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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 quarterly period ended June 26, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-113861
SIMMONS BEDDING COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3875743
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 800, Atlanta, Georgia 30328-6188
- -------------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
-----------------------
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. [X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ ] Yes [X] No
The number of shares of the registrant's common stock outstanding as of
August 10, 2004 was 100.
1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands)
Successor | Predecessor Successor | Predecessor
------------ | ------------ ------------ | ------------
Quarter | Quarter Six Months | Six Months
Ended | Ended Ended | Ended
June 26, | June 28, June 26, | June 28,
2004 | 2003 2004 | 2003
------------ | ------------ ------------ | ------------
| |
Net sales $ 201,795 | $ 199,299 $ 425,115 | $ 385,914
Cost of products sold 110,245 | 104,738 230,110 | 202,971
------------ | ------------ ------------ | ------------
Gross profit 91,550 | 94,561 195,005 | 182,943
------------ | ------------ ------------ | ------------
Operating expenses: | |
Selling, general and | |
administrative expenses 74,267 | 84,632 159,528 | 154,876
Plant closure charges 764 | - 764 | -
Amortization of intangibles (1,197) | 98 2,289 | 170
Transaction expenses - | 50 - | 822
Licensing fees (2,481) | (2,810) (5,062) | (5,424)
------------ | ------------ ------------ | ------------
71,353 | 81,970 157,519 | 150,444
------------ | ------------ ------------ | ------------
Operating income 20,197 | 12,591 37,486 | 32,499
| |
Interest expense, net 10,888 | 6,792 21,981 | 14,171
------------ | ------------ ------------ | ------------
Income before income taxes 9,309 | 5,799 15,505 | 18,328
Income tax expense 3,351 | 2,314 5,582 | 7,363
------------ | ------------ ------------ | ------------
Net income 5,958 | 3,485 9,923 | 10,965
| |
Other comprehensive income: | |
Foreign currency translation adjustment (8) | 134 (10) | 225
------------ | ------------ ------------ | ------------
Comprehensive income $ 5,950 | $ 3,619 $ 9,913 | $ 11,190
============ | ============ ============ | ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 26, December 27,
2004 2003*
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,377 $ 3,670
Accounts receivable, less allowances for
doubtful receivables, discounts, returns and
allowances of $6,390 and $4,960 76,199 65,868
Inventories 30,228 31,355
Deferred income taxes 2,256 973
Other current assets 16,106 22,616
Assets held for sale - 8,564
------------ ------------
Total current assets 149,166 133,046
------------ ------------
Property, plant and equipment, net 55,781 53,228
Goodwill 492,154 792,230
Intangible assets, net 527,626 159,198
Other assets 46,432 45,417
------------ ------------
$ 1,271,159 $ 1,183,119
============ ============
*Derived from the Company's 2003 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 26, December 27,
2004 2003*
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,575 $ 9,512
Accounts payable 44,843 39,956
Accrued wages and benefits 14,819 20,230
Accrued advertising and incentives 21,488 21,612
Accrued interest 12,592 1,238
Other accrued expenses 12,680 10,868
Liabilities held for sale - 2,064
------------ ------------
Total current liabilities 107,997 105,480
------------ ------------
Non-current liabilities:
Long-term debt 751,001 760,741
Deferred income taxes 150,650 23,719
Other 15,718 12,902
------------ ------------
Total liabilities 1,025,366 902,842
------------ ------------
Commitments and contingencies
Common stockholder's equity:
Common stock, $.01 par value; 3,000 shares
authorized; 100 issued and outstanding 1 1
Additional paid-in capital 243,052 287,449
Retained earnings (accumulated deficit) 2,733 (7,190)
Accumulated other comprehensive income 7 17
------------ ------------
Total common stockholder's equity 245,793 280,277
------------ ------------
$ 1,271,159 $ 1,183,119
============ ============
*Derived from the Company's 2003 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor Predecessor
------------ ------------
Six Months Six Months
Ended Ended
June 26, June 28,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 9,923 $ 10,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,719 11,380
Provision for bad debts 2,542 1,836
Provision for deferred income taxes 4,274 3,448
Non-cash interest expense 908 1,289
Non-cash stock compensation expense 3,308 10,421
Other, net - (250)
Net changes in operating assets and liabilities:
Accounts receivable (11,553) (18,557)
Inventories 3,108 (4,979)
Other current assets 5,774 (6,667)
Accounts payable 7,616 (2,408)
Accrued liabilities 6,689 5,163
Other, net (4,185) (6,027)
------------ ------------
Net cash provided by operating activities 39,123 5,614
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (6,728) (2,162)
Proceeds from the sale of Mattress Gallery, net 6,495 -
Other, net 105 (89)
------------ ------------
Net cash used in investing activities (128) (2,251)
------------ ------------
Cash flows from financing activities:
Payments of Successor Senior Credit Facility, net (11,675) -
Payments of other Successor debt (6,002) -
Repurchase of SC Holdings, Inc. minority interest and
payment of SC Holdings, Inc. debt - (18,653)
Proceeds from Predecessor Senior Credit Facility, net - 13,000
Payments of other Predecessor debt - (3,418)
Payments of financing fees (601) -
------------ ------------
Net cash used in financing activities (18,278) (9,071)
------------ ------------
Net effect of exchange rate changes on cash (10) 225
------------ ------------
Change in cash and cash equivalents 20,707 (5,483)
Cash and cash equivalents, beginning of period 3,670 7,108
------------ ------------
Cash and cash equivalents, end of period $ 24,377 $ 1,625
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In thousands, except share amounts)
Retained Accumulated
Additional Earnings Other Total
Common Common Paid-In (Accumulated Comprehensive Stockholder's
Shares Stock Capital Deficit) Loss Equity
-------- ---------- ---------- ------------ ------------- ----------------
December 27, 2003 (Audited) ..... 100 $ 1 $ 287,449 $ (7,190) $ 17 $ 280,277
Net income ................... - - - 9,923 - 9,923
Other comprehensive
income (loss):
Change in foreign currency
translation .............. - - - - (10) (10)
---------- ---------- ----------
Comprehensive income (loss).. - - - 9,923 (10) 9,913
----------
Deemed dividend to reflect
carryover basis............. - - (47,705) - - (47,705)
Termination of deferred
compensation plan ........... - - 3,308 - - 3,308
-------- ---------- ---------- ---------- ---------- ----------
June 26, 2004 (Unaudited) ....... 100 $ 1 $ 243,052 $ 2,733 $ 7 $ 245,793
======== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
For purposes of this report, the "Company" refers to Simmons Bedding
Company, formerly known as Simmons Company, and its subsidiaries, collectively.
The Condensed Consolidated Financial Statements of the Company are unaudited,
and have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying unaudited condensed consolidated
financial statements contain all adjustments, which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of June 26, 2004, and its results of operations and cash flows for
the periods presented herein. All adjustments in the periods presented herein
are normal and recurring in nature unless otherwise disclosed. These unaudited
condensed consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 27, 2003.
Operating results for the periods ended June 26, 2004 are not necessarily
indicative of future results that may be expected for the year ending December
25, 2004 or for any future period.
The preparation of unaudited condensed consolidated financial statements
in conformity with GAAP includes some amounts that are based upon management
estimates and judgments. Future actual results could differ from such current
estimates.
B. COMPANY NAME CHANGE
Effective July 14, 2004, the Company's indirect parent, THL Bedding
Holding Company, changed its name to Simmons Company and the Company changed its
name to Simmons Bedding Company.
C. THE ACQUISITION
In December 2003, THL Bedding Company, an affiliate of Thomas H. Lee
Partners, L.P., acquired the Company for approximately $1.115 billion, including
related acquisition costs (the "Acquisition"). Concurrently with the closing of
this transaction on December 19, 2003, each of THL Bedding Company and the
former Simmons Company merged with and into the Company with the Company
continuing as the surviving corporation. The entity, formerly known as Simmons
Holdings, Inc., was renamed Simmons Company.
Thomas H. Lee Partners, L.P. is a leading private equity firm focused on
identifying and acquiring substantial ownership stakes in mid- to large-cap
growth companies. The purchase price for the Company was impacted by the
following factors:
- The Company's leading U.S. market position in the bedding industry,
particularly in the premium segment;
7
- The Company's portfolio of brands;
- The Company's ability to innovate and introduce new products;
- The Company's superior manufacturing platform;
- The Company's historical and projected earnings; and
- The Company's management team and corporate culture.
The financing for the Acquisition (including the refinancing of
outstanding debt) was provided by (i) borrowings under a new $480.0 million
Senior Secured Credit Facility, consisting of a $405.0 million term loan
facility and a $75.0 million revolving credit facility, which refinanced the
Company's existing senior and subordinated loans, (ii) borrowings under a new
$140.0 million senior unsecured term loan facility; (iii) issuance of $200.0
million senior subordinated notes; and (iv) $387.8 million of capital provided
by Thomas H. Lee Equity Fund V, L.P. and its affiliates (collectively "THL"),
affiliates of Fenway Partners, Inc. ("Fenway") and management of the Company.
As a result of the Acquisition, THL acquired approximately 75.8% of the
voting stock of THL Bedding Holding Company, since renamed Simmons Company
("Simmons Company"), the Company's indirect parent. In connection with the stock
purchase and the mergers, Fenway acquired 9.0% of voting stock of Simmons
Company and the Company's management and directors acquired 15.2% of the voting
stock of Simmons Company, after giving effect to restricted stock issued to
management under the Simmons Company's equity incentive plan.
In connection with the Acquisition, certain members of the Company's
management deferred $19.8 million of their proceeds from the Acquisition into a
deferred compensation plan of Simmons Company. The deferred proceeds were deemed
invested in Class A common stock of Simmons Company. As further described in
Note J to the condensed consolidated financial statements, the deferred
compensation plan was terminated on June 3, 2004. Prior to the termination, the
deferred compensation plan was recorded as a liability of Simmons Company and
was marked to market based upon a quarterly valuation of the common stock of
Simmons Company. The changes in the market value of the liability were recorded
as non-cash stock compensation expense of the Company.
The Acquisition was accounted for as a purchase as prescribed by Statement
of Financial Accounting Standards No. 141, Business Combinations, in accordance
with Emerging Issues Task Force ("EITF") No. 88-16, Basis in Leveraged Buyout
Transactions. This guidance requires the continuing residual interest retained
by the continuing management investors, as a result of the Transactions, to be
reflected at its predecessor basis. In accordance with EITF Issue No. 90-12,
Allocating Basis to Individual Assets and Liabilities for Transactions within
the Scope of Issue No. 88-16, a step-up of assets and liabilities to fair value
was recorded in purchase accounting for the remaining interest in Simmons
Company acquired by THL and Fenway. The amount of carryover basis determined was
reflected as a deemed dividend of $148.1 million in the opening consolidated
balance sheet.
The purchase price allocation was not finalized until the second quarter
of 2004. Prior to completion of the valuation, a tentative allocation had been
made using preliminary estimates of the values of the intangibles. Based upon
the final valuation completed in the second quarter, the fair market value of
the identifiable intangible assets on the date of Acquisition was $597.8
million. Based upon the preliminary valuation, the fair market value of the
identifiable intangible assets was $178.9 million. The difference in the
valuation amounts was primarily attributable to the following differences in
methodology and assumptions:
* Identifiable intangibles were trademarks, patented and unpatented
technology, contractual and non-contractual customer base, and
non-compete agreements in the final valuation. Identifiable intangibles
included patents, customer contracts, licenses, contract sales,
employment contracts, equipment leases, software, non-compete
agreements, brands, trademarks, supplier lists and domain names in the
preliminary valuation.
* The preliminary valuation did not fully consider the Acquisition
discount rate in determining the asset discount rates, nor were all
income streams captured; however the discount rate was considered and
all income streams captured in the final valuation.
The identifiable intangible assets were adjusted to reflect the final
valuation which resulted in the increase in intangible assets of $370.7 million
and an increase in the deemed dividend to reflect additional carryover basis in
the intangible assets of $47.7 million. A deferred tax liability of $141.4
million was recorded on the additional step-up of the identifiable intangible
assets. Following is a summary of the tentative and final allocation of the
8
estimated fair values of the assets acquired and liabilities assumed as of the
date of the Acquisition (In thousands):
Preliminary Final
Allocation Allocation
------------ -------------
Current assets......................... $ 137,296 $ 141,370
Property, plant and equipment.......... 54,446 54,670
Goodwill............................... 792,230 492,154
Other assets........................... 50,385 50,385
Intangibles............................ 159,511 530,221
------------ -------------
Total assets acquired................ 1,193,868 1,268,800
------------ -------------
Current liabilities.................... (91,765) (91,765)
Acquisition costs...................... (24,939) (24,655)
Non-current liabilities................ (62,295) (185,214)
------------ -------------
Total liabilities assumed............ (178,999) (301,634)
------------ -------------
Deemed dividend...................... 100,388 148,091
------------ -------------
Purchase price....................... $ 1,115,257 $ 1,115,257
============ =============
There were no pre-acquisition contingencies related to the Acquisition.
Since the Acquisition was accounted for as a stock purchase, the respective tax
bases of the assets and liabilities were not changed. Goodwill was assigned to
the wholesale and retail segments in the amounts of $471.3 million and $20.9
million, respectively.
D. SALE OF MATTRESS GALLERY
The Company sold its Gallery Corp. ("Mattress Gallery") operations in a
stock transaction on May 1, 2004 to Pacific Coast Mattress, Inc. ("PCM") for
cash proceeds of $6.5 million plus the cancellation of all intercompany debts
with the exception of current trade payables owed by Mattress Gallery to the
Company. The cancellation of intercompany debts was recorded as a capital
contribution to Mattress Gallery. No gain or loss was recorded on the sale since
Mattress Gallery was recorded at fair value in connection with the Acquisition
(see Note C to the condensed consolidated financial statements for further
explanation). Following the sale, the Company continues to guarantee
approximately $3.0 million of Mattress Gallery's obligations under certain store
and warehouse leases that expire over various periods through 2010. In
connection with the sale, the Company entered into a five-year supply agreement
with PCM.
In accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reflected assets and liabilities for Mattress
Gallery as held for sale in the December 27, 2003 consolidated balance sheet.
The Company has not reflected the results of operations for Mattress Gallery as
discontinued operations since the Company will have an ongoing interest in the
cash flows of the operations through a long-term supply agreement. For the six
months ended June 26, 2004, Mattress Gallery's net sales and net loss were $12.9
million and $3.3 million, respectively. For the six months ended June 28, 2003,
Mattress Gallery's net sales and net loss were $18.1 million and $2.2 million,
respectively.
9
E. INVENTORIES
A summary of inventories, exclusive of inventories included in assets held
for sale as of December 27, 2003, follows (In thousands):
June 26, December 27,
2004 2003
--------- ---------
Raw materials $ 14,491 $ 13,005
Work-in-progress 1,004 1,099
Finished goods 10,943 12,476
Inventory held at retail stores 3,790 4,775
--------- ---------
$ 30,228 $ 31,355
========= =========
F. WARRANTIES
The Company's warranty policy provides for a 10-year non-prorated warranty
service period on all first quality products, except for certain products for
the hospitality industry which have varying non-prorated warranty periods
generally ranging from five to ten years. The Company's policy is to accrue the
estimated costs of warranty coverage at the time a sale is recorded. The
following table presents a reconciliation of the Company's warranty liability
for the quarters and six months ended June 26, 2004 and June 28, 2003 (In
thousands):
For the For the
Quarters Ended Six Months Ended
----------------------------- -----------------------------
Successor | Predecessor Successor | Predecessor
---------- | ----------- ---------- | -----------
June 26, | June 28, June 26, | June 28,
2004 | 2003 2004 | 2003
---------- | ----------- ---------- | -----------
| |
Balance at beginning of period $ 3,831 | $ 3,617 $ 3,803 | $ 3,434
Additional warranties issued 1,381 | 1,209 2,295 | 2,257
Warranty settlements (1,204) | (1,073) (2,090) | (1,938)
Revisions of estimate 138 | - 138 | -
---------- | ----------- ---------- | -----------
Balance at end of period $ 4,146 | $ 3,753 $ 4,146 | $ 3,753
========== | =========== ========== | ===========
10
G. LONG-TERM DEBT
A summary of long-term debt follows (In thousands):
June 26, December 27,
2004 2003
--------- ---------
Senior Credit Facility:
New Revolving Loan $ - $ 3,275
New Tranche B Term Loan 396,600 405,000
--------- ---------
Total Senior Credit Facility 396,600 408,275
Senior Unsecured Term Loan 140,000 140,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 3.16%, due 2016 4,000 4,000
Banco Santander Loan, 3.12%, due 2013 2,009 2,116
7.875% Senior Subordinated Notes due 2014 200,000 200,000
10.25% Series B Senior Subordinated Notes due 2009 - 5,284
Other, including capital lease obligations 267 878
--------- ---------
752,576 770,253
Less current portion (1,575) (9,512)
--------- ---------
$ 751,001 $ 760,741
========= =========
In connection with the Acquisition on December 19, 2003, the Company
entered into a new Senior Credit Facility (the "Senior Credit Facility"), a
Senior Unsecured Term Loan Facility and issued 7.875% Senior Subordinated Notes,
the aggregate proceeds of which repaid the outstanding amounts under the old
senior credit facility, notes payable to former shareholders, a junior
subordinated payment-in-kind note, and a portion of the Company's 10.25% Senior
Subordinated Notes.
The Senior Credit Facility provides for a $75.0 million revolving credit
facility. The revolving credit facility will expire on the earlier of (a)
December 19, 2009 or (b) such other date as the revolving credit commitments
thereunder shall terminate in accordance with the terms of the Senior Credit
Facility. The Senior Credit Facility also provided for a $405.0 million Tranche
B Term Loan facility. The Company prepaid $8.4 million of the Tranche B Term
Loan in the first quarter of 2004. The Tranche B Term Loan has a final scheduled
maturity date of December 19, 2011.
As of June 26, 2004, the Company had availability to borrow $64.5 million
under the Revolving Loan Facility after giving effect to $10.5 million that was
reserved for the Company's reimbursement obligations with respect to outstanding
letters of credit. The remaining availability under the Revolving Loan Facility
may be utilized to meet the Company's current working capital requirements,
including issuance of stand-by and trade letters of credit. The Company also may
utilize the remaining availability under the Revolving Loan Facility to fund
distributions, acquisitions and capital expenditures.
11
The Senior Unsecured Term Loan Facility provides for a $140.0 million
Senior Unsecured Term Loan. The Senior Unsecured Term Loan has a final scheduled
maturity date of June 17, 2012.
The Senior Credit Facility and the Senior Unsecured Term Loan bear
interest at the Company's choice of the Eurodollar Rate or Base Rate (both as
defined), plus the applicable interest rate margins as follows:
Eurodollar Base
Rate Rate
---------- -----
Revolving Loan Facility.................... 2.50% 1.50%
Tranche B Term Loan........................ 2.75% 1.75%
Senior Unsecured Term Loan................. 3.75% 2.75%
The weighted average interest rates per annum in effect as of June 26,
2004 for the Tranche B Term Loan and Senior Unsecured Term Loan were 4.13% and
5.13%, respectively.
The use of interest rate risk management instruments, such as collars and
swaps, is required under the terms of the Senior Credit Facility. The Company is
required to maintain protection against fluctuations in interest rates, and may
do so through utilizing Eurodollar Rate loans having twelve-month interest
periods or through one or more interest rate agreements. In order to address
interest rate risk, the Company has developed and implemented a policy to
utilize extended Eurodollar contracts to minimize the impact of near term
Eurodollar rate increases. On January 26, 2004, the Company elected to set its
interest rate at the twelve-month Eurodollar Rate for approximately $325.0
million of the Tranche B Term Loan and for the $140.0 million Senior Unsecured
Term Loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005
for approximately 86% of floating rate debt outstanding as of June 26, 2004.
Additionally, to further address interest rate risk, the Company entered into an
interest rate cap agreement on February 11, 2004 for a notional amount of $170.0
million which capped the Eurodollar Rate, plus margin, at 5.0% for the period
from January 26, 2005 through January 26, 2006.
On April 12, 2004 the remaining 10.25% Series B Senior Subordinated Notes
outstanding were repurchased at 105.125% of the principal amount thereof for a
total payment of $5.3 million.
On December 19, 2003 in connection with the Acquisition, the Company
completed a financing, which consisted of the sale of $200.0 million of 7.875%
Senior Subordinated Notes due 2014 (the "New Notes") pursuant to a private
offering. The New Notes bear interest at the rate of 7.875% per annum, which is
payable semi-annually in cash in arrears on January 15 and July 15. The New
Notes mature on January 15, 2014. The New Notes are subordinated in right of
payment to all existing and future senior indebtedness of the Company. The
Company plans to issue 7.875% Senior Subordinated Notes due 2014 (the "Exchange
Notes") in exchange for all New Notes, pursuant to an exchange offer whereby
holders of the New Notes will receive Exchange Notes which have been registered
under the Securities Act of 1933, as amended, but are otherwise identical to the
New Notes.
12
At any time prior to January 17, 2007, the Company may redeem up to 40% of
the aggregate principal amount of the New Notes at a price of 107.875% in
connection with an Equity Offering, as defined. With the exception of an Equity
Offering, the New Notes are redeemable at the option of the Company beginning
January 15, 2009 at prices decreasing from 103.938% of the principal amount
thereof to par on January 15, 2012 and thereafter. The Company is not required
to make mandatory redemption or sinking fund payments with respect to the New
Notes.
The indenture for the New Notes requires the Company and its subsidiaries
to comply with certain restrictive covenants, including a restriction on
dividends, and limitations on the incurrence of indebtedness, certain payments
and distributions, and sales of the Company's assets and stock.
The New Notes are fully and unconditionally guaranteed, on a joint and
several basis, and on an unsecured, senior subordinated basis by all the
Company's active domestic subsidiaries. All the subsidiary guarantors are 100%
owned by the Company. The following Supplemental Consolidating Condensed
Financial Statements provide additional guarantor/non-guarantor information.
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Operations
For the Quarter Ended June 26, 2004
(In thousands)
Successor
- -------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- --------- --------- ---------
Net sales $ (19,064) $ 217,898 $ 2,961 $ - $ 201,795
Cost of products sold 280 107,883 2,082 - 110,245
--------- --------- --------- --------- ---------
Gross margin (19,344) 110,015 879 - 91,550
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 45,385 28,224 658 - 74,267
Plant closure charges - 764 - - 764
Amortization of intangibles (2,007) 810 - - (1,197)
Intercompany fees (52,956) 52,886 70 - -
Licensing fees (174) (2,161) (146) - (2,480)
--------- --------- --------- --------- ---------
(9,752) 80,523 582 - 71,353
--------- --------- --------- --------- ---------
Operating income (loss) (9,592) 29,492 297 - 20,197
Interest expense, net 10,677 200 11 - 10,888
Income from subsidiaries (18,715) - - 18,715
--------- --------- --------- --------- ---------
Income (loss) before income taxes (1,554) 29,292 286 (18,715) 9,309
Income tax expense (benefit) (7,512) 10,792 71 - 3,351
--------- --------- --------- --------- ---------
Net income (loss) $ 5,958 $ 18,500 $ 215 $ (18,715) $ 5,958
========= ========= ========= ========= =========
13
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Operations
For the Quarter Ended June 28, 2003
(In thousands)
Predecessor
- ------------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
--------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
Net sales $ (14,065) $ 210,605 $ 2,759 $ - $ 199,299
Cost of products sold 247 102,477 2,014 - 104,738
----------- ----------- ----------- ----------- -----------
Gross margin (14,312) 108,128 745 - 94,561
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 55,630 28,428 574 - 84,632
Amortization of intangibles - 98 - - 98
Transaction expenses 50 - - - 50
Intercompany fees (88,848) 88,612 236 - -
Licensing fees (273) (2,384) (153) - (2,810)
----------- ----------- ----------- ----------- -----------
(33,441) 114,754 657 - 81,970
----------- ----------- ----------- ----------- -----------
Operating income (loss) 19,129 (6,626) 88 - 12,591
Interest expense (income), net 6,613 175 4 - 6,792
Income from subsidiaries 6,753 - - (6,753) -
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 5,763 (6,801) 84 6,753 5,799
Income tax expense 2,278 - 36 - 2,314
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 3,485 $ (6,801) $ 48 $ 6,753 $ 3,485
=========== =========== =========== =========== ===========
14
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Operations
For the Six Months Ended June 26, 2004
(In thousands)
Successor
- -------------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
--------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- ------------
Net sales $ (31,229) $ 450,958 $ 5,386 $ - $ 425,115
Cost of products sold 595 225,580 3,935 - 230,110
----------- ----------- ----------- ----------- -----------
Gross margin (31,824) 225,378 1,451 - 195,005
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 101,403 56,774 1,351 - 159,528
Plant closure charges - 764 - - 764
Amortization of intangibles 661 1,628 - - 2,289
Intercompany fees (106,880) 106,740 140 - -
Licensing fees (520) (4,259) (283) - (5,062)
----------- ----------- ----------- ----------- -----------
(5,336) 161,647 1,208 - 157,519
----------- ----------- ----------- ----------- -----------
Operating income (loss) (26,488) 63,731 243 - 37,486
Interest expense (income), net 21,564 396 21 - 21,981
Income from subsidiaries (39,408) - - 39,408 -
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (8,644) 63,335 222 (39,408) 15,505
Income tax expense (benefit) (18,567) 24,071 78 - 5,582
----------- ----------- ----------- ----------- -----------
Net income $ 9,923 $ 39,264 $ 144 $ (39,408) $ 9,923
=========== =========== =========== =========== ===========
15
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Operations
For the Six Months Ended June 28, 2003
(In thousands)
Predecessor
- -----------------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
----------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net sales $ (26,617) $ 407,629 $ 4,902 $ - $ 385,914
Cost of products sold 462 198,904 3,605 - 202,971
------------ ------------ ------------ ------------ ------------
Gross margin (27,079) 208,725 1,297 - 182,943
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 99,541 54,292 1,043 - 154,876
Amortization of intangibles - 170 - - 170
Transaction expenses 636 186 - - 822
Intercompany fees (146,246) 145,812 434 - -
Licensing fees (545) (4,606) (273) - (5,424)
------------ ------------ ------------ ------------ ------------
(46,614) 195,854 1,204 - 150,444
------------ ------------ ------------ ------------ ------------
Operating income 19,535 12,871 93 - 32,499
Interest expense (income), net 13,320 853 (2) - 14,171
Income from subsidiaries (12,066) - - 12,066 -
------------ ------------ ------------ ------------ ------------
Income before income taxes 18,281 12,018 95 (12,066) 18,328
Income tax expense 7,316 - 47 - 7,363
------------ ------------ ------------ ------------ ------------
Net income $ 10,965 $ 12,018 $ 48 $ (12,066) $ 10,965
============ ============ ============ ============ ============
16
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Balance Sheets
As of June 26, 2004
(In thousands)
Successor
- ------------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
---------------------------
Simmons Non-
Bedding Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............... $ 20,192 $ 2,928 $ 1,257 $ - $ 24,377
Accounts receivable ..................... 4 74,325 1,870 - 76,199
Inventories ............................. - 29,359 869 - 30,228
Other ................................... 5,983 11,932 447 - 18,362
------------ ------------ ------------ ------------ ------------
Total current assets ................. 26,179 118,544 4,443 - 149,166
------------ ------------ ------------ ------------ ------------
Property, plant and equipment, net ........ 10,944 39,650 5,187 - 55,781
Goodwill and other intangibles, net ....... 996,944 22,771 65 - 1,019,780
Other assets .............................. 33,030 12,691 711 - 46,432
Net investment in and advances to
(from) subsidiaries ..................... 119,864 86,612 (2,184) (204,292) -
------------ ------------ ------------ ------------ ------------
$ 1,186,961 $ 280,268 $ 8,222 $ (204,292) $ 1,271,159
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt .... $ 1,002 $ 342 $ 231 $ - $ 1,575
Accounts payable and accrued liabilities. 44,617 60,082 1,723 - 106,442
------------ ------------ ------------ ------------ ------------
Total current liabilities ............ 45,619 60,424 1,954 - 107,997
Long-term debt ............................ 735,599 13,589 1,813 - 751,001
Deferred income taxes ..................... 149,231 1,001 418 - 150,650
Other non-current liabilities ............. 10,719 4,647 352 - 15,718
------------ ------------ ------------ ------------ ------------
Total liabilities .................... 941,168 79,661 4,537 - 1,025,366
------------ ------------ ------------ ------------ ------------
Stockholder's equity ...................... 245,793 200,607 3,685 (204,292) 245,793
------------ ------------ ------------ ------------ ------------
$ 1,186,961 $ 280,268 $ 8,222 $ (204,292) $ 1,271,159
============ ============ ============ ============ ============
17
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Cash Flows
For the Six Months Ended June 26, 2004
(In thousands)
Successor
- ----------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
---------------------------
Simmons Non-
Bedding Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities ............................ $ (31,767) $ 69,117 $ 1,773 $ - $ 39,123
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net ..................... (2,899) (2,852) (977) - (6,728)
Proceeds from sale of Mattress Gallery. 6,495 - - 6,495
Other, net ............................ 105 - - - 105
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities ............................ 3,701 (2,852) (977) - (128)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayment of long-term obligations .... (16,960) (601) (116) - (17,677)
Receipt from (distribution to)
subsidiaries ......................... 65,202 (63,402) (1,800) - -
Debt issuance costs ................... (601) - - - (601)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities ............................ 47,641 (64,003) (1,916) - (18,278)
------------ ------------ ------------ ------------ ------------
Net effect of exchange rate change ...... - - (10) - (10)
Change in cash and cash equivalents ..... 19,575 2,262 (1,130) - 20,707
Cash and cash equivalents:
Beginning of period ................ 615 667 2,388 - 3,670
------------ ------------ ------------ ------------ ------------
End of period ...................... $ 20,190 $ 2,929 $ 1,258 $ - $ 24,377
============ ============ ============ ============ ============
18
Simmons Bedding Company and Subsidiaries
Supplemental Consolidating Condensed Statements of Cash Flows
For the Six Months Ended June 28, 2003
(In thousands)
Predecessor
- ------------------------------------------------------------------------------------------------------------------------
Issuer and
Guarantors
----------------------------
Simmons Non-
Bedding Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ..................... $ (28,023) $ 32,588 $ 1,049 $ - $ 5,614
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net ...................... (1,885) (250) (27) - (2,162)
Purchase of intangible assets .......... 34 (132) 9 - (89)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities .... (1,851) (382) (18) - (2,251)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings on long-term obligations, net 9,182 (18,117) (136) - (9,071)
Receipt from (distribution to)
subsidiary........................... 18,772 (16,697) (2,075) - -
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities ................... 27,954 (34,814) (2,211) - (9,071)
------------ ------------ ------------ ------------ ------------
Net effect of exchange rate change ....... - - 225 - 225
Change in cash and cash equivalents ...... (1,920) (2,608) (955) - (5,483)
Cash and cash equivalents:
Beginning of period ................. 2,316 2,821 1,971 - 7,108
------------ ------------ ------------ ------------ ------------
End of period ....................... $ 396 $ 213 $ 1,016 $ - $ 1,625
============ ============ ============ ============ ============
H. SEGMENT INFORMATION
Operating segments are generally organized internally by whether the
products are sold to a reseller or to an end consumer. The Company has
aggregated similar operating segments into two reportable segments, (1)
wholesale bedding and (2) retail bedding. The wholesale bedding segment consists
of (i) the manufacture, sale and distribution of premium branded bedding
products to retail customers and institutional users of bedding products, such
as the hospitality industry; (ii) the licensing of intellectual property to
companies that manufacture and sale products which complement the bedding
products manufactured by the Company; and (iii) the sale of product returns,
off-quality product and excess inventory through retail outlet stores to
consumers. The retail bedding segment currently operates specialty sleep stores
in Oregon and Washington that sell to consumers principally premium branded
bedding products. On May 1, 2004, the Company sold one of its retail bedding
subsidiaries, Mattress Gallery (see Note D to the condensed consolidated
financial statements for further explanation).
The Company evaluates segment performance and allocates resources based on
net sales and Adjusted EBITDA. Adjusted EBITDA differs from the term "EBITDA" as
it is commonly used. In addition to adjusting net income to exclude interest
expense, income taxes, depreciation and amortization, Adjusted EBITDA also
adjusts net income by excluding items or expenses not typically excluded in the
calculation of "EBITDA" such as management fees, non-cash stock compensation
expenses, and other unusual or non-recurring items as defined by the Company's
new Senior Credit Facility. Management believes the aforementioned approach is
the most informative representation of how management evaluates performance.
Adjusted EBITDA does not represent net income or cash flow from operations as
those terms are defined by GAAP and does not necessarily indicate whether cash
flows will be sufficient to fund cash needs.
19
The following tables summarizes segment information:
Successor
Quarter Ended June 26, 2004
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ------------ -----------
Net sales for external customers $ 182,597 $ 19,198 $ - $ 201,795
Intersegment net sales 5,138 - (5,138) -
Adjusted EBITDA 28,092 514 301 28,907
Depreciation and amortization expense 2,996 101 - 3,097
Expenditures for long-lived assets 4,701 215 - 4,916
Segment assets 1,243,320 29,945 (2,106) 1,271,159
Reconciliation of EBITDA and Adjusted EBITDA to net income (loss):
Net income (loss) $ 6,168 $ (511) $ 301 $ 5,958
Depreciation and amortization 2,996 101 - 3,097
Income taxes 3,508 (157) - 3,351
Interest expense, net 10,840 48 - 10,888
Interest income 31 - - 31
----------- ----------- ----------- -----------
EBITDA 23,543 (519) 301 23,325
Plant opening, closing charges 4,722 - - 4,722
Mattress Gallery transaction expenses 162 500 - 662
Other (income) expense (335) 533 - 198
----------- ----------- ----------- -----------
Adjusted EBITDA $ 28,092 $ 514 $ 301 $ 28,907
=========== =========== =========== ===========
20
Predecessor
Quarter Ended June 28, 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ---------- ------------ ----------
Net sales for external customers $ 175,910 $ 23,389 $ - $ 199,299
Intersegment net sales 8,091 - (8,091) -
Adjusted EBITDA 29,611 819 (242) 30,188
Depreciation and amortization expense 5,585 55 - 5,640
Expenditures for long-lived assets 1,651 69 - 1,720
Segment assets 431,937 41,273 (46,368) 426,842
Reconciliation of EBITDA and Adjusted EBITDA to net income (loss):
Net income (loss) $ 4,351 $ (624) $ (242) $ 3,485
Depreciation and amortization 5,585 55 - 5,640
Income taxes 2,314 - - 2,314
Interest expense, net 6,742 50 - 6,792
Interest income 53 - - 53
----------- ---------- ---------- ----------
EBITDA 19,045 (519) (242) 18,284
Variable stock compensation expense 9,591 - - 9,591
Sleep Country acquisition expenses 50 - - 50
Non-recurring litigation and insurance 778 - - 778
Other expenses 147 1,338 - 1,485
----------- ---------- ---------- ----------
Adjusted EBITDA $ 29,611 $ 819 $ (242) $ 30,188
=========== ========== ========== ==========
21
Successor
Six Months Ended June 26, 2004
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ------------ -----------
Net sales for external customers $ 380,810 $ 44,305 $ - $ 425,115
Intersegment net sales 14,027 - (14,027) -
Adjusted EBITDA 64,848 1,617 (261) 66,204
Depreciation and amortization expense 10,300 417 - 10,717
Expenditures for long-lived assets 6,052 676 - 6,728
Segment assets 1,243,320 29,945 (2,106) 1,271,159
Reconciliation of EBITDA and Adjusted EBITDA to net income (loss):
Net income (loss) $ 14,368 $ (4,184) $ (261) $ 9,923
Depreciation and amortization 10,300 417 - 10,717
Income taxes 5,969 (386) - 5,582
Interest expense, net 21,883 98 - 21,981
Interest income 75 - - 75
----------- ----------- ----------- -----------
EBITDA 52,594 (4,055) (261) 48,278
Variable stock compensation expense 3,308 - - 3,308
Transaction related expenditures, including cost of products sold 2,640 3,844 - 6,484
Plant opening, closing charges 6,951 - - 6,951
Mattress Gallery transaction expenses 162 500 - 662
Other (income) expense (807) 1,328 - 521
----------- ----------- ----------- -----------
Adjusted EBITDA $ 64,848 $ 1,617 $ (261) $ 66,204
=========== =========== =========== ===========
22
Predecessor
Six Months Ended June 28, 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ------------ -----------
Net sales for external customers $ 340,264 $ 45,650 $ - $ 385,914
Intersegment net sales 15,880 - (15,880) -
Adjusted EBITDA 58,210 1,498 (430) 59,278
Depreciation and amortization expense 10,890 490 - 11,380
Expenditures for long-lived assets 1,958 204 - 2,162
Segment assets 431,937 41,273 (46,368) 426,842
Reconciliation of EBITDA and Adjusted EBITDA to net income (loss):
Net income (loss) $ 13,130 $ (1,735) $ (430) $ 10,965
Depreciation and amortization 10,890 490 - 11,380
Income taxes 7,363 - - 7,363
Interest expense, net 13,577 594 - 14,171
Interest income 103 - - 103
----------- ----------- ----------- -----------
EBITDA 45,063 (651) (430) 43,982
Variable stock compensation expense 10,421 - - 10,421
Sleep Country acquisition expenses 822 - - 822
Non-recurring litigation and insurance 1,556 - - 1,556
Other expenses 348 2,149 - 2,497
----------- ----------- ----------- -----------
Adjusted EBITDA $ 58,210 $ 1,498 $ (430) $ 59,278
=========== =========== =========== ===========
In the "Eliminations" column of each period presented above, the segment
assets consist primarily of investments in subsidiaries, receivables and
payables and gross wholesale bedding profit in ending retail inventory.
Consolidated Adjusted EBITDA reflects the elimination of the wholesale bedding
profit in ending retail inventory.
I. PLANT CLOSING AND OPENING CHARGES
The Company's Columbus, Ohio manufacturing facility was closed in April
2004. The Company incurred plant closure charges of approximately $0.8 million
of severance, retention, rent, and transfer of equipment costs during the second
quarter of fiscal year 2004 related to this closing. The Company wrote off
inventory and incurred other miscellaneous charges of $0.2 million as a result
of the closure of the plant, which was included in cost of goods sold during the
second quarter of 2004. Additionally, the Company dismantled and abandoned
equipment resulting in a $0.2 million charge to selling, general and
administrative expenses during the second quarter of 2004.
The Company opened a new manufacturing facility in Hazleton, Pennsylvania
on March 15, 2004 and is currently constructing a new manufacturing facility in
Waycross, Georgia which is expected to open in the third quarter of 2004. The
Company incurred approximately $3.0 million and $5.8 million for the quarter and
six months ended June 26, 2004 of non-recurring start-up costs, net of local and
state training grants, related to the openings. The start-up costs include
travel and relocation, rent, utilities, repair and maintenance, and training
23
expenses totalling $1.5 million and $3.2 million for the quarter and six months
ended June 26, 2004, which are included in cost of products sold, and
incremental distribution costs of $1.5 million and $2.6 million for the quarter
and six months ended June 26, 2004, which are included in selling, general and
administrative expenses. The incremental distribution expense resulted from the
extra miles driven to service the customers that were previously serviced by the
Company's closed manufacturing facilities. Once the new manufacturing facilities
meet normal production levels, the Company will no longer incur incremental
distribution expense to service these customers. The Company estimates that an
additional $3.6 million of non-recurring start-up costs will be incurred for the
remainder of 2004 of which approximately $1.8 million will be additional cost of
products sold and $1.8 million will be additional selling, general and
administrative expense.
J. TERMINATION OF SIMMONS COMPANY DEFERRED COMPENSATION PLAN
Simmons Company, the Company's indirect parent, terminated its deferred
compensation plan on June 3, 2004 by issuing 197,998 shares of Class A common
stock in exchange for deemed Class A shares of common stock (the "Deemed
Shares") held by the participants in the deferred compensation. The Deemed
Shares had a put option that gave the holder the right for cash settlement under
certain circumstances outside Simmons Company's control. Accordingly, the
deferred compensation plan was recorded as a liability of Simmons Company and
was marked to market based upon a quarterly valuation of the fair value of the
common stock of Simmons Company. The changes in the market value of the
liability were recorded as non-cash stock compensation expense of the Company.
As of the date of termination, the Company had recorded a $3.3 million increase
in the market value of the liability related to the Deemed Shares. Upon
termination of the deferred compensation plan, the $3.3 million was recorded as
a contribution to additional paid-in capital.
K. SUBSEQUENT EVENT
The Company entered into a definitive agreement with Simmons Juvenile
Products Company, Inc. ("Simmons Juvenile") on July 21, 2004 to acquire certain
assets and liabilities of its crib mattress and related soft goods business for
$19 million plus transaction expenses, and contingent consideration based upon
performance not to exceed $4.4 million. Simmons Juvenile, with crib mattress and
related soft goods manufacturing and distribution operations in York,
Pennsylvania, Oshkosh, Wisconsin and Ontario, California, is a licensee of the
Company that manufactures and sells Simmons branded products to the U.S.
juvenile market. The transaction is expected to close by the end of the
Company's third quarter. The Company intends to fund the purchase through cash
on hand and borrowings under the Company's $75.0 million Revolving Loan
Facility. Net sales of the business to be acquired were approximately $11.7
million for the six months ended June 30, 2004.
L. CONTINGENCIES
From time to time, the Company has been involved in various legal
proceedings. The Company believes that all current litigation is routine in
nature and incidental to the conduct of the Company's business, and that none of
this litigation, if determined adversely to the Company, would have a material
adverse effect on the Company's financial condition or results of its
operations.
24
M. ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements that had an impact on the
Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the our consolidated
financial statements, including related notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our 2003
Annual Report on Form 10-K, and the unaudited interim financial statements
included elsewhere in this report.
RECENT EVENTS
Name Change
Effective July 14, 2004, our indirect parent, THL Bedding Holding Company,
changed its name to Simmons Company and we changed our name to Simmons Bedding
Company.
Initial Public Offering
Simmons Company, our indirect parent, filed a registration statement with
the Securities and Exchange Commission on June 4, 2004 for a proposed initial
public offering of its common stock. The number of shares to be offered and the
price range for the offering has not been determined. Simmons Company announced
on July 19, 2004 it was delaying the proposed initial public offering due to
uncertain market conditions.
Labor Unions
The United Furniture Workers labor union at our San Leandro, California
manufacturing facility ratified a two-year collective bargaining agreement on
April 30, 2004. This agreement was retroactive to April 1, 2004, and we do not
expect it to have a significant impact on our future operating results.
The United Steel Workers of America labor union at our Kansas City, Kansas
manufacturing facility ratified a three-year collective bargaining agreement on
May 16, 2004. This agreement was retroactive to April 19, 2004, and we do not
expect it to have a significant impact on our future operating results.
Plant Closing/Openings
Our Columbus, Ohio manufacturing facility was closed in April 2004. We
incurred plant closure charges of approximately $0.8 million of severance,
retention, rent, and transfer of equipment costs during the second quarter of
fiscal year 2004 related to this closing. We wrote off inventory and incurred
other miscellaneous charges of $0.2 million as a result of the closure of the
plant, which was included in cost of goods sold during the second quarter of
2004.
25
Additionally, the Company dismantled and abandoned equipment resulting in a $0.2
million charge to selling, general and administrative expenses during the second
quarter of 2004.
We opened a new manufacturing facility in Hazleton, Pennsylvania on March
15, 2004 and we are currently constructing a new manufacturing facility in
Waycross, Georgia which is expected to open in the third quarter of 2004. We
incurred approximately $3.0 million and $5.8 million for the quarter and six
months ended June 26, 2004 of non-recurring start-up costs, net of state and
local training grants, related to the openings. The start-up costs include
travel and relocation, rent, utilities, repair and maintenance and training
expenses totalling $1.5 million and $3.2 million for the quarter and six months
ended June 26, 2004, which are included in cost of products sold, and
incremental distribution costs totalling $1.5 million and $2.6 million for the
quarter and six months ended June 26, 2004, which are included in selling,
general and administrative expenses. The incremental distribution expense
resulted from the extra miles driven to service the customers that were
previously serviced by our closed manufacturing facilities. Once our new
manufacturing facilities meet normal production levels, we will no longer incur
incremental distribution expense to service these customers. We estimate that an
additional $3.6 million of non-recurring start-up costs will be incurred for the
remainder of 2004 of which approximately $1.8 million will be additional cost of
products sold and $1.8 million will be additional selling, general and
administrative expense.
Sale of Mattress Gallery
We sold the Mattress Gallery retail operations to PCM on May 1, 2004 for
cash proceeds of $6.5 million plus the cancellation of all intercompany debts
with the exception of certain trade payables owed by Mattress Gallery to Simmons
and its affiliates. The cancellation of intercompany debts was recorded as a
capital contribution to Mattress Gallery. No gain or loss was recorded on the
sale since Mattress Gallery was recorded at fair value in connection with the
Acquisition. Following the sale, the Company continues to guarantee
approximately $3.0 million of Mattress Gallery's obligations under certain store
and warehouse leases that expire over various periods through 2010. In
connection with the sale, we entered into a five-year supply agreement with PCM.
We have not reflected the results of operations for Mattress Gallery prior to
its sale as discontinued operations since we have an ongoing interest in the
cash flows of the operations through the five-year supply agreement.
Mattress Gallery had net sales, gross profit and Adjusted EBITDA of $40.0
million, $19.2 million and $1.1 million, respectively, for the year ended
December 27, 2003. Mattress Gallery had net sales, gross profit and Adjusted
EBITDA of $12.9 million, $4.1 million and $(0.2) million, respectively, for the
four months ended May 1, 2004. Our wholesale segment had net sales to Mattress
Gallery of $18.9 million and $6.6 million for the year ended December 27, 2003
and the four months ended May 1, 2004.
26
The following table reconciles Mattress Gallery's net loss to EBITDA and
Adjusted EBITDA for the year ended December 27, 2003 and the four months ended
May 1, 2004 (In thousands):
Four Months
Year Ended Ended
Dec. 27, 2003 May 1, 2004
------------- -----------
Net loss $ (1,279) $ (3,297)
Depreciation and amortization 167 7
Interest expense 168 55
---------- ----------
EBITDA (944) (3,235)
Management fees 1,307 324
Transaction related expenditures,
including cost of products sold 267 2,720
Non-recurring other charges 432 (31)
---------- ----------
Adjusted EBITDA $ 1,062 $ (222)
========== ==========
Termination of Simmons Company Deferred Compensation Plan
Simmons Company, our indirect parent, terminated its deferred compensation
plan on June 3, 2004 by issuing 197,998 shares of Class A common stock in
exchange for Deemed Shares held by the participants in the deferred stock
compensation plan. The Deemed Shares had a put option that gave the holder the
right for cash settlement under certain circumstances outside Simmons Company's
control. Accordingly, the deferred compensation plan was recorded as a liability
of Simmons Company and was marked to market based upon a quarterly valuation of
the fair value of the common stock of Simmons Company. The changes in the market
value of the liability were recorded as non-cash stock compensation expense of
the Company. As of the date of termination, we had recorded a $3.3 million
increase in the market value of the liability related to the Deemed Shares. Upon
termination of the deferred compensation plan, the $3.3 million was recorded as
a contribution to additional paid-in capital.
Acquisition of Crib Mattress Business
We entered into a definitive agreement with Simmons Juvenile Products
Company, Inc. ("Simmons Juvenile") on July 21, 2004 to acquire certain assets
and liabilities of its crib mattress and related soft goods business for $19
million plus transaction expenses and contingent consideration based upon
performance not to exceed $4.4 million. Simmons Juvenile, with crib mattress and
related soft goods manufacturing and distribution operations in York,
Pennsylvania, Oshkosh, Wisconsin and Ontario, California, is a licensee of the
Company that manufactures and sells Simmons branded products to the U.S.
juvenile market. The transaction is expected to close by the end of the
Company's third quarter. The Company intends to fund the purchase through cash
on hand and borrowings under our $75.0 million Revolving Loan Facility. Net
sales of the business to be acquired were approximately $11.7 million for the
six months ended June 30, 2004. We expect that one result of this acquisition
will be a reduction of our leverage ratio as measured by our Senior Credit
Facility due to the cash flows we expect the Simmons Juvenile crib mattress
business to generate.
27
RESULTS OF OPERATIONS
Our capital structure changed significantly as a result of the Acquisition
and the concurrent refinancing of our debt. Due to required purchase accounting
adjustments relating to the transaction, the consolidated financial and other
data for the period subsequent to the acquisition (the "Successor" periods) are
not comparable to such data for the periods prior to the acquisition (the
"Predecessor" periods). In order to provide investors with useful information
and to facilitate understanding of our quarter and six months ended June 26,
2004 results, the following pro forma results of operations are presented to
give effect to the Acquisition and the termination of the deferred compensation
plan of Simmons Company as if each had been consummated on December 29, 2002,
the first day of our fiscal year 2003.
The pro forma information for the quarter ended June 28, 2003 includes the
following adjustments resulting from the Acquisition and termination of the
deferred compensation plan:
- adjustment to cost of products sold of $(0.6) million, or 0.3% of
net sales, to (i) reduce depreciation expense by $(0.8) million as a
result of the extension of the remaining average useful lives,
partially offset by the increases in the bases of property, plant
and equipment and (ii) increase amortization of favorable leases by
$0.2 million due to the step-up to fair market value of leases;
- adjustment to selling, general and administrative expense of $(10.4)
million, or 5.2% of net sales, to (i) reduce depreciation expense by
$(0.6) million as a result of the extension of the remaining average
useful lives, partially offset by the increases in the bases of
property, plant and equipment; (ii) reduce management fees by
$(0.2) million to reflect the change in our equity-sponsor
management agreement; and (iii) reduce variable stock compensation
expense by $(9.6) million to reflect the elimination of our stock
option plans and deferred compensation plan;
- adjustment to amortization of intangibles of $1.1 million, or 0.6%
of net sales, to reflect additional amortization as a result of
increases in the bases of our intangible assets;
- adjustment to interest expense, net of $4.1 million, or 2.1% of net
sales, to reflect the additional interest expense associated with
the new debt, net of the interest expense associated with the old
debt retired and the elimination of one-time financing charges
resulting from the Acquisition; and
- adjustment to income tax expense of $2.2 million to reflect the tax
effects of the pro forma adjustments based upon an effective tax
rate of 38.0%.
The pro forma information for the six months ended June 26, 2004 includes
the following adjustments resulting from the Acquisition and termination of the
deferred compensation plan:
- adjustment to cost of products sold of $(6.5) million, or 1.5% of
net sales, for inventory recorded at fair market value as a result
of the Acquisition and sold during the six months ended June 26,
2004;
28
- adjustment to selling, general and administrative expense of $(3.3)
million, or 0.8% of net sales, to reduce variable stock compensation
expense by $(3.3) million to reflect the elimination of our stock
option plans and deferred compensation plan; and
- adjustment to income tax expense of $3.7 million to reflect the tax
effects of the pro forma adjustments based upon an effective tax
rate of 38.0%.
The pro forma information for the six months ended June 28, 2003 includes
the following adjustments resulting from the Acquisition and termination of the
deferred compensation plan:
- adjustment to cost of products sold of $(1.4) million, or 0.4% of
net sales, to (i) reduce depreciation expense by $(1.7) million as a
result of the extension of the remaining average useful lives,
partially offset by the increases in the bases of property, plant
and equipment and (ii) increase amortization of favorable leases by
$0.3 million due to the step-up to fair market value of leases;
- adjustment to selling, general and administrative expense of $(12.4)
million, or 3.2% of net sales, to (i) reduce depreciation expense by
$(1.5) million as a result of the extension of the remaining average
useful lives, partially offset by the increases in the bases of
property, plant and equipment; (ii) reduce management fees by $(0.5)
million to reflect the change in our equity-sponsor management
agreement; and (iii) reduce variable stock compensation expense by
$(10.4) million to reflect the elimination of our stock option plans
and deferred compensation plan;
- adjustment to amortization of intangibles of $2.3 million, or 0.6%
of net sales, to reflect additional amortization as a result of
increases to the bases of our intangible assets;
- adjustment to interest expense, net of $7.8 million, or 2.0% of net
sales, to reflect the additional interest expense associated with
the new debt, net of the interest expense associated with the old
debt retired and the elimination of one-time financing charges
resulting from the Acquisition; and
- adjustment to income tax expense of $1.4 million to reflect the tax
effects of the pro forma adjustments based upon an effective tax
rate of 38.0%.
The pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable under the circumstances. The pro
forma financial information does not purport to represent what our results of
operations would actually have been had each of the Acquisition and the
termination of the deferred compensation plan occurred on December 29, 2002 or
to project our results of operations for any future period.
29
The following table sets forth historical financial information and pro
forma financial information based upon the adjustments discussed above for the
second quarter and first six- months of 2004 and 2003 (In thousands):
Successor Predecessor Successor Predecessor
--------- ----------- --------- -----------
Pro Forma Pro Forma Pro Forma
Quarter Quarter Quarter Six Months Six Months Six Months Six
Ended Ended Ended Ended Ended Ended Months
June 26, June 28, June 28, June 26, June 26, June 28, June 28,
2004 2003 2003 2004 2004 2003 2003
--------- ----------- --------- ---------- ---------- ----------- ---------
Net sales $ 201,795 $ 199,299 $ 199,299 $ 425,115 $ 425,115 $ 385,914 $ 385,914
Cost of products sold 110,245 104,738 104,134 230,110 223,626 202,971 201,564
--------- --------- --------- --------- --------- --------- ---------
Gross margin 91,550 94,561 95,165 195,005 201,489 182,943 184,350
Selling, general and
administrative expenses 74,267 84,632 74,243 159,528 156,220 154,876 142,468
Plant closure charges 764 - - 764 764 - -
Amortization of intangibles (1,197) 98 1,246 2,289 2,289 170 2,491
Transaction expenses - 50 50 - - 822 822
Licensing fees (2,481) (2,810) (2,810) (5,062) (5,062) (5,424) (5,424)
--------- --------- -------- --------- --------- --------- ---------
Operating income 20,197 12,591 22,437 37,486 47,278 32,499 43,993
Interest expense, net 10,888 6,792 10,888 21,981 21,981 14,171 21,981
--------- --------- -------- --------- --------- --------- ---------
Income before income taxes 9,309 5,799 11,549 15,505 25,297 18,328 22,012
Income tax expense 3,351 2,314 4,499 5,582 9,303 7,363 8,763
--------- --------- --------- --------- --------- --------- ---------
Net income $ 5,958 $ 3,485 $ 7,050 $ 9,923 $ 15,994 $ 10,965 $ 13,249
========= ========= ========= ========= ========= ========= =========
The following table sets forth historical financial information and pro
forma financial information based upon the adjustments discussed above for the
second quarter and first Six months of 2004 and 2003 as a percentage of net
sales:
Successor Predecessor Successor Predecessor
--------- ----------- --------- -----------
Pro Forma Pro Forma Pro Forma
Quarter Quarter Quarter Six Months Six Months Six Months Six
Ended Ended Ended Ended Ended Ended Months
June 26, June 28, June 28, June 26, June 26, June 28, June 28,
2004 2003 2003 2004 2004 2003 2003
--------- ----------- ---------- ---------- ---------- ----------- ----------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold 54.6% 52.6% 52.3% 54.1% 52.6% 52.6% 52.2%
----- ----- ----- ----- ----- ----- -----
Gross margin 45.4% 47.4% 47.7% 45.9% 47.4% 47.4% 47.8%
Selling, general and
administrative expenses 36.8% 42.5% 37.3% 37.5% 36.7% 40.1% 36.9%
Plant closure charges 0.4% - % - % 0.2% 0.2% - % - %
Amortization of intangibles (0.6)% - % 0.6% 0.5% 0.5% - % 0.6%
Transaction expenses - % - % - % - % - % 0.2% 0.2%
Licensing fees (1.2)% (1.4)% (1.4)% (1.2)% (1.2)% (1.4)% (1.4)%
----- ----- ----- ----- ----- ----- -----
Operating income 10.0% 6.3% 11.2% 8.9% 11.2% 8.4% 11.4%
Interest expense, net 5.4% 3.4% 5.5% 5.2% 5.2% 3.7% 5.7%
----- ----- ----- ----- ----- ----- -----
Income before income taxes 4.6% 2.9% 5.8% 3.7% 6.0% 4.7% 5.7%
Income tax expense 1.6% 1.2% 2.3% 1.3% 2.2% 1.9% 2.3%
----- ----- ----- ----- ----- ----- -----
Net income 3.0% 1.7% 3.5% 2.4% 3.8% 2.8% 3.5%
===== ===== ===== ===== ===== ===== =====
30
QUARTER ENDED JUNE 26, 2004 AS COMPARED TO PRO FORMA QUARTER ENDED JUNE 28, 2003
Net Sales. Net sales for the quarter ended June 26, 2004 increased $2.5
million, or 1.3%, to $201.8 million from $199.3 million for the pro forma
quarter ended June 28, 2003.
Wholesale bedding segment net sales increased $3.7 million, or 2.0%, to
$187.7 million for the quarter ended June 26, 2004 from $184.0 million for the
pro forma quarter ended June 28, 2003. For the second quarter of 2004 and the
pro forma second quarter of 2003, our wholesale bedding segment net sales
reflect a reduction of $19.5 million and $14.5 million, respectively, for cash
consideration paid to our customers for certain promotional programs and volume
rebates in accordance with Emerging Issues Task Force of the Financial
Accounting Standards Board 01-9, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Product" ("EITF 01-9"). The
wholesale bedding segment net sales increase was primarily due to an increase in
average unit selling prices ("AUSP") of 4.8%, partially offset by a decrease in
unit volume of 1.3%, compared to the pro forma second quarter of 2003. Our
improvements in AUSP was primarily attributable to a shift in our sales mix
toward our Beautyrest(R) branded product line following the rollout of the new
Beautyrest(R) 2004 product line in the first quarter of 2004. Our Beautyrest(R)
branded product has a higher AUSP compared to our other branded product lines.
Our unit volume decrease resulted primarily from lower unit sales to the
contract channel and the timing of promotional sales with certain dealers.
Our second quarter 2004 wholesale bedding sales, exclusive of EITF 01-9
sales deductions, which is the methodology used by the International Sleep
Products Association ("ISPA") in estimating industry sales, were up 4.4% over
the prior year pro forma second quarter. In comparison, ISPA estimated that for
the second quarter of 2004 total U.S. bedding manufacturers' sales were up 11.5%
over the prior year second quarter, comprised of an increase in unit shipments
and AUSP of 4.5% and 6.7%, respectively. We believe that our sales growth was
less than the industry due to our relatively higher growth in prior periods as
compared to the industry. Our second quarter of 2003 sales were up 18.3% over
the second quarter of 2002, whereas the industry was up 1.3% over the same
period.
Our retail segment sales for the quarter ended June 26, 2004 decreased
$4.2 million, or 17.9%, to $19.2 million from $23.4 million for the pro forma
quarter ended June 28, 2003. Retail segment sales were negatively impacted by
the sale of our Mattress Gallery retail operations on May 1, 2004. Mattress
Gallery contributed $3.0 million of retail sales in the second quarter of 2004
prior to its sale as compared to $9.9 million of retail sales in the pro forma
second quarter of 2003. On a comparable store basis, sales for our retail stores
increased 21.7% for the second quarter of 2004 versus the pro forma second
quarter of 2003. Retail segment same store sales benefited from an improved
retail sales environment versus a year ago, market share gains and increased
advertising.
Cost of Products Sold. For the quarter ended June 26, 2004, cost of
products sold, as a percentage of net sales, increased 2.3 percentage points to
54.6% from 52.3% for the pro forma quarter ended June 28, 2003. The increase in
our cost of products sold resulted principally from inflation in prices for
steel, foam and wood that were not passed on to our customers. Our wholesale
segment gross margin for the remainder of 2004 may be negatively impacted by
inflation in prices for steel, foam and wood and the start-up costs associated
with our new manufacturing facilities.
31
Our wholesale segment gross margin decreased 2.2 percentage points to
43.4% of wholesale segment net sales for the quarter ended June 26, 2004 from
45.6% for the pro forma quarter ended June 26, 2003. The decrease was
principally due to a 1.9 percentage point increase in the cost of raw materials
due to the inflation in prices for steel, foam and wood. Additionally, our
wholesale segment cost of products sold include $1.5 million, or 0.8 percentage
points of wholesale segment net sales, of start-up costs associated with the
opening of our Hazleton, Pennsylvania and Waycross, Georgia manufacturing
facilities. We anticipate incurring an additional $1.8 million of start-up
costs, classified as a cost of product sold, at these facilities for the
remainder of 2004.
Our retail segment gross margin of 50.4% of retail net sales for the
quarter ended June 26, 2004 was the same for the pro forma quarter ended June
28, 2003.
Selling, General and Administrative Expenses. For the quarter ended June
26, 2004, selling, general and administrative expenses ("SG&A") as a percentage
of net sales decreased 0.5 percentage points to 36.8% from 37.3% for the pro
forma quarter ended June 28, 2003. The decrease in consolidated SG&A expense is
primarily attributable to the sale of our Mattress Gallery retail operations,
which resulted in reduced SG&A expenses of $3.5 million, or 1.7 percent of our
net sales for the quarter ended June 26, 2004, compared to the pro forma quarter
ended June 28, 2003.
Our wholesale segment SG&A expenses as a percentage of wholesale segment
net sales increased 0.3 percentage points to 34.1% for the quarter ended June
26, 2004 from 33.8% for the pro forma quarter ended June 28, 2003. The increase
as a percentage of wholesale segment net sales from the pro forma second quarter
of 2003 was principally attributable to increases in selling and marketing
expenses of 0.8 percentage points and distribution costs of 0.6 percentage
points, partially offset by a 1.2 percentage point reduction of co-operative
advertising expenses. Distribution costs increased due to (i) the closing of the
Jacksonville, Florida and Columbus, Ohio manufacturing facilities resulting in
more miles driven to service customers and (ii) higher fuel costs. Co-operative
advertising expenditures classified as a selling expense decreased due to less
expenditures meeting the criteria of a selling expense in accordance with EITF
01-9 during the quarter compared to the same period of the prior year.
Our retail segment SG&A, as a percentage of retail segment net sales,
increased 0.6 percentage points to 53.4% for the quarter ended June 26, 2004
from 52.8% for the pro forma quarter ended June 28, 2003. This increase was
primarily attributable to higher distribution costs as a result of higher
fuel costs and the sale of our Mattress Gallery retail operations, which
resulted in less retail sales to cover our fixed retail SG&A.
Plant closure charges. For the quarter ended June 26, 2004, we incurred
$0.8 million of plant closure charges related to the closing of our Columbus,
Ohio manufacturing facility in April. The plant closure charges consisted of
severance, retention, rent and costs to transfer equipment. We will continue to
incur additional period costs, principally incremental distribution costs, for
the remainder of 2004 as business is shifted between manufacturing facilities.
32
Amortization of Intangibles. For the quarter ended June 26, 2004,
amortization of intangibles decreased $2.4 million to a negative $1.2 million
from $1.2 million for the pro forma quarter ended June 28, 2003. This decrease
is attributable to the finalization of the valuation of our intangible assets
relating to the Acquisition. As a result of the final valuation, a benefit of
$1.2 million was recorded in the second quarter of 2004 to properly record
amortization expense for the six months ended June 26, 2004. We anticipate that
our amortization expense will be approximately $5.0 million in total for fiscal
year 2004.
Transaction Expenses. Transaction expenses for the pro forma second
quarter of 2003 consisted of $0.1 million in costs incurred in connection with
the acquisition of SC Holdings, Inc in February 2003.
Licensing fees. For the quarter ended June 26, 2004, licensing fees
decreased $0.3 million, or 11.7%, to $2.5 million from $2.8 million for the
pro forma quarter ended June 28, 2003. Our decrease in licensing fees is
attributable to a $0.7 million licensing receivable being written-off as a
result of a licensee filing for bankruptcy during the second quarter of 2004.
Interest Expense, Net. For the quarter ended June 26, 2004, interest
expense, net of $10.9 million, or 5.4% of net sales, was the same as the
interest expense, net for the pro forma quarter ended June 28, 2003.
Income Taxes. The combined federal, state, and foreign effective income
tax rate of 36.0% for the quarter ended June 26, 2004 differs from the federal
statutory rate of 35.0% primarily due to a tax benefit realized as a result of a
decrease in the tax rate at which deferred tax assets and liabilities were
recorded in order to more properly reflect our overall state income tax
effective rate, a reduction in our prior year net operating loss carryforwards
and state income tax expense. The combined federal, state, and foreign effective
income tax rate of 39.0% for the pro forma quarter ended June 28, 2003 differed
from the federal statutory rate of 35.0% primarily due to state income tax
expense and the tax effects of non-deductible interest costs.
Net Income. For the reasons set forth above, our net income decreased $1.1
million, or 15.4%, to $6.0 million for the quarter ended June 26, 2004 compared
to $7.9 million for the pro forma quarter ended June 28, 2003.
PRO FORMA SIX MONTHS ENDED JUNE 26, 2004 AS COMPARED TO PRO FORMA SIX MONTHS
ENDED JUNE 28, 2003
Net Sales. Net sales for the pro forma six months ended June 26, 2004
increased $39.2 million, or 10.2%, to $425.1 million from $385.9 million for the
pro forma six months ended June 28, 2003.
Wholesale bedding segment net sales increased $38.7 million, or 10.9%, to
$394.8 million for the pro forma six months ended June 26, 2004 from $356.1
million for the pro forma six months ended June 28, 2003. For the first six
months of 2004 and 2003, our wholesale bedding segment net sales reflect a
reduction of $32.1 million and $27.4 million, respectively, for cash
consideration paid to our customers for certain promotional programs and volume
rebates in accordance with EITF 01-9. The wholesale bedding segment net sales
increase was
33
primarily due to an increase in both unit shipments and AUSP of 3.5% and 7.1%,
respectively, compared to the first six months of 2003. Our improvement in AUSP
was primarily attributable to a shift in our sales mix toward our higher priced
Beautyrest(R) and BackCare(R) product lines. Our unit shipments growth resulted
primarily from additional floor placements at new and existing customers and an
improved retail sales environment compared to the prior year period.
Our first six months 2004 wholesale bedding sales, exclusive of EITF 01-9
sales deductions, which is the methodology used by ISPA in estimating industry
sales, were up 11.3% over the prior year first six months. In comparison, ISPA
estimated that for the first six months of 2004 total U.S. bedding
manufacturers' sales were up 13.9% over the prior year first six months,
comprised of an increase in unit shipments and AUSP of 7.6% and 5.9%,
respectively.
Our retail segment sales for the pro forma six months ended June 26, 2004
decreased $1.3 million, or 2.9%, to $44.3 million from $45.7 million for the pro
forma six months ended June 28, 2003. Retail segment sales were negatively
impacted by the sale of our Mattress Gallery retail operations on May 1, 2004.
Mattress Gallery contributed $12.9 million of retail sales for the pro forma six
months ended June 26, 2004 prior to its sale compared to $18.1 million of
retail sales for the pro forma six months ended June 28, 2003. On a comparable
store basis, our retail store sales increased 16.8% for the first six months of
2004 compared to the prior year period. Retail segment sales benefited from an
improved retail sales environment and increased advertising.
Cost of Products Sold. For the pro forma six months ended June 26, 2004,
cost of products sold, as a percentage of net sales increased 0.4 percentage
points to 52.6% from 52.2% for the pro forma six months ended June 28, 2003. The
increase in our cost of products sold resulted principally from inflation in
prices for steel, foam and wood during the second quarter of 2004 that were not
passed on to our customers.
Our wholesale segment gross margin increased 0.1 percentage points to 45.5%
for the pro forma six months ended June 26, 2004 from 45.4% for the pro forma
six months ended June 28, 2003 due to better absorption of manufacturing fixed
costs as a result of our unit volume growth and operating one less manufacturing
facility in 2004 as a result of the closure of our Jacksonville, Florida plant
in December 2003. Partially offsetting this improvement, our wholesale segment
raw material costs, as a percentage of wholesale segment net sales, increased
0.8 percentage points, due to material price increases not passed along to our
customers. Our wholesale segment cost of products sold include $3.2 million, or
0.8 percentage points, of plant start-up costs associated with the opening of
our Hazleton, Pennsylvania and Waycross, Georgia manufacturing facilities. We
anticipate incurring an additional $1.8 million of start-up costs, recorded as a
cost of product sold, at these facilities for the remainder of 2004.
Our retail segment gross margin decreased 0.4 percentage points to 50.3%
for the pro forma six months ended June 26, 2004 from 50.7% for the pro forma
six months ended June 28, 2003. Our retail gross margins decreased primarily due
to the sale of a greater number of floor samples at a discount in connection
with the change-out of product lines in 2004 compared to 2003.
34
Selling, General and Administrative Expenses. For the pro forma six months
ended June 26, 2004, SG&A as a percentage of net sales decreased 0.2 percentage
points, to 36.7% from 36.9% for the pro forma six months ended June 28, 2003.
The decrease in consolidated SG&A expense is primarily attributable to the sale
of our Mattress Gallery retail operations, which resulted in lower SG&A expenses
of $3.9 million, or 0.9 percent of our net sales for the pro forma six months
ended June 26, 2004, compared to the pro forma six months ended June 28, 2003.
Our wholesale segment SG&A as a percentage of wholesale segment net sales
increased 0.6 percentage points to 33.8% for the pro forma six months ended June
26, 2004 from 33.2% for the pro forma six months ended June 28, 2003. The
increase was principally attributable to increases in co-operative advertising
expenses of 0.8 percentage points and distribution costs of 0.4 percentage
points, partially offset by a 0.5 percentage point reduction of administrative
costs. Co-operative advertising expenditures classified as a selling expense
increased due to more expenditures meeting the criteria of a selling expense in
accordance with EITF 01-9 during the six months ended June 26, 2004 compared to
the same period of the prior year. Distribution costs increased versus prior
year due to (i) the closing of our Jacksonville, Florida and Columbus, Ohio
manufacturing facilities in December 2003 and April 2004, respectively, while
new facilities in Hazleton, Pennsylvania and Waycross, Georgia were starting-up,
resulted in more miles driven to service customers and (ii) higher average fuel
costs. Our administrative costs decreased due to having a national leadership
meeting in the first quarter of 2003 that did not reoccur in 2004.
Our retail segment SG&A as a percentage of retail segment net sales
decreased 1.5 percentage points to 51.5% for the pro forma six months ended June
26, 2004 from 53.0% for the pro forma six months ended June 28, 2003. This
decrease was primarily attributable to the sale of our Mattress Gallery retail
operations in May 2004.
Plant closure charges. For the six months ended June 26, 2004, we incurred
$0.8 million of plant closure charges related to the closing of our Columbus,
Ohio manufacturing facility in April. The plant closure charges consisted of
severance, retention, rent and costs to transfer equipment. We will continue to
incur additional period costs, principally incremental distribution costs, for
the remainder of 2004 as business is shifted between manufacturing facilities.
Amortization of Intangibles. For the pro forma six months ended June 26,
2004, amortization of intangibles of $2.4 million was the same amount as for the
pro forma six months ended June 28, 2003. We anticipate that our amortization
expense will be approximately $5.0 million for fiscal year 2004.
Transaction Expenses. Transaction expenses for the first six months of
2003 consisted of $0.8 million in costs incurred in connection with the
acquisition of SC Holdings, Inc. in February 2003.
Licensing fees. For the pro forma six months ended June 26, 2004,
licensing fees
35
decreased $0.4 million, or 6.7%, to $5.1 million from $5.5 million for the pro
forma six months ended June 28, 2003. Our decrease in licensing fees is
attributable to a $0.7 million licensing receivable being written-off as a
result of a licensee filing for bankruptcy during the second quarter of 2004.
Interest Expense, Net. For the pro forma six months ended June 26, 2004,
interest expense, net of $22.0 million, or 5.2% of net sales, was the same as
the interest expense, net for the pro forma six months ended June 28, 2003.
Income Taxes. The combined federal, state, and foreign effective income
tax rate of 36.0% for the pro forma six months ended June 26, 2004 differs from
the federal statutory rate of 35.0% primarily due to a tax benefit realized as a
result of a decrease in the tax rate at which deferred tax assets and
liabilities were recorded in order to more properly reflect our overall state
income tax effective rate, a reduction in our prior year net operating loss
carryforwards and state income tax expense. The combined federal, state, and
foreign effective income tax rate of 39.8% for the pro forma six months ended
June 28, 2003 differed from the federal statutory rate of 35.0% primarily due to
state income tax expense and the tax effects of non-deductible interest costs.
Net Income. For the reasons set forth above, our net income increased $2.7
million, or 20.7%, to $16.0 million for the pro forma six months ended June 26,
2004 compared to $13.3 million for the pro forma six months ended June 28, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash to fund liquidity needs are (i) cash
provided by operating activities and (ii) borrowings available under our Senior
Credit Facility. Our primary use of funds consists of payments of principal and
interest for our debt, capital expenditures, acquisitions, and funding for
working capital increases. Barring any unexpected significant external or
internal developments, we expect current cash balances on hand, cash provided by
operating activities and borrowings available under our Senior Credit Facility
to be sufficient to meet our short-term and long-term liquidity needs.
In the first six months of 2004, our net debt, total debt less cash,
decreased by $38.4 million to $728.2 million and our capital expenditures were
$6.7 million. We expect to spend approximately $18 million on capital
expenditures in fiscal year 2004. We believe that annual capital expenditure
limitations in our Senior Credit Facility will not significantly inhibit us from
meeting our ongoing capital expenditure needs.
As of June 26, 2004, we had availability to borrow $64.5 million under our
Revolving Loan Facility after giving effect to $10.5 million that was reserved
for our reimbursement obligations with respect to outstanding letters of credit.
The weighted average interest rates per annum in effect as of June 26, 2004 for
the Tranche B Term Loan and Senior Unsecured Term Loan were 4.13% and 5.13%,
respectively.
On April 12, 2004, we repurchased the remaining 10.25% Series B Senior
Subordinated
36
Notes ("Old Notes") outstanding at 105.125% of the principal amount thereof for
a total payment of $5.3 million.
We sold the stock of our Mattress Gallery subsidiary, which was considered
an asset held for sale as of December 27, 2003, on May 1, 2004 to PCM for cash
proceeds of $6.5 million plus the cancellation of all intercompany debts,
excluding current trade payables owed to Simmons Bedding Company. In connection
with the sale, we entered into a five-year supply agreement with PCM. Following
the sale, we continue to guarantee approximately $3.0 million of Mattress
Gallery's obligations under certain store and warehouse leases that expire over
various periods through 2010.
Our cash flows from operations for the first six months increased $33.5
million to a source of $39.1 million for the first six months of 2004 from a
source of $5.6 million for the first six months of 2003. Our working capital
improved $6.5 million during the first six months due principally to the selling
of inventory that was written-up to fair market value as part of the allocation
of the Acquisition purchase price. Our June 26, 2004 working capital and cash
flow from operations for the first six months of 2004 were also impacted by (i)
a decrease in our wholesale segment accounts receivable days sales outstanding
to 38 in the second quarter of 2004 from 46 in the second quarter of 2003; (ii)
wholesale segment accounts payable days grew to 36 in the second quarter of 2004
from 46 in the second quarter of 2003; and (iii) inventory turns slowed to 16 in
the second quarter of 2004 from 18 in the second quarter of 2003.
Our long-term obligations contain various financial tests and covenants.
We were in compliance with such covenants as of the quarter ended June 26, 2004.
The most restrictive covenants relate to ratios of Adjusted EBITDA to interest
coverage (interest coverage ratio), total debt to Adjusted EBITDA (total
leverage ratio), and maximum capital expenditures all as defined in the Senior
Credit Facility. The minimum interest coverage and maximum leverage ratios are
computed based on our results for the last twelve months ended. More
specifically, the Senior Credit Facility's covenant require:
- a minimum interest coverage ratio, with compliance levels ranging
from an interest coverage of no less than 2.25:1:00 from March 31,
2004 through December 31, 2004; 2.30:1.00 from March 31, 2005
through December 31, 2005; 2.40:1.00 from March 31, 2006 to December
31, 2006; 2.55:1.00 from March 31, 2007 through December 31, 2007;
2.75:1.00 from March 31, 2008 through December 31, 2008; and
3.00:1.00 as of March 31, 2009 and each fiscal quarter ending
thereafter.
- A maximum total leverage ratio, with compliance levels ranging from
total leverage of no greater than 6.85:1.00 from March 31, 2004
through December 31, 2004; 6.50:1.00 from March 31, 2005 through
December 31, 2005; 6.00:1.00 as of March 31, 2006 and June 30, 2006;
5.75:1.00 as of September 30, 2006 and December 31, 2006; 5.00:1.00
from March 31, 2007 through December 31, 2007; 4.50:1.00 from March
31, 2008 through December 31, 2008; and 4.00:1.00 as of March 31,
2009 and each fiscal quarter ending thereafter.
- a maximum capital expenditure limitation of $20.0 million per fiscal
year, with the ability to rollforward to future years unused amounts
for the previous fiscal year, and also
37
subject to adjustments for certain acquisitions and other events.
We expect to meet such covenants in 2004. Adjusted EBITDA (as defined in
the Senior Credit Facility) differs from the term "EBITDA" as it is commonly
used. In addition to adjusting net income to exclude interest expense, income
taxes, depreciation and amortization, Adjusted EBITDA also adjusts net income by
excluding items or expenses not typically excluded in the calculation of
"EBITDA" such as management fees; ESOP expenses; the aggregate amount of the
fees, costs and cash expenses paid by the Company in connection with the
consummation of the Acquisition (including without limitation, bonus and option
payments); other non-cash items reducing consolidated net income (including,
without limitation, non-cash purchase accounting adjustments and debt
extinguishment costs); the cure amount, if any, received by Simmons in respect
of that period; any extraordinary, unusual or non-recurring gains or losses or
charges or credits; and any reasonable expenses or charges related to any
issuance of securities, investments permitted, permitted acquisitions,
recapitalizations, asset sales permitted or indebtedness permitted to be
incurred, less other non-cash items increasing consolidated net income, all of
the foregoing as determined on a consolidated basis for the Company in
conformity with GAAP. Adjusted EBITDA is presented herein because it is a
material component of the covenants contained within the aforementioned credit
agreements. Non-compliance with such covenants could result in the requirement
to immediately repay all amounts outstanding under such agreements which could
have a material adverse effect on our results of operations, financial position
and cash flow. While the determination of "unusual and nonrecurring losses" is
subject to interpretation and requires judgment, we believe the Adjusted EBITDA
presented below is in accordance with the Senior Credit Facility. Adjusted
EBITDA does not represent net income or cash flow from operations as those terms
are defined by GAAP and does not necessarily indicate whether cash flows will be
sufficient to fund cash needs.
The following is a calculation of our minimum interest coverage and
maximum leverage ratios under the Senior Credit Facility as of June 26, 2004
(amounts In thousands, except ratios). The terms and related calculations are
defined in the Senior Credit Facility.
June 26,
2004
--------
Calculation of Minimum Cash Interest Coverage Ratio:
Twelve months ended Adjusted EBITDA(1) $ 131,229
=========
Consolidated cash interest expense(2) $ 42,296
=========
Actual interest coverage ratio(3) 3.10x
Minimum Permitted Interest Coverage Ratio 2.25x
Calculation of Maximum Leverage Ratio:
Consolidated indebtedness $ 752,575
Less: Cash and cash equivalents (24,377)
---------
Net debt $ 728,199
=========
Adjusted EBITDA(1) $ 131,229
=========
Actual Leverage Ratio(4) 5.55x
Maximum Permitted Leverage Ratio 6.85x
(1) Adjusted EBITDA for the twelve months ended June 26, 2004 adds back to net
income the following items: income taxes, interest expense, depreciation
and amortization,
38
variable stock compensation expense, transaction related expenditures,
plant opening and closing charges, certain litigation and insurance
charges relating to previous periods, retail segment charges relating to
previous periods, management fees, and other non-recurring/non-cash
charges as permitted under our Senior Credit Facility.
(2) Consolidated cash interest expense, as defined in the Senior Credit
Facility, for the period ended June 26, 2004, as follows (In thousands):
Interest expense, net $21,981
Interest income 75
-------
Gross interest expense 22,056
Less: Non-cash interest expense 908
-------
21,148
X 2
-------
Consolidated cash interest expense $42,296
=======
(3) Represents ratio of Adjusted EBITDA to consolidated cash interest expense.
(4) Represents ratio of consolidated indebtedness less cash and cash
equivalents to Adjusted EBITDA.
SEASONALITY/OTHER
For the past several years, there has not been significant seasonality to
our wholesale bedding business. Our retail bedding business, which accounted for
$44.3 million, or 10.4%, of our consolidated net sales for the first six months
of 2004, has historically experienced, and we expect will continue to
experience, seasonal and quarterly fluctuations in net sales, operating income
and Adjusted EBITDA. As is the case with many bedding retailers, our retail
business is subject to seasonal influences, typically characterized by higher
sales for the months of May through September, which impacts our second and
third quarter results.
MARKET RISK
The principal market risks to which we are exposed that may adversely
affect our results of operations and financial position include changes in
future commodity prices and interest rates. We seek to minimize or manage these
market risks through normal operating and financing activities and through the
use of interest rate cap agreements, where practicable. We do not trade or use
instruments with the objective of earning financial gains on the interest rate
fluctuations, nor do we use instruments where there are not underlying
exposures.
INTEREST RATE RISK
We are exposed to market risk from changes in interest rates. In order to
address this risk, the Senior Credit Facility requires us to adopt interest rate
protection measures on our variable rate indebtedness such that 50% of our
consolidated funded indebtedness is either fixed or protected.
39
In order to address interest rate risk, we have developed and implemented
a policy to utilize extended Eurodollar contracts to minimize the impact of near
term Eurodollar rate increases. On January 26, 2004, we elected to set the
interest rate at the twelve-month Eurodollar Rate for approximately $325.0
million of the Tranche B Term Loan and the $140.0 million Senior Unsecured Term
Loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for
approximately 86% of our floating rate debt outstanding as of June 26, 2004.
Additionally, to further address interest rate risk, we entered into an interest
rate cap agreement on February 11, 2004 for a notional amount of $170.0 million,
which capped the Eurodollar Rate, plus applicable margin, at 5.0% for the period
of January 26, 2005 through January 26, 2006.
All other factors remaining unchanged, a hypothetical 10% increase or
decrease in interest rates for one year on our variable rate financial
instruments would not have a material impact on earnings during 2004, but would
result in an additional $2.4 million of interest expense in 2005.
COMMODITY PRICE RISK
The major raw materials that we purchase for production are wire, spring
components, lumber, cotton, insulator pads, innersprings, fabrics and roll goods
consisting of foam, fiber, ticking and non-wovens. The price and availability of
these raw materials are subject to market conditions affecting supply and
demand. In particular, many of our goods can be impacted by fluctuations in
petrochemical and steel prices. We currently do not have a hedging program in
place to manage fluctuations in commodity prices.
ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements that had an impact on the
Company's consolidated financial statements.
FORWARD LOOKING STATEMENTS
Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995. When used in this Quarterly Report on Form 10-Q, the words "believes,"
"anticipates," "expects," "intends," "projects" and similar expressions are used
to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future financial and operating results, including expected benefits from our
Better Sleep Through Science(R) philosophy. Any forward-looking statements
contained in this report represent our management's current expectations, based
on present information and current assumptions, and are thus prospective and
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed in such forward-looking statements. Actual
results could differ materially from those anticipated or projected due to a
number of factors. These factors include, but are not limited to:
- the level of competition in the bedding industry;
40
- legal and regulatory requirements;
- the success of new products;
- our relationships with our major suppliers;
- fluctuations in costs of raw materials;
- our relationship with significant customers and licensees;
- our labor relations;
- departure of key personnel;
- encroachments on our intellectual property;
- product liability claims;
- the timing, cost and success of opening new manufacturing
facilities;
- our level of indebtedness;
- interest rate risks;
- future acquisitions;
- an increase in return rates; and
- other risks and factors identified from time to time in the
Company's reports filed with the Securities and Exchange Commission
("SEC"), including the Form 10-K for 2003 and the Form 10-Q for the
first quarter of 2004.
All forward-looking statements attributable to us or persons acting on our
behalf apply only as of the date of this Quarterly Report on Form 10-Q and are
expressly qualified in their entirety by the cautionary statements included in
this Quarterly Report on Form 10-Q. Except as may be required by law, we
undertake no obligation to publicly update or revise forward-looking statements
which may be made to reflect events or circumstances after the date made or to
reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information relative to our market risk sensitive instruments by major
category as of December 27, 2003 is presented under Item 7A of our Annual Report
on Form 10-K for the
41
fiscal year ended December 27, 2003. There have been no material changes to this
information as of March 27, 2004.
Item 4. Internal Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the end of the
period covered by this report (the "Evaluation Date"). Based on this evaluation,
our principal executive officer and principal financial officer concluded as of
the Evaluation Date that our disclosure controls and procedures were effective
such that the information relating to the Company, including our consolidated
subsidiaries, required to be disclosed in our SEC reports (i) is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated to the Company's
management, including our principal executive and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Chief Executive Officer Certification of the Type Described in Rule
13a - 14(a) and Rule 15d - 14(a)
31.2 Chief Financial Officer Certification of the Type Described in Rule
13a - 14(a) and Rule 15d - 14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 (furnished herewith)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (furnished herewith)
(b) Reports on Form 8-K
On May 13, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 12 the Press Release dated May 11, 2004
announcing the results of operations for the first quarter of 2004.
On May 14, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 5 the Press Release dated May 14, 2004
announcing the Company's indirect parent, Simmons Company, intention
of pursuing an initial public offering of its common stock.
42
On June 8, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 5 the Press Release dated June 8, 2004
announcing the Company's indirect parent, Simmons Company, filed a
registration statement for an initial public offering of its common
stock.
On June 14, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 5 the Company's indirect parent, Simmons
Company, terminated its deferred compensation plan by issuing
197,998 shares of Class A common stock in exchange for deemed Class
A shares of common stock held by participants in its deferred
compensation plan.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, Simmons Bedding Company has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
SIMMONS BEDDING COMPANY
By: /s/ William S. Creekmuir
----------------------------------------------
William S. Creekmuir
Executive Vice President & Chief Financial Officer
Date: August 10, 2004
44