,000,000 revolving credit facility, a $35,875,000 amortizing term loan facility and a $35,000,000 incremental amortizing term loan facility (the "Second Amended and Restated Credit Facility"). The terms of the Second Amended and Restated Credit Facility were substantially equivalent to those of the prior facility. Borrowings under the Second Amended and Restated Credit Facility were used to finance the acquisition of Simon. On June 30, 2000, in connection with the acquisition of Crescent, the Company issued an additional $25,000,000 of 13.4% senior subordinated notes due November, 2009. Also on June 30, 2000, the Company entered into a third amended and 7 8 restated credit agreement to provide for an aggregate amount of borrowings of up to $172,500,000, comprising a $40,000,000 5.5 year revolving credit facility, a 5.5 year Tranche A term loan of $57,500,000 and a 6.5 year Tranche B term loan of $75,000,000 (the "Third Amended and Restated Credit Facility"). This new facility includes a letter of credit sublimit of $25,000,000. Similar to the prior credit facility entered into on November 5, 1999, borrowings under this credit facility bear interest at floating rates based on LIBOR or applicable alternative base rates. Sleepmaster financed the acquisition of Crescent using proceeds from the Third Amended and Restated Credit Facility, the issuance of the $25,000,000 of senior subordinated notes, and $41,500,000 of equity from a group of investors and certain members of Crescent's management. In connection with the Third Amended and Restated Credit Facility, the Company wrote-off unamortized debt issuance costs. One bank included in the syndication of banks which were part of the Second Amended and Restated Credit Facility did not continue in the syndication of banks in connection with the Third Amended and Restated Credit Facility and its debt was extinguished. An extraordinary loss of $208,000, net of the associated income tax benefit, was recorded in connection with this extinguishment. In accordance with the Emerging Issues Task Force No. 98-14, for banks which continued with the syndication of banks in connection with the Third Amended and Restated Credit Facility, a charge to interest expense of $564,000 to write-off unamortized debt issuance costs was recorded. At June 30, 2000, the Company was not in compliance with two financial covenants contained in the Third Amended and Restated Credit Facility (1) the Interest Coverage Ratio and (2) the Minimum Consolidated EBITDA. The failure to comply with these covenants constituted an event of default. On September 19, 2000 the lenders granted a waiver for the debt covenant violations and an amendment to the Third Amended and Restated Credit Facility (the "Waiver and First Amendment to the Third Amended and Restated Credit Facility" or the "Waiver and Amendment"). The Waiver and Amendment also modified various financial covenants going forward including the two identified above. 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the staff of the Securities and Exchange Commission issued SAB 101, "Revenue Recognition in Financial Statements," which addressed some of the staff's concerns over the application of Generally Accepted Accounting Principles for revenue recognition. The Company is currently evaluating the impact, if any, of SAB 101, as amended, on its results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company presently does not have any derivative instruments or hedging activities and, consequently, SFAS No. 133 is not expected to have a material impact on the Company's results of operations, financial position or cash flow. 7. SUPPLEMENTAL CASH FLOW INFORMATION The Company recorded a charge to retained earnings (deficit) of $1,221,000 and $1,111,000 for the six months ended June 30, 2000 and 1999, respectively, representing the accretion of redeemable cumulative preferred interests at a compounded annual rate of 12%. 8 9 8. GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION As of May 18, 1999 and June 30, 2000, Sleepmaster and each of its domestic wholly owned subsidiaries ("Guarantor Subsidiaries") fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the $115,000,000 of 11% senior subordinated notes due 2009 and the $25,000,000 of 13.4% senior subordinated notes due 2009 (the "Notes"), respectively. The Company generates funds necessary to satisfy its debt service obligations from either its own operations or by distributions or advances from its subsidiaries. There are no contractual or legal restrictions that could limit the Company's ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Notes. Although holders of the Notes will be direct creditors of Sleepmaster's principal direct subsidiaries by virtue of the guarantees, Sleepmaster has a foreign subsidiary ("Non-Guarantor Subsidiary") that is not included among the Guarantor Subsidiaries and such subsidiary will not be obligated with respect to the Notes. As a consequence, the claims of creditors of the Non-Guarantor Subsidiary will effectively have priority with respect to the assets and earnings of this subsidiary over the claims of creditors of Sleepmaster, including the holders of the Notes. The following supplemental condensed consolidating financial statements present: 1. Condensed consolidating statements of income for the three and six months ended June 30, 2000 and 1999, respectively; condensed consolidating balance sheets as of June 30, 2000 and December 31, 1999 condensed consolidating statements of cash flows for the six months ended June 30, 2000 and 1999. 2. Sleepmaster, combined Guarantor Subsidiaries and Non-Guarantor Subsidiary with their investments in subsidiaries accounted for using the equity method. 3. Elimination entries necessary to consolidate Sleepmaster and all of its subsidiaries. 9. RESTATEMENT Subsequent to filing its Form 10Q for the quarter ended June 30, 2000, the Company discovered an error in its provision for income taxes, and the goodwill and deferred income taxes liabilities recorded in the acquisition of Simon and Crescent for the three and six month periods ended. The impact of the correction of these errors was to reduce income before extraordinary items and net income by $56,000. 8.1 10 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS)

9 11 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)

10 12 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS)

11 13 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)

12 14 \ SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)

13 15 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999 (IN THOUSANDS)

14 16 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS)

15 17 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS)

16 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's results of operations and of its liquidity and capital resources should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the related Notes thereto included elsewhere herein. GENERAL Sleepmaster acquired the stock of Crescent on June 30, 2000, the stock of Simon on April 28, 2000, substantially all of the assets of Adam Wuest Inc. and Adam Wuest Realty (collectively "Adam Wuest") on November 5, 1999, substantially all of the assets of Star Bedding Products (1986) Limited ("Star") on May 18, 1999 and the stock of Herr Manufacturing Company ("Herr") on February 26, 1999. Each of these acquisitions has been accounted for using the purchase method of accounting. The Company's historical results of operations reflect the results of the acquired businesses since their respective dates of acquisition. Therefore, the historical operating results of the Company for the periods presented are not necessarily comparable. QUARTER ENDED JUNE 30, 2000 AS COMPARED TO QUARTER ENDED JUNE 30, 1999 Net Sales. Net sales increased 60.8%, or $24.1 million, to $63.9 for the quarter ended June 30, 2000, from $39.8 million for the quarter ended June 30, 1999. A significant portion of the increase was due to the contribution of net sales from Star, acquired on May 18, 1999, Adam Wuest, acquired on November 5, 1999 and Simon, acquired on April 28, 2000. Net sales contributed by Star, Adam Wuest and Simon in the second quarter of 2000 were $25.1 million. Excluding these acquisitions, net sales increased by 3.5%, or $1.3 million, for the second quarter of 2000. Generally, higher unit sales volumes and higher average unit selling prices resulting from shifts in product sales mix toward higher priced products contributed to this increase. Cost of Sales. Cost of sales increased 59.5%, or $14.8 million, to $39.6 for the second quarter of 2000, from $24.8 million for the second quarter of 1999. Cost of sales as a percentage of net sales decreased from 62.4% in 1999 to 61.9% in 2000. Margins were favorably impacted by Sleepmaster successfully obtaining volume-related cost savings on raw material purchases as a result of the acquisitions of Star, Adam Wuest and Simon. This impact was offset by an increase in direct labor costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") increased 68.2%, or $6.7 million, to $16.5 million for the second quarter of 2000 from $9.8 million for the similar period of 1999. The increase in SG&A is primarily due to the SG&A associated with the Company's acquisitions of Star, Adam Wuest and Simon. SG&A as a percentage of sales increased to 25.9% in the second quarter of 2000 from 24.7% in the second quarter of 1999. This increase is primarily attributable to the increase in corporate costs associated with the aforementioned acquisitions. Amortization of Intangibles. Amortization of intangibles increased $0.6 million to $1.1 million for the second quarter of 2000 from $0.5 for the second quarter of 1999. The increase is a result of the intangible assets acquired in connection with the acquisitions of Star, Adam Wuest and Simon. Interest Expense, Net. Interest expense increased $3.0 million to $5.8 million for the quarter ended June 30, 2000 from $2.8 million for the quarter ended June 30, 1999. This increase was due primarily to the cost of additional debt financing incurred for the acquisitions of Adam Wuest and Simon, the issuance of senior subordinated notes on May 18, 1999 and the write-off of $0.6 million of unamortized debt issuance costs in the second quarter of 2000. 17 19 Provision for Income Taxes. The provision for income taxes resulted in an effective tax rate of 42.9% in the second quarter of 2000, down from 47.0% in the second quarter of 1999. The effective tax rate decreased due to the expansion of business activities into lower tax jurisdictions as a result of the aforementioned acquisitions. Extraordinary Items. The extraordinary item recorded in the second quarter of 2000 consisted of a write-off of unamortized debt issuance costs, net of the associated income tax benefit of $208,000 and was recorded in connection with the Company's third amended credit facility. The extraordinary item recorded in the second quarter of 1999 consisted of the payment of $3.6 million in premiums on the redemption of $20 million in aggregate principal amount of Series A and Series B 12% Subordinated Notes and repayment of $69.2 million of borrowings under the Company's former credit facility, together with the write-off of $1.8 million of unamortized debt issuance costs relating to such redemption and repayment on May 18, 1999, less an income tax benefit totaling $2.3 million. Net Income. As a result of the above factors, net income increased by $2.5 million, to $0.3 million for the quarter ended June 30, 2000 compared to the net loss of $2.2 million for the quarter ended June 30, 1999. SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Net Sales. Net sales increased 62.2%, or $46.0 million, to $120.0 for the six months ended June 30, 2000, from $74.0 million for the six months ended June 30, 1999. A significant portion of the increase was due to the contribution of net sales from Herr, acquired on February 26, 1999, Star, acquired on May 18, 1999, Adam Wuest, acquired on November 5, 1999 and Simon, acquired on April 28, 2000. Net sales contributed by Herr, Star, Adam Wuest and Simon for the six months were $53.1 million. Excluding these acquisitions, net sales increased by 4.9%, or $3.1 million, for the six months ended June 30, 2000. Generally, higher unit sales volumes and higher average unit selling prices resulting from shifts in product sales mix toward higher priced products contributed to this increase. Cost of Sales. Cost of sales increased 61.5%, or $28.3 million, to $74.4 for the first half of 2000, from $46.1 million for the first half of 1999. Cost of sales as a percentage of net sales decreased slightly from 62.3% in 1999 to 62.0% in 2000. Margins were favorably impacted by Sleepmaster successfully obtaining volume-related cost savings on raw material purchases as a result of the acquisitions of Star, Adam Wuest and Simon. This impact was offset by an increase in direct labor costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") increased 69.0%, or $12.6 million, to $30.8 million for the first half of 2000 from $18.2 million for the similar period of 1999. The increase in SG&A is primarily due to the SG&A associated with the Company's acquisitions of Herr, Star, Adam Wuest and Simon. SG&A as a percentage of sales increased to 25.7% in 2000 from 24.6% in 1999. This increase is primarily attributable to the increase in corporate costs associated with the aforementioned acquisitions. Amortization of Intangibles. Amortization of intangibles increased $1.1 million to $1.9 million for the first half of 2000 from $0.8 for the similar period of 1999. The increase is a result of the intangible assets acquired in connection with the acquisitions of Herr, Star, Adam Wuest and Simon. Interest Expense, Net. Interest expense increased $5.4 million to $10.3 million for the first half of 2000 from $4.9 million for the first half of 1999. This increase was due primarily to the cost of additional debt financing incurred for the acquisitions of Adam Wuest and Simon, the issuance of senior subordinated notes on May 18, 1999 and the write-off of $0.6 million of unamortized debt issuance costs in the first half of 2000. 18 20 Provision for Income Taxes. The provision for income taxes resulted in an effective tax rate of 40.5% in the first half of 2000, down from 43.3% in the first half of 1999. The effective tax rate decreased due to the expansion of business activities into lower tax jurisdictions as a result of the aforementioned acquisitions. Extraordinary Items. The extraordinary item recorded in the first half of 2000 consisted of a write-off of unamortized debt issuance costs, net of the associated income tax benefit, of $208,000 and was recorded in connection with the Company's third amended credit facility. The extraordinary item recorded in the first half of 1999 consisted of the payment of $3.6 million in premiums on the redemption of $20 million in aggregate principal amount of Series A and Series B 12% Subordinated Notes and repayment of $69.2 million of borrowings under the Company's former credit facility, together with the write-off of $1.8 million of unamortized debt issuance costs relating to such redemption and repayment on May 18, 1999, less an income tax benefit totaling $2.3 million. Net Income. As a result of the above factors, net income increased by $2.2 million, to $1.3 million for the first half of 2000 compared to a net loss of $0.9 million for the first half of 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to fund its liquidity needs is net cash provided by operating activities and availability under its current credit facility. Cash and cash equivalents increased by $10.6 million to $13.4 million as of June 30, 2000 from $2.8 million at December 31, 1999. Included in cash and cash equivalents at June 30, 2000 was an amount of $11,293,000 received as part of the proceeds from the Third Amended and Restated Credit Facility, and for which there was a corresponding payable at June 30, 2000 to the sellers of Crescent. Net cash provided by operating activities totaled $19.8 million for the six months ended June 30, 2000 compared to $4.2 for the six months ended June 30, 1999. The increase in cash flows from operations is primarily a result of the acquisitions of Herr, Star, Adam Wuest and Simon and the aforementioned proceeds due to the sellers of Crescent. At June 30, 2000, the Company was not in compliance with two financial covenants contained in the Third Amended and Restated Credit Facility (1) the Interest Coverage Ratio and (2) the Minimum consolidated EBITDA. The interest coverage ratio requires a minimum ratio of 1.80 and the actual was 1.73 at June 30, 2000. The minimum consolidated EBITDA covenant required a minimum of $56,000,000 (which is a 12 month rolling computation) and the actual was $55,312,000 at June 30, 2000. The principal reason the Company did not meet these two covenants was an increase in the competitive environment. The Company has implemented various steps to reverse this trend. The failure to comply with these covenants constituted an event of default. On September 19, 2000 the lenders granted a waiver for the debt covenant violations and an amendment to the Third Amended and Restated Credit Facility (the "Waiver and First Amendment to the Third Amended and Restated Credit Facility" or the "Waiver and Amendment"). The Waiver and Amendment also modified various financial covenants going forward including the two identified above. The minimum consolidated EBITDA was reset to $50,000,000 for the quarterly period ending September 30, 2000 and the interest coverage ratio was reset to a minimum of 1.50 for the period July 1, 2000 through December 31, 2000. The Company expects to comply with all of the covenants and conditions of the Third Amended and Restated Credit Facility, as amended, but there is no assurance that the Company will not require additional waivers in the future, or if required, the lenders will grant them. Sleepmaster generated $153.7 million of cash inflows from financing activities during the first half of 2000, principally arising from borrowings under increased credit facilities to acquire Simon and Crescent, the issuance of $25.0 million of 13.4% senior subordinated notes, and $41.5 million of equity contributed by a group of investors and various members of Crescent's management. Financing cash flows during the first half of 1999 of $40.5 million arose primarily from net proceeds from the issuance on May 18, 1999 of $115.0 million of 11% senior subordinated notes, a portion of which was used to prepay the existing credit facility, redeem the existing senior subordinated notes and complete the acquisition of Star. Capital expenditures totaled $2.0 million for the six months ended June 30, 2000. These capital expenditures consisted primarily of normal recurring capital expenditures. Management expects that capital expenditures at all of its existing facilities will be approximately $4.5 million in 2000. Management believes that annual capital expenditure limitations under its current credit facility will not significantly inhibit Sleepmaster from meeting its capital needs. On April 28, 2000, Sleepmaster amended and restated its existing credit facility to provide for borrowings of up to $103,875,000, comprising a $33,000,000 revolving credit facility, a $35,875,000 amortizing term loan facility and a $35,000,000 incremental amortizing term loan facility (the "Second Amended and Restated Credit Facility"). The terms of the Second Amended and Restated Credit Facility were substantially equivalent to those of the prior facility. On June 30, 2000, the Company issued an additional $25,000,000 of 13.4% senior subordinated notes due November 2009. Sleepmaster used the proceeds of the senior subordinated notes to acquire all the capital stock of Crescent. Also on June 30, 2000, in connection with the acquisition of Crescent, the Company entered into a third amended and restated credit agreement to provide for an aggregate amount of borrowings of up to $172,500,000, comprising a $40,000,000 revolving credit facility, a Tranche A term loan of $57,500,000 and a Tranche B term loan of $75,000,000 (the "Third Amended and Restated Credit Facility"). Similar to the prior credit facility, the revolving credit facility includes a sublimit for letters of credit of $25.0 million. At June 30, 2000, the Company had approximately $17.4 million available under its revolving credit facility with letters of credit issued totaling approximately $18.6 million. 19 21 Management believes that cash flows generated from operations, together with its borrowing capacity, are sufficient to support the Company's operations and general business and liquidity requirements for the foreseeable future. YEAR 2000 In order to minimize or eliminate the effect of the Year 2000 risk on the Company's business systems and applications, the Company identified, evaluated, implemented and tested changes to its computer systems, applications and software necessary to achieve Year 2000 compliance. The computer systems and equipment successfully transitioned to the Year 2000 with no significant issues. The Company continues to keep its Year 2000 project management in place to monitor latent problems that could surface at key dates or events in the future. Management does not anticipate any significant problems related to these events. The total cost of the Year 2000 compliance program was approximately $650,000 and was incurred principally during the first two quarters of 1999. The Company expensed and capitalized the costs to complete its compliance plan in accordance with appropriate accounting policies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from fluctuations in interest rates, which could impact its consolidated financial position, results of operations and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities. The Company does not use derivative financial instruments for speculative or trading purposes and does not maintain such instruments that may expose the Company to significant market risk. The Company's earnings are sensitive to changes in short-term interest rates as a result of its borrowings under the amended and restated credit facility. The Company also manages its portfolio of fixed-rate debt to reduce its exposure to interest rate changes. The fair value of the Company's fixed-rate long-term debt is sensitive to interest rate changes. Interest rate changes would result in gains or losses in the fair value of this debt due to differences between market interest rates and rates at the inception of the obligation. Management does not foresee nor expect any significant changes in its exposure to interest rate fluctuations, or in how such exposure is managed in the near future. FORWARD LOOKING STATEMENTS AND RISK FACTORS This document contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes its plans are based upon reasonable assumptions as of the current date, it can give no assurance that such expectations can be attained. Factors that could cause actual results to differ materially from the Company's expectations include; general business and economic conditions; competitive factors; raw materials availability and pricing; fluctuations in demand; and retention and availability of qualified employees. 20 22 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is, from time to time, a party to litigation arising in the normal course of business, most of which involves claims for personal injury and property damage incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position, results of operations or cash flows, of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule. (b) Reports on Form 8-K: Report on Form 8-K/A, filed September 13, 2000, concerning the Company's acquisition of Crescent Sleep Products Company. Report on Form 8-K/A, filed on July 12, 2000, concerning the Company's acquisition of Simon Mattress Manufacturing Company. 21 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Linden, State of New Jersey. SLEEPMASTER L.L.C. By: /s/ Charles Schweitzer -------------------------------------- President and Chief Executive Officer Dated: September 21, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

SLEEPMASTER LLC 10-Q/A