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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 September 25, 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
November 9, 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 Nine Months | Nine Months
Ended | Ended Ended | Ended
September 25, | September 27, September 25, | September 27,
2004 | 2003 2004 | 2003
------------- | ------------- ------------- | -------------
| |
Net sales $ 238,221 | $ 217,924 $ 663,336 | $ 603,838
Cost of products sold 127,050 | 113,433 357,160 | 316,404
--------- | --------- --------- | ---------
Gross profit 111,171 | 104,491 306,176 | 287,434
--------- | --------- --------- | ---------
| |
Operating expenses: | |
Selling, general and | |
administrative expenses 86,844 | 82,359 246,124 | 237,235
Plant closure charges - | - 764 | -
Amortization of intangibles 1,220 | 71 3,509 | 241
Transaction expenses 57 | 65 305 | 887
Licensing fees (2,435) | (2,365) (7,497) | (7,789)
--------- | --------- --------- | ---------
85,686 | 80,130 243,205 | 230,574
--------- | --------- --------- | ---------
| |
Operating income 25,485 | 24,361 62,971 | 56,860
Interest expense, net 10,737 | 7,299 32,718 | 21,470
--------- | --------- --------- | ---------
Income before income taxes 14,748 | 17,062 30,253 | 35,390
Income tax expense 5,309 | 1,489 10,891 | 8,852
--------- | --------- --------- | ---------
Net income 9,439 | 15,573 19,362 | 26,538
| |
Other comprehensive income: | |
Foreign currency translation | |
adjustment 42 | (3) 32 | 222
--------- | --------- --------- | ---------
Comprehensive income $ 9,481 | $ 15,570 $ 19,394 | $ 26,760
========= | ========= ========= | =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 25, December 27,
2004 2003*
------------ ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,030 $ 3,670
Accounts receivable, less allowances for
doubtful receivables, discounts, and returns
of $5,949 and $4,960 87,222 65,868
Inventories 30,739 31,355
Deferred income taxes 2,565 973
Other current assets 16,688 22,616
Assets held for sale - 8,564
---------- ----------
Total current assets 154,244 133,046
---------- ----------
Property, plant and equipment, net 61,287 53,228
Goodwill 493,818 792,230
Intangible assets, net 543,606 159,198
Other assets 43,097 45,417
---------- ----------
$1,296,052 $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
(Dollars in thousands)
September 25, December 27,
2004 2003*
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,506 $ 9,512
Accounts payable 53,617 39,956
Accrued wages and benefits 16,786 20,230
Accrued advertising and incentives 26,590 21,612
Accrued interest 6,197 1,238
Other accrued expenses 14,285 10,868
Liabilities held for sale - 2,064
----------- -----------
Total current liabilities 118,981 105,480
----------- -----------
Non-current liabilities:
Long-term debt 750,926 760,741
Deferred income taxes 157,308 23,719
Other 13,563 12,902
----------- -----------
Total liabilities 1,040,778 902,842
----------- -----------
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) 12,172 (7,190)
Accumulated other comprehensive income 49 17
----------- -----------
Total common stockholder's equity 255,274 280,277
----------- -----------
$ 1,296,052 $ 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
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Successor | Predecessor
-------------- | ------------
Nine Months | Nine Months
Ended | Ended
September 25, | September 27,
2004 | 2003
-------------- | -------------
|
Cash flows from operating activities: |
Net income $ 19,362 | $ 26,538
Adjustments to reconcile net income to net cash |
provided by operating activities: |
Depreciation and amortization 16,653 | 16,814
Provision for bad debts 2,735 | 2,758
Provision for deferred income taxes 11,061 | 1,997
Non-cash interest expense 1,370 | 2,431
Non-cash stock compensation expense 3,308 | 15,118
Other, net - | (249)
Net changes in operating assets and liabilities: |
Accounts receivable (21,855) | (19,561)
Inventories 4,531 | (2,982)
Other current assets 5,911 | (7,271)
Accounts payable 15,485 | 691
Accrued liabilities 7,670 | 5,113
Other, net (6,590) | (7,522)
--------- | ---------
Net cash provided by operating activities 59,641 | 33,875
--------- | ---------
Cash flows from investing activities: |
Purchases of property, plant and equipment (15,216) | (4,857)
Proceeds from the sale of Gallery Corp., net 6,327 | -
Purchase of certain assets of Simmons Juvenile |
Products Company, Inc. (19,668) | -
Other, net 2,231 | (1,682)
--------- | ---------
Net cash used in investing activities (26,326) | (6,539)
--------- | ---------
Cash flows from financing activities: |
Payments of Successor Senior Credit Facility, net (11,675) | -
Payments of other Successor debt (6,146) | -
Payments to Simmons Company (1,296) | -
Repurchase of SC Holdings, Inc. minority interest and |
payment of SC Holdings, Inc. debt - | (18,653)
Payments on Predecessor Senior Credit Facility, net - | (12,005)
Payments of other Predecessor debt - | (1,980)
Payments of financing fees (870) | -
--------- | ---------
Net cash used in financing activities (19,987) | (32,638)
--------- | ---------
Net effect of exchange rate changes on cash 32 | 222
--------- | ---------
Change in cash and cash equivalents 13,360 | (5,080)
Cash and cash equivalents, beginning of period 3,670 | 7,108
--------- | ---------
Cash and cash equivalents, end of period $ 17,030 | $ 2,028
========= | =========
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
(Dollars in thousands)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS/ OTHER TOTAL
COMMON COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
SHARES STOCK CAPITAL DEFICIT) INCOME EQUITY
--------- --------- --------- ------------ ------------- -------------
DECEMBER 27, 2003 (AUDITED) 100 $ 1 $ 287,449 $ (7,190) $ 17 $ 280,277
Net income - - - 19,362 - 19,362
Other comprehensive
income (loss):
Change in foreign
currency translation - - - - 32 32
Comprehensive income/
(loss) - - - 19,362 32 19,394
Deemed dividend to reflect
carryover basis - - (47,705) - - (47,705)
Termination of deferred
compensation plan - - 3,308 - - 3,308
------- --------- --------- --------- --------- ---------
SEPTEMBER 25, 2004 (UNAUDITED) 100 $ 1 $ 243,052 $ 12,172 $ 49 $ 255,274
======= ========= ========= ========= ========= =========
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 September 25, 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 September 25, 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 from Simmons Company 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 and later renamed Simmons Bedding
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;
- The Company's portfolio of brands;
7
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- 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 ("Senior 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
("Senior Unsecured Term Loan Facility"); (iii) issuance of $200.0 million 7.875%
senior subordinated notes ("7.875% 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 Simmons Company. 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 L 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 continuing management investors, as a result of the Acquisition, 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 purchase price
allocation was made using preliminary estimates of the values of the
intangibles. Based upon the final valuation completed in the
8
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
second quarter, the fair market value of the identifiable intangible assets on
the date of Acquisition was $597.3 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:
- In the final valuation, identifiable intangibles included trademarks,
patented and unpatented technology, contractual and non-contractual
customer base, and non-compete agreements. In the preliminary valuation,
identifiable intangibles included trademarks, patents, customer contracts,
non-compete agreements, licenses, contract sales, employment contracts,
equipment leases, software, brands, supplier lists and domain names.
- The preliminary valuation did not fully consider the Acquisition discount
rate in determining the asset discount rates, nor were all income streams
captured. However, in the final valuation, the discount rate was
considered and all income streams captured.
As a result, during the second quarter identifiable intangible assets were
adjusted to reflect the final valuation, which resulted in an 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.
Additionally, a deferred tax liability of $141.4 million was recorded on the
additional step-up of the identifiable intangible assets. Following is a summary
comparison of the tentative and final allocation of the 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 $ 141,272
Property, plant and equipment 54,446 53,802
Goodwill 792,230 492,637
Other assets 50,385 50,385
Intangibles 159,511 530,221
----------- -----------
Total assets acquired 1,193,868 1,268,317
----------- -----------
Current liabilities (91,765) (91,765)
Acquisition costs (24,939) (24,655)
Non-current liabilities (62,295) (184,731)
----------- -----------
Total liabilities assumed (178,999) (301,151)
----------- -----------
Deemed dividend 100,388 148,091
----------- -----------
Purchase price $ 1,115,257 $ 1,115,257
=========== ===========
9
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Definite-lived intangible asset classes were assigned the following
amounts and have the following weighted average amortization lives (dollars
in thousands):
WEIGHTED
AVERAGE ALLOCATED
LIFE AMOUNT
-------- ----------
Patented and unpatented technology 25 $ 32,578
Contractual and non-contractual customer base 23 67,956
Non-compete agreements 3 1,832
---------
$ 102,366
=========
Trademarks, which are considered indefinite-lived intangible assets, were
assigned a value of $427.9 million.
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 $475.8 million and $16.8
million, respectively.
D. ACQUISITION OF CERTAIN ASSETS OF SIMMONS JUVENILE PRODUCTS COMPANY, INC.
On August 27, 2004, the Company acquired certain assets and liabilities of
the crib mattress and related soft goods business of Simmons Juvenile Products
Company, Inc. ("Simmons Juvenile"), a licensee of the Company, for $19.7 million
in cash, including transaction costs. Additional contingent consideration, not
to exceed $4.4 million, will be paid by the Company based upon Simmons
Juvenile's future operating performance. The purchase price allocation will be
adjusted within the year subsequent to the acquisition should the contingent
consideration be paid.
Simmons Juvenile manufactures and sells Simmons branded crib mattresses
and related soft goods to the U.S. infant market. The acquisition of Simmons
Juvenile provides the Company access to sell products to the U.S. infant market.
Simmons Juvenile has leased manufacturing and distribution operations in York,
Pennsylvania; Oshkosh, Wisconsin and Ontario, California. The leases for these
facilities expire in 2005 and 2006.
10
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company recorded the acquisition using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values.
Following is a summary of the estimated fair values of the assets acquired and
liabilities assumed as of the date of acquisition (in thousands):
Current assets $ 3,673
Property, plant and equipment 49
Goodwill 1,173
Intangibles 17,200
---------
Total assets acquired 22,095
---------
Current liabilities (2,203)
Non-current liabilities (224)
---------
Total liabilities assumed (2,427)
---------
Purchase price $ 19,668
=========
The intangible assets acquired include non-contractual customer contracts
of $8.0 million and trademarks of $9.2 million. The non-contractual customer
contracts have a weighted average life of nine years. The trademarks have an
indefinite-life. The goodwill, which is expected to be deductible for tax
purposes over 15 years, was $2.9 million and was assigned to the Company's
wholesale segment. There were no pre-acquisition contingencies related to the
acquisition of Simmons Juvenile.
The results of operations for Simmons Juvenile from August 27, 2004
through September 25, 2004 are included in the Company's results of operations
for the quarter and nine months ended September 25, 2004. This acquisition is
not considered significant to the Company's balance sheet and statement of
operations, therefore pro forma information has not been presented.
E. SALE OF GALLERY CORP.
The Company sold its Gallery Corp. ("Mattress Gallery") retail operations
in a stock transaction on May 1, 2004 to Pacific Coast Mattress, Inc. ("PCM")
for cash proceeds of $6.4 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 $2.6 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
11
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 27, 2003 consolidated balance sheet. The Company did not reflect 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 four months ended May 1, 2004,
Mattress Gallery's net sales and net loss were $12.9 million and $3.3 million,
respectively. For the nine months ended September 27, 2003, Mattress Gallery's
net sales and net loss were $29.8 million and $1.1 million, respectively.
F. INVENTORIES
A summary of inventories, exclusive of inventories included in assets held
for sale as of December 27, 2003, follows (in thousands):
SEPTEMBER 25, DECEMBER 27,
2004 2003
--------- ---------
Raw materials $ 14,214 $ 13,005
Work-in-progress 950 1,099
Finished goods 11,451 12,476
Inventory held at retail stores 4,124 4,775
--------- ---------
$ 30,739 $ 31,355
========= =========
G. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following as of September 25, 2004 and
December 27, 2003 (dollars in thousands):
SEPTEMBER 25, 2004 DECEMBER 27, 2003
WEIGHTED ----------------------------- -------------------------------
AVERAGE GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- -------------- ------------ -------------- --------------
Definite-lived intangible
assets:
Patents 25 $ 32,578 $ (1,006) $ 29,994 $ (66)
Customer contracts 23 75,956 (2,244) 20,078 (40)
Licenses - - - 15,370 (56)
Contract sales - - - 8,823 (48)
Employment contracts - - - 3,367 (25)
Equipment leases - - - 660 (14)
Software - - - 2,249 (25)
Non-compete agreements 3 1,832 (565) 2,838 (32)
-------------- ------------ -------------- ------------
$ 110,366 $ (3,815) $ 83,379 $ (306)
============== ============ ============== ============
Indefinite-lived intangible
assets:
Trademarks $ 437,055 $ 29,573
Brands - 43,505
Supplier lists - 2,567
Domain names - 480
-------------- --------------
$ 437,055 $ 76,125
============== ==============
12
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company finalized the valuation of intangible assets acquired in
connection with the Acquisition during the second quarter of 2004. As of
December 27, 2003, an allocation of the value of the intangible assets was made
based upon a preliminary valuation. In the final valuation, the fair market
value of the identifiable intangible assets was $597.3 million whereas in the
preliminary valuation the fair market value was $178.9 million. The difference
in the valuation amounts was primarily attributable to the following differences
in methodology and assumptions:
- In the final valuation, identifiable intangibles included trademarks,
patented and unpatented technology, contractual and non-contractual
customer base, and non-compete agreements. In the preliminary valuation,
identifiable intangibles included trademarks, patents, customer contracts,
non-compete agreements, licenses, contract sales, employment contracts,
equipment leases, software, brands, 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, in the final valuation, the discount rate was
considered and all income streams captured.
In accordance with EITF Issue 90-12, Allocating Basis to Individual Assets
and Liabilities for Transactions within the Scope of Issue No. 88-16, a step-up
of identifiable intangible assets to fair value was recorded in purchase
accounting for the remaining interest in Simmons Company acquired by THL and
Fenway. As a result of the increase in the fair value of the identifiable
intangible assets, the amount of carryover basis reflected as a deemed dividend
increased $47.7 million to a total deemed dividend of $148.1 million.
In connection with the Acquisition, goodwill was assigned to the wholesale
and retail segments in the amount of $475.8 million and $16.8 million,
respectively. During the second quarter of 2004, the Company sold a portion of
its retail segment, Mattress Gallery. No gain or loss was recorded on the sale
since Mattress Gallery was recorded at fair value in connection with the
Acquisition. Goodwill for the retail segment decreased by $4.0 million as a
result of the sale of Mattress Gallery.
In connection with the acquisition of Simmons Juvenile, the Company
allocated the purchase price to the assets acquired and liabilities assumed
based on their estimated fair values. The intangible assets acquired included
non-contractual customer base of $8.0 million, with a weighted average life of
nine years, and trademarks of $9.2 million, with an indefinite life. The
goodwill of $1.2 million related to this acquisition was assigned to the
wholesale segment.
13
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The aggregate amortization expense associated with the definite-lived
intangible assets for the nine months ended September 25, 2004 was $3.4 million.
The estimated amortization expense for definite-lived intangible assets for 2004
as a whole and for the next four years is as follows (in thousands):
2004 $ 5,278
2005 5,870
2006 5,488
2007 5,138
2008 5,138
H. WARRANTIES
The Company's warranty policy provides for a 10-year non-prorated warranty
service period on all first quality non-juvenile 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 juvenile
products have warranty periods which range from five years to a lifetime
warranty. 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 nine
months ended September 25, 2004 and September 27, 2003 (in thousands):
FOR THE FOR THE
QUARTERS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
------------- | ------------- ------------- | -------------
SEPTEMBER 25, | SEPTEMBER 27, SEPTEMBER 25, | SEPTEMBER 27,
2004 | 2003 2004 | 2003
------------- | ------------- ------------- | -------------
| |
Balance at beginning of period $ 4,146 | $ 3,753 $ 3,803 | $ 3,434
Additional warranties issued 1,340 | 1,420 3,635 | 3,677
Warranty settlements (1,402) | (853) (3,492) | (2,791)
Revisions of estimate 94 | (435) 232 | (435)
-------------- | ------------- ------------- | -------------
Balance at end of period $ 4,178 | $ 3,885 $ 4,178 | $ 3,885
============== | ============= ============= | =============
14
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
I. LONG-TERM DEBT
A summary of long-term debt follows (in thousands):
SEPTEMBER 25, DECEMBER 27,
2004 2003
------------- ------------
Senior Credit Facility:
New Revolving Loan $ - $ 3,275
Tranche B Term Loan - 405,000
New Tranche C Term Loan 396,600 -
--------- ---------
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, 3.62%, due 2016 4,000 4,000
Banco Santander Loan, 3.15%, due 2013 1,955 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 177 878
--------- ---------
752,432 770,253
Less current portion (1,506) (9,512)
--------- ---------
$ 750,926 $ 760,741
========= =========
In connection with the Acquisition on December 19, 2003, the Company
entered into a new 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
there under 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.
On August 27, 2004, the Company amended and restated its Senior Credit
Facility to, among other things:
(i) Refinance its then existing $396.6 million Tranche B Term Loan with
a new Tranche C Term Loan priced at LIBOR + 250 basis points, a 25
basis point decline from its existing borrowing rates;
15
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(ii) Amend its existing annual capital spending limitation from $20
million to $30 million; and
(iii) Amend the limitation on indebtedness of Simmons Company, its
indirect parent, to allow for the incurrence of permitted
indebtedness up to a total leverage ratio, including debt of
Simmons Company of 6:75:1:00, provided that Simmons Bedding
Company's leverage ratio is less than 5:50:1:00.
As of September 25, 2004, the Company had availability to borrow $64.5
million under the revolving credit 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
credit 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 credit
facility to fund distributions, acquisitions and capital expenditures.
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 Credit Facility 2.50% 1.50%
Tranche C Term Loan 2.50% 1.50%
Senior Unsecured Term Loan 3.75% 2.75%
The weighted average interest rates per annum in effect as of September
25, 2004 for the Tranche C Term Loan and Senior Unsecured Term Loan were 3.95%
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. The Company has
developed and implemented a policy to utilize extended Eurodollar contracts to
minimize the impact of near term Eurodollar rate increases. For approximately
$325.0 million of the Tranche C Term Loan and the $140.0 million Senior
Unsecured Term Loan, the Company has set the interest rate utilizing
twelve-month Eurodollar Rate loans which have fixed the Eurodollar Rate at
1.375% through January 26, 2005 for approximately 86% of floating rate debt
outstanding as of September 25, 2004. Additionally, to further address interest
rate risk, the Company has an interest rate cap agreement 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.
16
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. On October 29, 2004, the Company issued $200.0 million aggregate
amount of Exchange Notes in exchange for all New Notes.
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.
17
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 25, 2004
(In thousands)
SUCCESSOR
Issuer and Guarantors
------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ (8,000) $ 242,717 $ 3,504 $ - $ 238,221
Cost of products sold 317 123,914 2,819 - 127,050
--------- --------- --------- --------- ---------
Gross margin (8,317) 118,803 685 - 111,171
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 60,134 25,977 733 - 86,844
Amortization of intangibles 336 884 - - 1,220
Transaction expenses 57 - - - 57
Intercompany fees (55,887) 55,817 70 - -
Licensing fees (259) (2,011) (165) - (2,435)
--------- --------- --------- --------- ---------
4,381 80,667 638 - 85,686
--------- --------- --------- --------- ---------
Operating income (loss) (12,698) 38,136 47 - 25,485
Interest expense, net 10,531 186 20 - 10,737
Income from subsidiaries (37,461) - - 37,461 -
--------- --------- --------- --------- ---------
Income before income taxes 14,232 37,950 27 (37,461) 14,748
Income tax expense 4,793 485 31 - 5,309
--------- --------- --------- --------- ---------
Net income $ 9,439 $ 37,465 $ (4) $ (37,461) $ 9,439
========= ========= ========= ========= =========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003
(In thousands)
PREDECESSOR
Issuer and Guarantors
------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ (16,919) $ 231,886 $ 2,957 $ - $ 217,924
Cost of products sold 356 110,957 2,120 - 113,433
--------- --------- --------- --------- ---------
Gross margin (17,275) 120,929 837 - 104,491
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 52,482 29,315 562 - 82,359
Amortization of intangibles - 71 - - 71
Transaction expenses 65 - - - 65
Intercompany fees (32,241) 31,998 243 - -
Licensing fees (273) (1,884) (208) - (2,365)
--------- --------- --------- --------- ---------
20,033 59,500 597 - 80,130
--------- --------- --------- --------- ---------
Operating income (loss) (37,308) 61,429 240 - 24,361
Interest expense, net 7,122 171 6 - 7,299
Income from subsidiaries (61,405) - - 61,405 -
--------- --------- --------- --------- ---------
Income before income taxes 16,975 61,258 234 (61,405) 17,062
Income tax expense 1,402 - 87 - 1,489
--------- --------- --------- --------- ---------
Net income $ 15,573 $ 61,258 $ 147 $ (61,405) $ 15,573
========= ========= ========= ========= =========
18
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2004
(In thousands)
SUCCESSOR
Issuer and Guarantors
------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------- ------------
Net sales $ (39,229) $ 693,675 $ 8,890 $ - $ 663,336
Cost of products sold 912 349,494 6,754 - 357,160
--------- --------- --------- --------- ----------
Gross margin (40,141) 344,181 2,136 - 306,176
--------- --------- --------- --------- ----------
Operating expenses:
Selling, general and administrative expenses 161,286 82,752 2,086 - 246,124
Plant closure charges - 764 - - 764
Amortization of intangibles 997 2,512 - - 3,509
Intercompany fees (162,767) 162,558 209 - -
Transaction expenses 305 - - - 305
Licensing fees (778) (6,270) (449) - (7,497)
--------- --------- --------- --------- ----------
(957) 242,316 1,846 - 243,205
--------- --------- --------- --------- ----------
Operating income (loss) (39,184) 101,865 290 - 62,971
Interest expense, net 32,095 583 40 - 32,718
Income from subsidiaries (76,867) - - 76,867 -
--------- --------- --------- --------- ----------
Income before income taxes 5,588 101,282 250 (76,867) 30,253
Income tax expense (benefit) (13,774) 24,556 109 - 10,891
--------- --------- --------- --------- ----------
Net income $ 19,362 $ 76,726 $ 141 $ (76,867) $ 19,362
========= ========= ========= ========= ==========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003
(In thousands)
PREDECESSOR
Issuer and Guarantors
-------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net sales $ (43,536) $ 639,516 $ 7,858 $ - $ 603,838
Cost of products sold 818 309,860 5,726 - 316,404
--------- --------- --------- --------- ---------
Gross margin (44,354) 329,656 2,132 - 287,434
--------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 152,024 83,606 1,605 - 237,235
Amortization of intangibles - 241 - - 241
Transaction expenses 701 186 - - 887
Intercompany fees (178,487) 177,810 677 - -
Licensing fees (818) (6,491) (480) - (7,789)
--------- --------- --------- --------- ---------
(26,580) 255,352 1,802 - 230,574
--------- --------- --------- --------- ---------
Operating income (loss) (17,774) 74,304 330 - 56,860
Interest expense, net 20,442 1,024 4 - 21,470
Income from subsidiaries (73,472) - - 73,472 -
--------- --------- --------- --------- ---------
Income before income taxes 35,256 73,280 326 (73,472) 35,390
Income tax expense 8,718 - 134 - 8,852
--------- --------- --------- --------- ---------
Net income $ 26,538 $ 73,280 $ 192 $ (73,472) $ 26,538
========= ========= ========= ========= =========
19
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENT CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 25,2004
(In thousands)
SUCCESSOR
Issuer and Guarantors
----------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,604 $ 5,944 $ 2,482 $ - $ 17,030
Accounts receivable (120) 84,957 2,385 - 87,222
Inventories - 29,789 950 - 30,739
Other 7,566 11,257 430 - 19,253
----------- ----------- ----------- ----------- -----------
Total current assets 16,050 131,947 6,247 - 154,244
----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 10,491 45,658 5,138 - 61,287
Goodwill and other intangibles, net 543,009 494,350 65 - 1,037,424
Other assets 30,544 11,669 884 - 43,097
Net investment in and advances to
(from) subsidiaries 231,052 10,744 (42) (241,754) -
----------- ----------- ----------- ----------- -----------
$ 831,146 $ 694,368 $ 12,292 $ (241,754) $ 1,296,052
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt 1,013 266 227 - 1,506
Accounts payable and accrued liabilities 48,114 66,150 3,211 - 117,475
----------- ----------- ----------- ----------- -----------
Total current liabilities 49,127 66,416 3,438 - 118,981
----------- ----------- ----------- ----------- -----------
Long-term debt 735,588 13,580 1,758 - 750,926
Deferred income taxes (16,305) 173,194 419 - 157,308
Net due to (from) subsidiaries (201,361) 198,761 2,600 - -
Other non-current liabilities 8,823 4,345 395 - 13,563
----------- ----------- ----------- ----------- -----------
Total liabilities 575,872 456,296 8,610 - 1,040,778
----------- ----------- ----------- ----------- -----------
Stockholder's equity 255,274 238,072 3,682 (241,754) 255,274
----------- ----------- ----------- ----------- -----------
$ 831,146 $ 694,368 $ 12,292 $ (241,754) $ 1,296,052
=========== =========== =========== =========== ===========
20
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENT CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 25,2004
(In thousands)
SUCCESSOR
Issuer and Guarantors
----------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities $(36,299) $ 92,929 $ 3,011 $ - $ 59,641
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net (1,684) (12,558) (974) - (15,216)
Proceeds from sale of Mattress Gallery 6,327 - - - 6,327
Purchase of Simmons Juvenile Products (19,668) - - - (19,668)
Other, net 2,231 - - - 2,231
-------- -------- -------- -------- --------
Net cash used in investing
activities (12,794) (12,558) (974) - (26,326)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Repayment of long-term obligations (18,350) (592) (175) - (19,117)
Receipt from (distribution to)
subsidiaries 76,302 (74,502) (1,800) - -
Debt issuance costs (870) - - - (870)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 57,082 (75,094) (1,975) - (19,987)
-------- -------- -------- -------- --------
Net effect of exchange rate change - - 32 - 32
-------- -------- -------- -------- --------
Change in cash and cash equivalents 7,989 5,277 94 - 13,360
Cash and cash equivalents:
Beginning of period 615 667 2,388 - 3,670
-------- -------- -------- -------- --------
End of period $ 8,604 $ 5,944 $ 2,482 $ - $ 17,030
======== ======== ======== ======== ========
21
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENT CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27,2003
(In thousands)
PREDECESSOR
Issuer and Guarantors
------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities $ 89,498 $ (58,267) $ 2,644 $ - $ 33,875
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net (2,055) (2,797) (5) - (4,857)
Other, net 34 (1,703) (13) - (1,682)
--------- --------- --------- --------- ---------
Net cash used in investing activities (2,021) (4,500) (18) - (6,539)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repurchase of SC Holdings, Inc.
minority interest - (18,653) - - (18,653)
Repayment of long-term obligations, net (14,517) 729 (197) - (13,985)
Receipt from (distribution to) subsidiary 27,181 (24,397) (2,784) - -
--------- --------- --------- --------- ---------
Net cash used in (provided by) financing
activities 12,664 (42,321) (2,981) - (32,638)
--------- --------- --------- --------- ---------
Net effect of exchange rate change - - 222 - 222
--------- --------- --------- --------- ---------
Change in cash and cash equivalents 100,141 (105,088) (133) - (5,080)
Cash and cash equivalents:
Beginning of period 2,316 2,821 1,971 - 7,108
--------- --------- --------- --------- ---------
End of period $ 102,457 $(102,267) $ 1,838 $ - $ 2,028
========= ========= ========= ========= =========
J. 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 manufacture and distribution of branded juvenile bedding and related soft
good products; (iii) the licensing of intellectual property to domestic and
international companies that manufacture and sell the Company's premium branded
bedding products or products which complement the bedding products manufactured
by the Company; and (iv) 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 its retail bedding subsidiary,
Mattress Gallery (see Note E to the condensed consolidated financial statements
for further explanation).
The Company evaluates segment performance and allocates resources based on
net sales
22
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, variable 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.
The following tables summarize segment information:
SUCCESSOR
QUARTER ENDED SEPTEMBER 25, 2004
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
---------- ---------- ------------ ----------
Net sales to external customers $ 219,242 $ 18,979 $ - $ 238,221
Intersegment net sales 2,889 - (2,889) -
Adjusted EBITDA 33,003 1,335 120 34,458
Depreciation and amortization expense 5,708 228 - 5,936
Expenditures for long-lived assets 8,460 28 - 8,488
Segment assets 1,264,901 31,226 (75) 1,296,052
Reconciliation of EBITDA and Adjusted
EBITDA to net income:
Net income $ 8,190 $ 1,129 $ 120 $ 9,439
Depreciation and amortization 5,708 228 - 5,936
Income taxes 5,309 - - 5,309
Interest expense, net 10,731 6 - 10,737
Interest income 42 - - 42
---------- ---------- ---------- ----------
EBITDA 29,980 1,363 120 31,463
Plant opening, closing charges 2,526 - - 2,526
Management fees 440 (28) - 412
Management severance 190 - - 190
Transaction expenses 57 - - 57
---------- ---------- ---------- ----------
Adjusted EBITDA $ 33,193 $ 1,335 $ 120 $ 34,648
========== ========== ========== ==========
23
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PREDECESSOR
QUARTER ENDED SEPTEMBER 27, 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
--------- -------- ------------ --------
Net sales to external customers $190,672 $ 27,252 $ - $217,924
Intersegment net sales 8,901 (8,901) -
Adjusted EBITDA 35,628 1,743 (253) 37,118
Depreciation and amortization expense 5,380 55 - 5,435
Expenditures for long-lived assets 3,281 1,073 - 4,354
Segment assets 435,267 42,990 (54,290) 423,967
Reconciliation of EBITDA and Adjusted EBITDA to net income:
Net income $ 13,467 $ 2,359 $ (253) $ 15,573
Depreciation and amortization 5,380 55 - 5,435
Income taxes 1,488 - - 1,488
Interest expense, net 7,251 48 - 7,299
Interest income 36 - - 36
-------- -------- -------- --------
EBITDA 27,622 2,462 (253) 29,831
Variable stock compensation expense 4,697 - - 4,697
Management fees 1,416 (748) - 668
Plant opening, closing charges 593 - - 593
Management severance 418 - - 418
Non-recurring litigation and insurance 290 - - 290
Transaction expenses 66 - - 66
Other 555 - - 555
-------- -------- -------- --------
Adjusted EBITDA $ 35,657 $ 1,714 $ (253) $ 37,118
======== ======== ======== ========
24
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUCCESSOR
NINE MONTHS ENDED SEPTEMBER 25, 2004
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ------------ -----------
Net sales to external customers $ 600,052 $ 63,284 $ - $ 663,336
Intersegment net sales 16,916 - (16,916) -
Adjusted EBITDA 97,605 3,197 (140) 100,662
Depreciation and amortization expense 16,007 646 - 16,653
Expenditures for long-lived assets 14,512 704 - 15,216
Segment assets 1,264,901 31,226 (75) 1,296,052
Reconciliation of EBITDA and Adjusted EBITDA to net income (loss):
Net income (loss) $ 22,558 $ (3,056) $ (140) $ 19,362
Depreciation and amortization 16,007 646 - 16,653
Income taxes 11,063 (172) - 10,891
Interest expense, net 32,614 104 - 32,718
Interest income 117 - - 117
----------- ----------- ----------- -----------
EBITDA 82,359 (2,478) (140) 79,741
Plant opening, closing charges 9,477 - - 9,477
Variable stock compensation expense 3,308 - - 3,308
Transaction related expenditures,
including cost of products sold 3,107 4,344 - 7,451
Management fees (49) 1,331 - 1,282
Management severance 190 - - 190
Non-recurring litigation and insurance (650) - - (650)
Other 53 - - 53
----------- ----------- ----------- -----------
Adjusted EBITDA $ 97,795 $ 3,197 $ (140) $ 100,852
=========== =========== =========== ===========
25
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 27, 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
--------- -------- ------------ --------
Net sales to external customers $530,936 $ 72,902 $ - $603,838
Intersegment net sales 24,782 - (24,782) -
Adjusted EBITDA 93,838 3,241 (683) 96,396
Depreciation and amortization expense 16,269 545 - 16,814
Expenditures for long-lived assets 5,239 1,277 - 6,516
Segment assets 435,267 42,990 (54,290) 423,967
Reconciliation of EBITDA and Adjusted EBITDA to net income:
Net income $ 26,597 $ 624 $ (683) $ 26,538
Depreciation and amortization 16,269 545 - 16,814
Income taxes 8,852 - - 8,852
Interest expense, net 20,828 642 - 21,470
Interest income 139 - - 139
-------- -------- -------- --------
EBITDA 72,685 1,811 (683) 73,813
Variable stock compensation expense 15,118 - - 15,118
Non-recurring litigation and insurance 1,846 - - 1,846
Management fees 1,052 976 - 2,028
Transaction expenses 701 186 - 887
Management severance 640 - - 640
Plant opening, closing charges 593 - - 593
Non-recurring retail operational charge - 432 - 432
Other expenses 1,039 - - 1,039
-------- -------- -------- --------
Adjusted EBITDA $ 93,674 $ 3,405 $ (683) $ 96,396
======== ======== ======== ========
K. 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. Additionally, as a result
of the closure of the plant, the Company wrote-off inventory and incurred other
miscellaneous charges totaling $0.2 million, which was included in cost of goods
sold during the second quarter of 2004. The Company also dismantled and
abandoned equipment resulting in a $0.2 million charge to selling, general and
administrative expenses during the second quarter of 2004.
26
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company opened new manufacturing facilities in Hazleton, Pennsylvania
and Waycross, Georgia on March 15, 2004 and August 9, 2004, respectively. The
Company incurred approximately $2.5 million and $8.3 million for the quarter and
nine months ended September 25, 2004, respectively, 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 expenses totaling $1.2 million and $4.4 million for
the quarter and nine months ended September 25, 2004, respectively, which are
included in cost of products sold, and incremental distribution costs of $1.3
million and $3.9 million for the quarter and nine months ended September 25,
2004, respectively, 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.
On October 18, 2004, the Company announced the closing of its
manufacturing facility in Piscataway, New Jersey. The Company plans to close the
plant by the end of December 2004 and anticipates incurring plant closure
charges related to severance, retention, rent, and transfer of equipment costs
during the fourth quarter of fiscal year 2004 related to this closing.
The Company estimates that an additional $2.3 million of non-recurring
plant closure and start-up costs will be incurred for the remainder of 2004
relating to the Piscataway, Waycross and Hazleton facilities, of which
approximately $1.7 million will be additional cost of products sold and $0.6
million will be additional selling, general and administrative expense.
L. 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 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, 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.
M. 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
27
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of its operations.
N. ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements that had an impact on the
Company's consolidated financial statements.
28
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
New Product Launch
In October 2004, we introduced our new 2005 Beautyrest(R), BackCare(R),
BackCare Kids(R) and DeepSleep(R) non-juvenile product lines. For products to be
manufactured for sale in the state of California, the new product lines are
compliant with new flame retardant regulations, which become effective January
1, 2005. The new Beautyrest(R), BackCare(R) and BackCare Kids(R) product lines
include the new HealthSmart(TM) removable mattress top at premium retail price
points. The HealthSmart(TM) removable mattress top, which includes patent
pending technology, will help consumers wash away stains, germs, bacteria, dust
mites, odors and perspiration, just like cleaning sheets. We anticipate
incurring incremental selling expenses related to the rollout of the new product
lines during the fourth quarter of 2004.
2004 Product Line Price Increases
In an effort to address inflation of prices for steel, foam and wood, we
implemented a 12% price increase on our 2004 product lines in late October 2004.
The price increase is anticipated to help offset the recent price increases in
some of our key components.
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. Additionally, as a result of the
closure of the plant, we wrote off inventory and incurred other miscellaneous
charges totaling $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. We also
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 new manufacturing facilities in Hazleton, Pennsylvania and
Waycross Georgia on March 15, 2004 and August 9, 2004, respectively. We incurred
approximately $2.5 million and $8.3 million for the quarter and nine months
ended September 25, 2004, respectively, 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 totaling $1.2 million and $4.6 million for the quarter and
nine months
29
ended September 25, 2004, respectively, which are included in cost of products
sold, and incremental distribution costs totaling $1.3 million and $3.7 million
for the quarter and nine months ended September 25, 2004, respectively, 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.
On October 18, 2004, we announced plans to close our plant located in
Piscataway, New Jersey by the end of 2004. We anticipate incurring plant closure
charges related to severance, retention, rent, and transfer of equipment costs
during the fourth quarter of fiscal year 2004 related to this closing.
We estimate that an additional $2.3 million of non-recurring start-up and
plant closure costs will be incurred for the remainder of 2004 related to the
Piscataway, Hazleton and Waycross facilities of which approximately $1.7 million
will be additional cost of products sold and $0.6 million will be additional
selling, general and administrative expense.
Acquisition of Simmons Juvenile Products
On August 27, 2004, we acquired certain assets and liabilities of the crib
mattress and related soft goods business of Simmons Juvenile, our licensee, for
$19.7 million in cash, including transaction costs, and contingent consideration
based upon Simmons Juvenile's future operating performance not to exceed $4.4
million. The purchase price allocation will be adjusted in future periods should
the contingent consideration be paid.
Simmons Juvenile manufactures and sells Simmons branded crib mattresses
and related soft goods to the U.S. infant market. The acquisition of Simmons
Juvenile provides us access to sale products to the U.S. infant market. Simmons
Juvenile has leased manufacturing and distribution operations in York,
Pennsylvania; Oshkosh, Wisconsin and Ontario, California. The leases for these
facilities expire in 2005 and 2006.
We recorded the acquisition using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on the estimated fair market values. The results of
operations for Simmons Juvenile from August 27, 2004 through September 25, 2004
are included in our results of operations.
This acquisition is not considered significant to our balance sheet and
statement of operations, therefore pro forma information has not been presented.
RESULTS OF OPERATIONS
Our capital structure changed significantly as a result of the Acquisition
and the
30
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 nine months ended September
25, 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 September 27, 2003
includes the following adjustments resulting from the Acquisition and
termination of the deferred compensation plan:
- adjustment to cost of products sold of $(0.5) million, or 0.2% of net
sales, to (i) reduce depreciation expense by $(0.7) 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 $0.2 million due to the
step-up to fair market value of leases;
- adjustment to selling, general and administrative expense of $(5.2)
million, or 2.4% of net sales, to (i) reduce depreciation expense by
$(0.3) 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 $(4.7) million to reflect
the elimination of our stock option plans and deferred compensation plan;
- adjustment to amortization of intangibles of $1.1 million, or 0.5% 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 $3.3 million, or 1.5% 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
- adjustment to income tax expense of $0.5 million to reflect the tax
effects of the pro forma adjustments based upon an effective income tax
rate of 36.0%.
The pro forma information for the nine months ended September 25, 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 nine months ended September 25, 2004;
- 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 $3.5 million to reflect the tax
effects of the pro forma adjustments based upon an effective income tax
rate of 36.0%.
31
The pro forma information for the nine months ended September 27, 2003
includes the following adjustments resulting from the Acquisition and
termination of the deferred compensation plan:
- adjustment to cost of products sold of $(1.9) million, or 0.3% of net
sales, to (i) reduce depreciation expense by $(2.4) 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 $0.5 million due to the
step-up to fair market value of leases;
- adjustment to selling, general and administrative expense of $(17.6)
million, or 2.9% of net sales, to (i) reduce depreciation expense by
$(1.8) 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; (ii) reduce management fees by $(0.7) million to
reflect the change in our equity-sponsor management agreement; and (iii)
reduce variable stock compensation expense by $(15.1) million to reflect
the elimination of our stock option plans and deferred compensation plan;
- adjustment to amortization of intangibles of $3.2 million, or 0.5% 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 $11.6 million, or 1.9% 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,
resulting from the Acquisition; and
- adjustment to income tax expense of $1.7 million to reflect the tax
effects of the pro forma adjustments based upon an effective income tax
rate of 36.0%.
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.
32
The following table sets forth historical financial information and pro
forma financial information based upon the adjustments discussed above for the
third quarter and first nine months of 2004 and 2003 (in thousands):
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
--------- | ----------- --------- | -----------
| PRO FORMA NINE PRO FORMA | NINE PRO FORMA
QUARTER | QUARTER QUARTER MONTHS NINE MONTHS | MONTHS NINE MONTHS
ENDED | ENDED ENDED ENDED ENDED | ENDED ENDED
SEP. 25, | SEP. 27, SEP. 27, SEP. 25, SEP. 25, | SEP.27, SEP. 27,
2004 | 2003 2003 2004 2004 | 2003 2003
--------- | --------- --------- --------- --------- | --------- ---------
| |
Net sales $ 238,221 | $ 217,924 $ 217,924 $ 663,337 $ 663,337 | $ 603,838 $ 603,838
Cost of products sold 127,050 | 113,433 112,956 357,161 350,677 | 316,404 314,520
--------- | --------- --------- --------- --------- | --------- ---------
Gross margin 111,171 | 104,491 104,968 306,176 312,660 | 287,434 289,318
Selling, general and | |
administrative expenses 86,844 | 82,359 77,141 246,124 242,816 | 237,235 219,610
Plant closure charges - | - - 764 764 | - -
Amortization of | |
intangibles 1,220 | 71 1,146 3,509 3,509 | 241 3,435
Transaction expenses 57 | 65 65 305 305 | 887 887
Licensing fees (2,435) | (2,365) (2,365) (7,497) (7,497) | (7,789) (7,789)
--------- | --------- --------- --------- --------- | --------- ---------
Operating income 25,485 | 24,361 28,981 62,971 72,763 | 56,860 73,175
Interest expense, net 10,737 | 7,299 10,633 32,718 32,718 | 21,470 33,039
--------- | --------- --------- --------- --------- | --------- ---------
Income before | |
income taxes 14,748 | 17,062 18,348 30,253 40,045 | 35,390 40,136
Income tax expense 5,309 | 1,489 1,952 10,891 14,416 | 8,852 10,561
--------- | --------- --------- --------- --------- | --------- ---------
Net income $ 9,439 | $ 15,573 $ 16,396 $ 19,362 $ 25,629 | $ 26,538 $ 29,575
========= | ========= ========= ========= ========= | ========= =========
33
The following table sets forth historical and pro forma financial
information based upon the adjustments discussed above for the third quarter and
first nine months of 2004 and 2003 as a percentage of net sales:
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
---------- | ----------- --------- | -----------
| PRO FORMA NINE PRO FORMA | NINE PRO FORMA
QUARTER | QUARTER QUARTER MONTHS NINE MONTHS | MONTHS NINE MONTHS
ENDED | ENDED ENDED ENDED ENDED | ENDED ENDED
SEP. 25, | SEP. 27, SEP. 27, SEP. 25, SEP. 25, | SEP.27, SEP. 27,
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 53.3% | 52.1% 51.8% 53.8% 52.9% | 52.4% 52.1%
-------- | -------- -------- -------- -------- | -------- --------
Gross margin 46.7% | 47.9% 48.2% 46.2% 47.1% | 47.6% 47.9%
Selling, general and | |
administrative expenses 36.5% | 37.8% 35.4% 37.1% 36.6% | 39.3% 36.4%
Plant closure charges 0.0% | 0.0% 0.0% 0.1% 0.1% | 0.0% 0.0%
Amortization of | |
intangibles 0.5% | 0.0% 0.5% 0.5% 0.5% | 0.0% 0.6%
Transaction expenses 0.0% | 0.0% 0.0% 0.0% 0.0% | 0.1% 0.1%
Licensing fees -1.0% | -1.1% -1.1% -1.1% -1.1% | -1.3% -1.3%
-------- | -------- -------- -------- -------- | -------- --------
Operating income 10.7% | 11.2% 13.4% 9.6% 11.0% | 9.5% 12.1%
Interest expense, net 4.5% | 3.3% 4.9% 4.9% 4.9% | 3.6% 5.5%
-------- | -------- -------- -------- -------- | -------- --------
Income before | |
income taxes 6.2% | 7.9% 8.5% 4.7% 6.1% | 5.9% 6.6%
Income tax expense 2.2% | 0.7% 0.9% 1.7% 2.2% | 1.5% 1.7%
-------- | -------- -------- -------- -------- | -------- --------
Net income 4.0% | 7.2% 7.6% 3.0% 3.9% | 4.4% 4.9%
======== | ======== ======== ======== ======== | ======== ========
QUARTER ENDED SEPTEMBER 25, 2004 AS COMPARED TO PRO FORMA QUARTER ENDED
SEPTEMBER 27, 2003
Net Sales. Net sales for the quarter ended September 25, 2004 increased
$20.3 million, or 9.3%, to $238.2 million from $217.9 million for the pro forma
quarter ended September 27, 2003.
Wholesale bedding segment net sales increased $22.6 million, or 11.3%, to
$222.1 million for the quarter ended September 25, 2004 from $199.6 million for
the pro forma quarter ended September 27, 2003. For the third quarter of 2004
and the pro forma third quarter of 2003, our wholesale bedding segment net sales
reflect a reduction of $9.3 million and $17.6 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"). Our sales
reductions decreased principally due to more co-op advertising expenditures
meeting the criteria of a selling expense versus a sales reduction in accordance
with EITF 01-9 in the third quarter of 2004 compared to the pro forma third
quarter of 2003. The wholesale bedding segment net sales increase was primarily
due to (i) an increase in unit volume and average unit selling prices ("AUSP")
of 6.2% and 0.5%, respectively, compared to the pro forma third quarter of 2003
and (ii) the decrease in EITF 01-9 sales reductions in comparison to the prior
year mentioned above. Our non-juvenile wholesale bedding unit volume and AUSP
increased 4.5% and 1.7%, respectively, compared to the pro forma third quarter
of 2003. Our non-juvenile unit volume increased due to more Beautyrest(R) and
34
DeepSleep(R) branded product sales resulting primarily from new dealer accounts
and certain dealer promotions held during the quarter. Our improvements in
non-juvenile 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 significant branded
product lines.
Our third quarter 2004 non-juvenile 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 6.0%
over the prior year pro forma third quarter. In comparison, ISPA estimated that
for the third quarter of 2004 total U.S. bedding manufacturers' sales were up
8.0% over the prior year third quarter, comprised of an increase in unit
shipments and AUSP of 0.4% and 7.5%, respectively. We believe that our sales
growth was less than the industry due primarily to our relatively higher growth
in prior periods as compared to the industry and certain industry competitors
implementing price increases in the second and third quarter of 2004, whereas we
did not increase our prices until the fourth quarter of 2004.
Our retail segment sales for the quarter ended September 25, 2004
decreased $8.3 million, or 30.3%, to $19.0 million from $27.3 million for the
pro forma quarter ended September 27, 2003. Retail segment sales were negatively
impacted by the sale of our Mattress Gallery retail operations on May 1, 2004.
Mattress Gallery contributed $11.7 million of retail sales in the pro forma
third quarter of 2003. On a comparable store basis, sales for our retail stores
increased 23.1% for the third quarter of 2004 versus the pro forma third quarter
of 2003. Retail segment same store sales have benefited from increased
advertising.
Cost of Products Sold. For the quarter ended September 25, 2004, cost of
products sold, as a percentage of net sales, increased 1.5 percentage points to
53.3% from 51.8% for the pro forma quarter ended September 27, 2003.
Our wholesale segment gross margin decreased 0.3 percentage points to
45.6% of wholesale segment net sales for the quarter ended September 25, 2004
from 45.9% for the pro forma quarter ended September 25, 2003. The decrease was
principally due to a 1.6 percentage points of wholesale segment net sales
increase in the cost of raw materials due principally to inflation in prices for
steel, foam and wood. Our gross margin for the remainder of 2004 will continue
to be negatively impacted by inflation in prices for raw materials, but will be
positively impacted by the 12% price increase implemented on our 2004 product
lines on October 23, 2004 and the rollout of our new 2005 product lines.
Additionally, our wholesale segment cost of products sold for the third quarter
include $1.2 million, or 0.6 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 $1.7 million, classified as a cost of product sold, for the remainder
of 2004 of start-up costs related to the new manufacturing facilities and plant
closure costs related to the closing of the Piscataway, New Jersey manufacturing
facility.
Our retail segment gross margin of 51.9% of retail net sales for the
quarter ended September 25, 2004 was 2.0 percentage points better than the 49.9%
of retail net sales for the pro
35
forma quarter ended September 27, 2003. The improvement in retail segment gross
margin is attributable to the sale of our Mattress Gallery retail operations in
May 2004, which had a lower margin product sales mix than our Sleep Country
retail operations.
Selling, General and Administrative Expenses. For the quarter ended
September 25, 2004, selling, general and administrative expenses ("SG&A") as a
percentage of net sales increased 1.1 percentage points, to 36.5% from 35.4% for
the pro forma quarter ended September 27, 2003. The increase in consolidated
SG&A is primarily attributable to an increase in our wholesale segment co-op
advertising expense of $10.5 million and wholesale segment distribution costs of
$2.5 million, partially offset by a reduction in our retail segment SG&A of $4.3
million due to the sale of our Mattress Gallery retail operations in May 2004.
Our wholesale segment SG&A increased $12.6 million, or 2.3 percentage
points as a percentage of wholesale segment net sales, to 35.3% for the quarter
ended September 25, 2004 from 33.0% for the pro forma quarter ended September
27, 2003. Co-op advertising expenses increased $10.5 million, or 3.9 percentage
points of wholesale segment net sales, in the third quarter of 2004 compared to
the pro forma third quarter of 2003 due principally to the reasons mentioned
above. Additionally, our distribution costs increased $2.5 million, or 0.7
percentage points, in the third quarter of 2004 compared to the pro forma third
quarter of 2003. Distribution costs have risen primarily as a result of (i) an
increase in miles driven to service our customers from existing manufacturing
facilities after our manufacturing facilities in Jacksonville, Florida and
Columbus, Ohio were closed and until our new manufacturing facilities production
increases to normal levels and (ii) increased fuel costs in comparison to the
prior year. Our wholesale segment anticipates that an additional $0.6 million in
incremental distribution costs will be incurred in the fourth quarter of 2004
related to the start up of the new manufacturing facilities.
Our retail segment SG&A, as a percentage of retail segment net sales,
increased 3.0 percentage points to 44.5% for the quarter ended September 25,
2004 from 41.5% for the pro forma quarter ended September 27, 2003. This
increase was primarily attributable to (i) an increase in advertising and
promotional expenditures to stimulate sales and (ii) higher distribution costs
resulting from increases in fuel costs.
Amortization of Intangibles. For the quarter ended September 25, 2004,
amortization of intangibles increased $0.1 million to $1.2 million from $1.1
million for the pro forma quarter ended September 27, 2003.
Transaction Expenses. Transaction expenses were $0.1 million the quarter
ended September 25, 2004 and the pro forma quarter ended September 27, 2003.
Licensing Fees. For the quarter ended September 25, 2004 and the pro forma
quarter ended September 27, 2003, licensing fees were $2.4 million
Interest Expense, Net. For the quarter ended September 25, 2004, interest
expense, net, of $10.7 million was $0.1 million more than the interest expense,
net for the pro forma quarter ended September 27, 2003.
Income Taxes. The combined federal, state, and foreign effective income
tax rate
36
of 36.0% for the quarter ended September 25, 2004 differs from the federal
statutory rate of 35.0% primarily due to a reduction in our prior year net
operating loss carryforwards, 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, and
state income tax expense. The combined federal, state, and foreign effective
income tax rate of 10.6% for the pro forma quarter ended September 27, 2003
differed from the federal statutory rate of 35.0% primarily due to a tax benefit
realized for additional prior period net operating losses not previously
recognized, the tax effects of non-deductible interest costs and state income
tax expense.
Net Income. For the reasons set forth above, our net income decreased $7.0
million, or 42.4%, to $9.4 million for the quarter ended September 25, 2004
compared to $16.4 million for the pro forma quarter ended September 27, 2003.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 25, 2004 AS COMPARED TO PRO FORMA NINE
MONTHS ENDED SEPTEMBER 27, 2003
Net Sales. Net sales for the pro forma nine months ended September 25,
2004 increased $59.5 million, or 9.9%, to $663.3 million from $603.8 million for
the pro forma nine months ended September 27, 2003.
Wholesale bedding segment net sales increased $61.3 million, or 11.0%, to
$617.0 million for the pro forma nine months ended September 25, 2004 from
$555.7 million for the pro forma nine months ended September 27, 2003. For the
first nine months of 2004 and 2003, our wholesale bedding segment net sales
reflect a reduction of $41.5 million and $45.0 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 primarily due to an increase in both unit shipments and AUSP of
4.4% and 4.7%, respectively, compared to the first nine months of 2003. Our
non-juvenile wholesale bedding unit shipments and AUSP increased 3.8% and 5.1%,
respectively, compared to the first nine months of 2003. Our improvement in AUSP
was primarily attributable to a shift in our sales mix toward our higher priced
Beautyrest(R) product line following the rollout of our Beautyrest(R) 2004
product line in the first quarter of 2004. Our unit shipments growth resulted
primarily from additional floor placements at new and existing customers.
Our first nine months of 2004 non-juvenile wholesale bedding sales,
exclusive of EITF 01-9 sales deductions, which is the methodology used by ISPA
in estimating industry sales, were up 9.4% over the prior year first nine
months. In comparison, ISPA estimated that for the first nine months of 2004
total U.S. bedding manufacturers' sales were up 11.7% over the prior year first
nine months, comprised of an increase in unit shipments and AUSP of 5.0% and
6.5%, respectively. We believe that our sales growth was less than the industry
due primarily to our relatively higher growth in prior periods as compared to
the industry and certain industry competitors implementing price increases in
the second and third quarter of 2004, whereas we did not increase our prices
until the fourth quarter of 2004.
Our retail segment sales for the pro forma nine months ended September 25,
2004 decreased $9.6 million, or 13.2%, to $63.3 million from $72.9 million for
the pro forma nine months ended September 27, 2003. Retail segment sales were
negatively impacted by the sale of
37
our Mattress Gallery retail operations on May 1, 2004. Mattress Gallery
contributed $12.9 million of retail sales for the pro forma nine months ended
September 25, 2004 prior to its sale compared to $29.8 million of retail sales
for the pro forma nine months ended September 27, 2003. On a comparable store
basis, our retail store sales increased 19.1% for the first nine months of 2004
compared to the prior year period. Retail segment sales benefited from increased
advertising.
Cost of Products Sold. For the pro forma nine months ended September 25,
2004, cost of products sold, as a percentage of net sales increased 0.8
percentage points to 52.9% from 52.1% for the pro forma nine months ended
September 27, 2003.
Our wholesale segment gross margin decreased 0.1 percentage points to
45.5% for the pro forma nine months ended September 25, 2004 from 45.6% for the
pro forma nine months ended September 27, 2003. The decrease in gross margin is
attributable to inflation in prices for steel, foam and wood that were not
passed on to our customers. Our cost of raw materials increased 1.5 percentage
points of wholesale segment net sales for the pro forma nine months ended
September 25, 2004 compared to the pro forma nine months ended September 27,
2003. Additionally, our wholesale segment gross margins were negatively impacted
by the closure of the Columbus, Ohio manufacturing facility and the start-up
costs associated with the opening of our Hazleton, Pennsylvania and Waycross,
Georgia manufacturing facilities. We have incurred $5.6 million, or 0.8
percentage points of wholesale segment net sales, of plant closure and start-up
costs for the pro forma nine months ended September 25, 2004. We anticipate
incurring an additional $1.7 million of start-up costs and closure costs for the
remainder of 2004, recorded as a cost of product sold, related to the closure of
the Piscataway, New Jersey manufacturing facility and the increase of production
levels of our new facilities. Partially offsetting the increase in raw material
costs and the plant closure and start-up costs, we had better absorption of
manufacturing fixed costs as a result of our unit volume growth and operating
one less manufacturing facility through July 2004 as a result of the closure of
our Jacksonville, Florida plant in December 2003.
Our retail segment gross margin increased 0.4 percentage points to 50.8%
for the pro forma nine months ended September 25, 2004 from 50.4% for the pro
forma nine months ended September 27, 2003. The improvement in retail gross
margin is attributable to the sale of our Mattress Gallery retail operations in
May 2004, which had a lower margin product sales mix than our Sleep Country
retail operations.
Selling, General and Administrative Expenses. For the pro forma nine
months ended September 25, 2004, SG&A increased $23.2 million, or 0.2 percentage
points as a percentage of net sales, to 36.6% from 36.4% for the pro forma nine
months ended September 27, 2003. The increase in consolidated SG&A is primarily
attributable to an increase in wholesale segment co-op advertising expense of
$16.3 million, wholesale segment distribution expense of $6.1 million and
wholesale segment selling expense of $2.6 million, partially offset by a
reduction in our retail segment SG&A of $4.3 million as a result of the sale of
our Mattress Gallery retail operations in May 2004.
Our wholesale segment SG&A as a percentage of wholesale segment net sales
increased $27.3 million, or 1.1 percentage points of wholesale segment net
sales, to 34.3% for the pro
38
forma nine months ended September 25, 2004 from 33.2% for the pro forma nine
months ended September 27, 2003. The increase was principally attributable to
increases in co-operative advertising expenses of $16.3 million, or 2.2
percentage points of wholesale segment net sales, distribution costs of $6.1
million, or 0.6 percentage points of wholesale segment net sales, and selling
expenses of $2.6 million, or 0.1 percentage points of wholesale segment net
sales. 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 nine months ended September 25, 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 commencing operations in March 2004 and July 2004, respectively,
resulting in more miles driven to service customers and (ii) higher average fuel
costs. Partially offsetting these increases in SG&A, our administrative costs
decreased due in part 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
increased 0.6 percentage points to 49.4% for the pro forma nine months ended
September 25, 2004 from 48.8% for the pro forma nine months ended September 27,
2003. This increase was primarily attributable to (i) an increase in advertising
and promotional expenditures to drive sales and (ii) higher distribution costs
resulting from increases in fuel costs.
Plant Closure Charges. For the pro forma nine months ended September 25,
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.
Amortization of Intangibles. For the pro forma nine months ended September
25, 2004, amortization of intangibles of $3.5 million increased $0.1 million
from $3.4 million for the pro forma nine months ended September 27, 2003. We
anticipate that our amortization expense will be approximately $5.3 million for
fiscal year 2004.
Transaction Expenses. Transaction expenses for the first nine months of
2004 were $0.3 million related to the Acquisition and our purchase of certain
assets of Simmons Juvenile. Transaction expenses for the first nine 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 nine months ended September 25, 2004,
licensing fees decreased $0.3 million, or 3.8%, to $7.5 million from $7.8
million for the pro forma nine months ended September 27, 2003. Our decrease in
licensing fees is principally attributable to the loss of a licensee as a result
of their filing for bankruptcy during the second quarter of 2004.
Interest Expense, Net. For the pro forma nine months ended September 25,
2004, interest expense, net, of $32.7 million, or 4.9% of net sales, was $0.3
million less than the interest expense, net, for the pro forma nine months ended
September 27, 2003.
39
Income Taxes. The combined federal, state, and foreign effective income
tax rate of 36.0% for the pro forma nine months ended September 25, 2004 differs
from the federal statutory rate of 35.0% primarily due to a reduction in our
prior year net operating loss carryforwards, 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, and state income tax expense. The combined federal, state, and
foreign effective income tax rate of 26.3% for the pro forma nine months ended
September 27, 2003 differed from the federal statutory rate of 35.0% primarily
due to a tax benefit realized from additional prior period net operating losses
not previously recognized, the tax effects of non-deductible interest costs, and
state income tax expense.
Net Income. For the reasons set forth above, our net income decreased $3.9
million, or 13.3%, to $25.6 million for the pro forma nine months ended
September 25, 2004 compared to $29.6 million for the pro forma nine months ended
September 27, 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.
We amended and restated our Senior Credit Facility on August 27, 2004 to,
among other things:
(i) Refinance our existing $396.6 million Tranche B Term Loan with a new
Tranche C Term Loan priced at LIBOR + 250 basis points, a 25 basis
point decline in borrowing rates;
(ii) Amend our existing annual capital spending limitation from $20
million to $30 million; and
(iii) Amend the limitation on indebtedness of Simmons Company, our
indirect parent, to allow for the incurrence of permitted
indebtedness up to a total leverage ratio including debt of Simmons
Company of 6:75:1:00 provided that Simmons Bedding Company has a
leverage ratio less than 5:50:1:00.
In the first nine months of 2004, our net debt (total debt less cash)
decreased by $31.2 million to $735.4 million. For the first nine months of 2004,
our capital expenditures were $15.2 million, an increase of $10.4 million
compared to the first nine months of 2004. Our increase in capital expenditures
was due to the opening of the Hazleton and Waycross manufacturing facilities in
2004. We expect to spend approximately $19.0 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.
40
As of September 25, 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
September 25, 2004 for the Tranche C Term Loan and Senior Unsecured Term Loan
were 3.95% and 5.13%, respectively.
On April 12, 2004, we repurchased the remaining 10.25% Series B Senior
Subordinated 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 $6.4 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 $2.6 million of Mattress
Gallery's obligations under certain store and warehouse leases that expire over
various periods through to 2010.
On August 27, 2004, we acquired certain assets and liabilities of the crib
mattress and related soft goods of Simmons Juvenile, our licensee, for $19.7
million in cash, including transaction costs. Additional contingent
consideration, not to exceed $4.4 million, will be paid by the Company based
upon Simmons Juvenile's future operating performance. The purchase price
allocation will be adjusted in future periods should the contingent
consideration be paid.
Our cash flows from operations for the first nine months increased $25.8
million to a source of $59.6 million for the first nine months of 2004 from a
source of $33.9 million for the first nine months of 2003. Our working capital
(current assets plus liabilities held for sale and current long-term debt, less
current liabilities, assets held for sale and cash) decreased $6.5 million
during the first nine months of 2004. Our September 25, 2004 working capital and
cash flow from operations for the first nine months of 2004 were impacted by (i)
a decrease in our wholesale segment accounts receivable days sales outstanding
to 35 in the third quarter of 2004 from 42 in the third quarter of 2003; (ii)
wholesale segment accounts payable days increasing to 37 in the third quarter of
2004 from 31 in the third quarter of 2003; and (iii) inventory turns decreasing
to 19 in the third quarter of 2004 from 20 in the third quarter of 2003.
Our long-term obligations contain various financial tests and covenants.
We were in compliance with such covenants as of September 25, 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,
as amended. 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 covenants 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
41
March 31, 2005 through December 31, 2005; 2.40:1.00 from March 31, 2006
through 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 from March 31, 2009 through 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 from March 31, 2006 through June 30, 2006; 5.75:1.00 from
September 30, 2006 through 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 from March 31, 2009 through each fiscal
quarter ending thereafter.
- a maximum capital expenditure limitation of $30.0 million per fiscal year,
with the ability to roll forward to future years unused amounts from the
previous fiscal year, and also 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.
42
The following is a calculation of our minimum interest coverage and
maximum leverage ratios under the Senior Credit Facility as of September 25,
2004 (dollar amounts in thousands, except ratios). The terms and related
calculations are defined in the Senior Credit Facility.
SEPTEMBER 25,
2004
-------------
Calculation of minimum cash interest coverage ratio:
Twelve months ended Adjusted EBITDA(1) $134,056
========
Consolidated cash interest expense(2) $ 41,848
========
Actual interest coverage ratio(3) 3.20x
Minimum permitted interest coverage ratio 2.25x
Calculation of maximum leverage ratio:
Consolidated indebtedness $752,432
Less: Cash and cash equivalents 17,030
--------
Net debt $735,402
========
Adjusted EBITDA(1) $134,056
========
Actual leverage ratio(4) 5.49x
Maximum permitted leverage ratio 6.85x
(1) Adjusted EBITDA for the twelve months ended September 25, 2004 adds back
to net income the following items: income taxes, interest expense,
depreciation and amortization, 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. Additionally, Adjusted EBITDA excludes Mattress Gallery's
Adjusted EBITDA for the twelve months ended September 25, 2004 and
includes Simmons Juvenile's Adjusted EBITDA for the twelve months ended
September 25, 2004.
(2) Consolidated cash interest expense, as defined in the Senior Credit
Facility, for the period ended September 25, 2004, as follows (in
thousands):
Interest expense, net $32,718
Interest income 117
-------
Gross interest expense 32,835
Less: Non-cash interest expense 1,370
-------
31,456
X 1.33
-------
Consolidated cash interest expense $41,848
=======
(3) Represents ratio of Adjusted EBITDA to consolidated cash interest
expense.
(4) Represents ratio of consolidated indebtedness less cash and cash
equivalents to Adjusted
43
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
$63.3 million, or 9.5%, of our consolidated net sales for the first nine 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.
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;
- 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;
44
- 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 and
second quarters 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 fiscal year ended December 27, 2003.
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
45
or protected.
We have developed and implemented a policy to utilize extended Eurodollar
contracts to minimize the impact of near term Eurodollar rate increases. For
approximately $325.0 million of the Tranche C Term Loan and the $140.0 million
Senior Unsecured Term Loan, we set the interest rate at the twelve-month
Eurodollar Rate, which fixed the Eurodollar Rate at 1.375% through January 26,
2005 for approximately 86% of our floating rate debt outstanding as of September
25, 2004. Additionally, to further address interest rate risk, we have an
interest rate cap agreement 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 $2.3 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 affected by supply and
demand. In particular, many of our goods can be impacted by fluctuations in
petrochemical and steel prices. Additionally, our distribution costs can be
impacted by fluctuations in diesel fuel prices. We currently do not have a
hedging program in place to manage fluctuations in commodity prices.
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.
46
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 July 14, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 5, that the Company had changed its name
to Simmons Bedding Company and its indirect parent, THL Bedding
Holding Company, changed its name to Simmons Company. The Company
also reported under Item 5, the Press Release dated July 19, 2004
announcing its intention to delay the proposed initial public
offering of the common stock of Simmons Company.
On August 12, 2004, the Company filed with the Commission a Form 8-K
which reported under Item 12, the Press Release dated August 10,
2004 announcing the results of operations for the second quarter and
first six months of 2004 and announcing the appointment of B. Joseph
Messner to the Board of Directors. The Company also reported under
Item 5 a reconciliation of EBITDA and Adjusted EBITDA to net income
for the second quarter and first six months of 2004.
On September 2, 2004, the Company filed with the Commission a Form
8-K, which reported under Item 1.01, that the Company amended and
restated its Senior Credit Facility. The Company also reported under
Item 9.01, the amended and restated credit and guaranty agreement.
47
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: November 9, 2004
48