10-Q 1 y49367ae10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarter ended March 31, 2001. [ ] 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)

(908) 986-5000 (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 May 21, 2001 Class B common units, no par value - 0 units as of May 21, 2001 2 SLEEPMASTER L.L.C. FORM 10-Q FOR THE QUARTER ENDED March 31, 2001 INDEX

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

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)

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)

(1) Depreciation and amortization totaled $3,230 and $1,417 for the three months ended March 31, 2001 and 2000, respectively. 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 (ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Sleepmaster L.L.C. ("we," "us" or "our") and all of our domestic and foreign subsidiaries. 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 our financial position as of March 31, 2001 and the results of our operations and cash flows for the interim periods presented. Our condensed consolidated balance sheet data at December 31, 2000 is derived from the audited financial statements which are included in our Form 10-K for the year ended December 31, 2000 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 months ended March 31, 2001 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2001. Certain reclassifications were made to previously reported financial information to conform to the current year presentation. 2. ACQUISITIONS On April 28, 2000, we acquired all of the capital stock of Simon Mattress Manufacturing Co. ("Simon ") for approximately $42.6 million in cash. We financed the acquisition using proceeds from our second amended and restated credit facility. On June 30, 2000, we acquired all the capital stock of Crescent Sleep Products Company ("Crescent") for approximately $118.4 million in cash. We financed the acquisition using proceeds from our third amended and restated credit facility, the issuance of an additional $25.0 million of senior subordinated notes, and $41.5 million of equity from a group of investors and certain members of Crescent's and our management. 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 on the books and records of Simon and Crescent and is being amortized over 40 years. A summary of the purchase price allocations is as follows:

6 7 SLEEPMASTER L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED) The following summarized unaudited pro forma financial information for the three month period ended March 31, 2000 assumes that the acquisitions of Simon and Crescent were consummated on January 1, 2000. This information is not necessarily indicative of the results that we would have achieved had these events actually occurred on such dates or of our actual or future results.

3. INVENTORIES Inventories consist of the following:

4. ASSETS HELD FOR SALE On February 9, 2001, we sold a building in Vacaville, California belonging to Simon. The building was sold for $0.8 million in cash and a $2.0 million interest only note receivable, which carries an interest rate of 11%, and with principal due in 2003. No gain or loss was recorded on the sale of the Vacaville facility. 5. DEBT On April 28, 2000, we amended and restated our existing credit facility to provide for borrowings of up to $103.9 million, comprising a $33.0 million revolving credit facility, a $35.9 million amortizing term loan facility and a $35.0 million 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, we issued an additional $25.0 million of 13.4% senior subordinated notes due November 2009 and received a $41.5 million equity investment from a group of existing investors and certain members of Crescents' management. On June 30, 2000, in connection with the acquisition of Crescent, we entered into a third amended and restated credit agreement to provide for an aggregate amount of borrowings of up to $172.5 million, comprising a $40.0 million 5.5 year revolving credit facility, a 5.5 year Tranche A term loan of $57.5 million and a 6.5 year Tranche B term loan of $75.0 million (the "Third Amended and Restated Credit Facility"). Borrowings under the Third Amended and Restated Credit Facility bear interest at floating rates that are based on LIBOR, plus an applicable margin or on the applicable alternate base rate and, accordingly, our financial condition and performance will be affected by changes in interest rates. This new facility includes a letter of credit sublimit of $25.0 million. We used all the proceeds of the senior subordinated notes and the equity investment and a portion of the proceeds of the Third Amended and Restated Credit Facility to acquire all of the capital stock of Crescent. 7 8 SLEEPMASTER L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED) In connection with the Third Amended and Restated Credit Facility, we wrote-off unamortized debt issuance costs. One bank included in the syndication of banks which was 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 $0.2 million, net of the associated income tax benefit of $0.1 million, was recorded in connection with this extinguishment for the year ended December 31, 2000. In accordance with the Emerging Issues Task Force Bulletin No. 98-14, for banks which continued in the syndication of banks in connection with the Third Amended and Restated Credit Facility that reduced their borrowing capacity, a charge to interest expense of $0.6 million was recorded to write off unamortized debt issuance costs. At March 31, 2001, we were not in compliance with five financial covenants contained in the Waiver and First Amendment to the Third Amended and Restated Credit Facility (1) the Leverage Ratio (2) the Senior Leverage Ratio (3) the Fixed Charge Coverage Ratio (4) the Interest Coverage Ratio and (5) the Minimum Consolidated EBITDA requirement. The failure to comply with these covenants constituted an event of default. On May 15, 2001 the lenders granted a waiver for the debt covenant violations as of March 31, 2001 and entered into a second amendment to the Third Amended and Restated Credit Facility (the "Waiver and Second Amendment to the Third Amended and Restated Credit Facility" or the "Waiver and Second Amendment"). Additionally, the Waiver and Second Amendment modified various financial covenants going forward including the ones identified above and added a new minimum liquidity financial covenant and several non-financial covenants and requirements. 6. RECENT ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged and specifies detailed criteria to be met to qualify for hedge accounting. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years beginning after September 15, 2000. We adopted this statement as of January 1, 2001 and it did not have an effect on our results of operations or our financial position. 7. SUPPLEMENTAL CASH FLOW INFORMATION We recorded a charge to accumulated deficit of $0.5 million and $0.6 million for the three months ended March 31, 2001 and 2000, respectively, representing the accretion of redeemable cumulative preferred interests at a compounded annual rate of 12%. 8. COMPREHENSIVE INCOME The only component of our accumulated other comprehensive income is foreign currency translation adjustments and consists of the following:

8 9 SLEEPMASTER L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED) 9. SUBSEQUENT EVENTS On May 15, 2001, in connection with obtaining the Waiver and Second Amendment we and Sleepmaster Holdings L.L.C. ("Holdings") entered into a Unsecured Senior Note and Warrant Purchase Agreement with Citicorp Venture Capital, Ltd. ("CVC") and PMI Mezzanine Fund, L.P. ("PMI") pursuant to which we issued $15.0 million of 14% pay-in-kind Unsecured Senior Notes due 2007 for an aggregate purchase price of $15.0 million. As required by the Unsecured Senior Note agreement (i) $5.0 million of the proceeds were used to pay down our term A and term B loans on a pro-rata basis, and (ii) $10.0 million of the proceeds were used to pay down our revolving credit facility. Also on May 15, 2001, in conjunction with the sale of the Unsecured Senior Notes pursuant to the Unsecured Senior Note and Warrant Purchase Agreement, Holdings issued CVC and PMI warrants to purchase 3,670.35 and 1,498.43 warrant interests, respectively. The warrant interests are exercisable at any time until May 15, 2011 for Class C Units of Holdings at an exercise price of $0.01 per unit, subject to adjustment. 10. TAXES For the quarter ended March 31, 2001, we recorded a tax benefit of $1.8 million. Our projected annualized effective tax rate for 2001 is 110.0% due primarily to non-deductible goodwill related to the Simon and Crescent acquisitions, and operating losses for state tax purposes for which no benefit is realized. 11. GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION We and each of our 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 11% and 13.4% senior subordinated notes. We generate funds necessary to satisfy our debt service obligations from either our own operations or by distributions or advances from our subsidiaries. There are no contractual or legal restrictions that could limit our ability to obtain cash from our subsidiaries for the purpose of meeting our debt service obligations, including the payment of principal and interest on the 11% and 13.4% senior subordinated notes. Although holders of the 11% and 13.4% senior subordinated notes will be direct creditors of our principal direct subsidiaries by virtue of the guarantees, we have 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 11% and 13.4% senior subordinated 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 such company over the claims of our creditors, including the holders of the 11% and 13.4% senior subordinated notes. 9 10 SLEEPMASTER L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (ALL AMOUNTS IN THOUSANDS UNLESS OTHERWISE NOTED) The following presents the supplemental consolidating condensed financial statements: SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS)

SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS)

10 11 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2001 (IN THOUSANDS)

11 12 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN THOUSANDS)

12 13 SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS)

SLEEPMASTER L.L.C. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS)

13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our results of operations and of our 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 We acquired all of the stock of Simon on April 28, 2000 and all of the stock of Crescent on June 30, 2000. Each of these acquisitions has been accounted for using the purchase method of accounting. Our historical results of operations reflect the results of the acquired businesses since their respective dates of acquisition. Therefore, our historical operating results for the periods presented are not necessarily comparable. THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 Net Sales - Net sales increased 55.6%, or $31.2 million, to $87.3 million for the quarter ended March 31, 2001, from $56.1 million for the quarter ended March 31, 2000. All of the increase was attributable to the contribution of net sales from Simon, acquired on April 28, 2000, and Crescent, acquired on June 30, 2000. The increase in net sales attributable to Simon and Crescent in the first quarter of 2001 totaled $32.6 million. Excluding the aforementioned acquisitions net sales decreased by 0.2%, or $1.4 million, for the first quarter of 2001 as compared to the same period in the prior year. The decline is due primarily to a decrease in unit volume and selling price related to the increased competitive environment and the overall downturn in the economy during the three months ended March 31, 2001 as compared to the same period in the prior year. Cost of Sales - Cost of sales increased 58.0%, or $20.2 million, to $55.0 for the first quarter of 2001, from $34.8 million for the same period in the prior year. Substantially all of the increase was attributable to increased cost of sales from Simon, acquired on April 28, 2000, and Crescent, acquired on June 30, 2000. The increase attributable to Simon and Crescent in the first quarter of 2001 totaled $19.5 million. Excluding the aforementioned acquisitions cost of sales increased by $0.7 million for the first quarter of 2001 as compared to the same period in the prior year. This increase is due primarily to additional costs incurred related to the launch of our Easycare, no flip, product line. Cost of sales as a percentage of net sales increased to 63.0% in the first quarter of 2001 from 62.0% in the first quarter of 2000. The following factors contributed to the increase: (1) labor costs, and (2) rising raw material costs. Selling, General and Administrative - Selling, general and administrative expenses ("SG&A") increased 67.8%, or $9.7 million, to $24.0 million for the first quarter of 2001 from $14.3 million for the same period in the prior year. Substantially all of the increase was attributable to increased SG&A cost from Simon, acquired on April 28, 2000, and Crescent, acquired on June 30, 2000. The increase attributable to Simon and Crescent in the first quarter of 2001 totaled $9.9 million. Excluding the aforementioned acquisitions SG&A decreased by $0.2 million for the first quarter of 2001 as compared to the same period in the prior year. This decrease was due primarily to decreases in co-op advertising, administrative expenses and other selling expenses, which were offset by increases in shipping expenses. SG&A as a percentage of sales increased to 27.5% in the first quarter of 2001 from 25.5% in the first quarter of 2000. The following factors contributed to the increase: (1) the acquisitions of Simon and Crescent, and (2) increased shipping costs as a result of higher fuel costs in 2001 as compared to 2000. 14 15 Amortization of Intangibles - Amortization of intangibles increased $1.1 million to $1.9 million for the first quarter of 2001 from $0.8 for the same period in the prior year. This increase is the result of additional amortization relating to additional goodwill and licenses in connection with the acquisitions of Simon and Crescent. Interest Expense, Net - Interest expense increased $3.5 million to $8.0 million for the quarter ended March 31, 2001 from $4.5 million for the same period in the prior year. The increase was due primarily to the cost of additional debt financing incurred for the acquisitions of Simon and Crescent. The increase was slightly offset by decreases in interest rates. Benefit/Provision for Income Taxes - For the first quarter of 2001 we recorded an income tax benefit of $1.8 million. Our projected annualized effective tax rate for 2001 is 110.0% due primarily to non-deductible goodwill related to the Simon and Crescent acquisitions, and operating losses for state tax purposes for which no benefit is realized. The provision for income taxes of $0.6 million for the first quarter of 2000 resulted in an effective tax rate of 39.1%. Net Income - As a result of the above factors, net income decreased by $0.8 million, to income of $0.2 million in the first quarter of 2001 from income of $1.0 million for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to fund our liquidity needs was net cash provided by financing activities (i.e., availability under our third amended and restated credit facility). We had funds available under our existing third amended and restated credit facility totaling $2.5 million at March 31, 2001. Historically, our principal uses of funds provided by operating activities consist of acquisitions of other Serta licenses, payments of principal and interest on our indebtedness and capital expenditures. Cash and cash equivalents decreased by $0.7 million to $1.0 million as of March 31, 2001 from $1.7 million for the same period in the prior year. We used $3.3 million of net cash in our operations for the first quarter ended March 31, 2001 as compared to generating $3.8 million of net cash for the same period in the prior year. This change was due primarily to increases in accounts receivable, other current and long-term assets and decreases in other current and long-term liabilities offset by increases in accounts payable and accrued interest. The increase in accounts receivable is attributable to a significant increase in sales for the February and March period of 2001 as compared to the November and December period of 2000 ($2.4 million increase) for Serta New York as well as the erosion in the timing of payments received from customers. The increase in accounts payable was attributable to the timing of payments made to vendors. Cash used in investing activities increased by $0.7 million to $1.2 million as of March 31, 2001 from $0.5 million for the same period in the prior year. Capital expenditures totaled $2.0 million for the first quarter of 2001 as compared to $0.5 million for the same period in the prior year. The increase in expenditures in 2001 was primarily attributable to continued activity at our new manufacturing facility located in California as well as additional spending related to the implementation of a new IT system at our Linden facility. The balance of the increase in capital expenditures was for machinery and equipment at all facilities. Offsetting our capital expenditures were proceeds we received from the sale of a building at Simon. We received proceeds of $0.8 million in cash and a note receivable for $2.0 million in exchange for the building. Management expects that capital expenditures at all our facilities will be approximately $7.0 million in 2001. Additionally, management believes that annual capital expenditure limitations under the third amended and restated credit facility will not significantly inhibit us from meeting our capital needs. 15 16 We generated $3.5 million of cash inflows from financing activities in the first quarter of 2001, principally arising from borrowings under our revolving line of credit compared with cash outflows of $4.4 million for the same period in the prior year. The outflows during the first quarter of 2000 were primarily due to repayments of long-term debt and payments made on our revolving line of credit. At March 31, 2001, we were not in compliance with five financial covenants contained in the Waiver and First Amendment to the Third Amended and Restated Credit Facility; (1) the Leverage Ratio (2) the Senior Leverage Ratio (3) the Interest Coverage Ratio (4) the Fixed Charge Coverage Ratio and (5) the Minimum Consolidated EBITDA requirement. The leverage ratio required a maximum ratio of 5.75 and our actual ratio was 6.12, the senior leverage ratio required a maximum ratio of 2.75 and our actual ratio was 3.04, the interest coverage ratio required a minimum ratio of 1.60 and our actual ratio was 1.58 and the fixed charge coverage ratio required a minimum ratio of 1.05 and our actual ratio was 1.01 at March 31, 2001. The minimum consolidated EBITDA covenant required a minimum of $52 million (which is a 12-month rolling computation) and our actual consolidated EBITDA was $48.8 million at March 31, 2001. The principal reasons we did not meet these covenants was a slowdown in the general economy, an increase in the competitive environment and additional costs incurred related to the launch of our Easycare, no flip, product line. We have implemented various steps to increase our competitive position, including improved marketing efforts, introduction of a new product line and more effective cost control programs. The failure to comply with these covenants constituted an event of default under the Waiver and First Amendment to the Third Amended and Restated Credit Facility. On May 15, 2001, the lenders granted a waiver for the debt covenant violations as of March 31, 2001 and entered into a second amendment to the Third Amended and Restated Credit Facility (the "Waiver and Second Amendment"). The Waiver and Second Amendment also modified various financial covenants going forward, including the financial covenants identified above and added a new minimum liquidity financial covenant and several new non-financial covenants and requirements. The Leverage Ratio was reset to a maximum of 6.25 for the period October 1, 2002 through March 31, 2003, the Senior Leverage Ratio was reset to a maximum ratio of 3.25 for the period April 1, 2001 through December 31, 2001, the Interest Coverage Ratio was reset to a minimum ratio of 1.40 for the period April 1, 2001 through September 30, 2001 and 1.30 for the period October 1, 2001 through March 31, 2002, the Fixed Charge Coverage Ratio was reset to a minimum ratio of .80 for the period April 1, 2001 through December 31, 2001 and Minimum Consolidated EBITDA was reset to $42.0 million for the period ending June 30, 2001, $41.0 million for the period ending September 30, 2001 and $40.0 million for the period ending December 31, 2001. On May 15, 2001, in connection with obtaining the Waiver and Second Amendment we and Sleepmaster Holdings L.L.C. ("Holdings") entered into a Unsecured Senior Note and Warrant Purchase Agreement with Citicorp Venture Capital, Ltd. ("CVC") and PMI Mezzanine Fund, L.P. ("PMI") pursuant to which we issued $15.0 million of 14% pay-in-kind Unsecured Senior Notes due 2007 for an aggregate purchase price of $15.0 million. As required by the Unsecured Senior Note agreement (i) $5.0 million of the proceeds were used to pay down our term A and term B loans on a pro-rata basis, and (ii) $10.0 million of the proceeds were used to pay down our revolving credit facility. Also on May 15, 2001, in conjunction with the sale of the Unsecured Senior Notes pursuant to the Unsecured Senior Note and Warrant Purchase Agreement, Holdings issued CVC and PMI warrants to purchase 3,670.35 and 1,498.43 warrant interests, respectively. The warrant interests are exercisable at any time until May 15, 2011 for Class C Units of Holdings at an exercise price of $0.01 per unit, subject to adjustment. 16 17 Management believes that cash flows generated from operations, together with funds available from our revolving credit facility are sufficient to support our operations and general business and liquidity requirements for the foreseeable future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from fluctuations in interest rates, which could impact our consolidated financial position, results of operations and cash flows. We manage our exposure to market risk through our regular operating and financing activities. We do not use derivative financial instruments for speculative or trading purposes and do not maintain such instruments that may expose us to significant market risk. Our earnings are sensitive to changes in short-term interest rates as a result of our borrowings under the third amended and restated credit facility. We also manage our portfolio of fixed-rate debt to reduce our exposure to interest rate changes. The fair value of our 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 with respect to our financial condition, results of operations and business. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "predict," "project," "will," "could," and similar terms and expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to numerous risks, uncertainties and assumptions. Although we believe our plans are based upon reasonable assumptions as of the current date, we can give no assurance that such expectations can be attained. Factors that could cause actual results to differ materially from our expectations include: general business and economic conditions; competitive factors; raw materials availability and pricing; fluctuations in demand; and retention and availability of qualified employees. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are, 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 our operations. Management believes that none of these actions will have a material adverse effect on our financial position, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Unsecured Senior Note and Warrant Purchase Agreement, dated as of May 15, 2001 by and among Sleepmaster L.L.C., Sleepmaster Holdings L.L.C., Citicorp Venture Capital, Ltd., and PMI Mezzanine Fund, L.P. 4.2 Common Unit Purchase Warrant Certificate No. W-2 issued by Sleepmaster Holdings L.L.C. on May 15, 2001 to Citicorp Venture Capital, Ltd. 4.3 Common Unit Purchase Warrant Certificate No. W-3 issued by Sleepmaster Holdings L.L.C. on May 15, 2001 to PMI Mezzanine Fund L.P. 4.4 Unsecured Senior Note issued by Sleepmaster L.L.C. on May 15, 2001 to Citicorp Venture Capital, Ltd. in the aggregate principal amount of $10,651,500. 4.5 Unsecured Senior Note issued by Sleepmaster L.L.C. on May 15, 2001 to PMI Mezzanine Fund, L.P. in the aggregate principal amount of $4,348,500. 10.85 Waiver and Second Amendment to Third Amended and Restated Credit Agreement, dated as of May 15, 2001, by and among Sleepmaster L.L.C., as borrower, Sleepmaster Holdings, L.L.C. and the domestic subsidiaries of Sleepmaster L.L.C., as guarantor, the several banks and other financial institutions identified therein, as lenders and First Union National Bank as administrative agent. (b) Reports on Form 8-K We did not file any reports on Form 8-K during the quarter ended March 31, 2001. 17 18 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: May 21, 2001 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