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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 25, 2004
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 13-3875743
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 800, Atlanta, Georgia 30328
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 512-7700
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange
Title of each class on which registered
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Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act: None
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 2005 was $0.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: [X] No: [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of The Act).
Yes: [ ] No: [X]
There were 100 shares of the registrant's common stock outstanding on
March 22, 2005.
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As used within this report, the terms "Company," "Simmons," "we," "our,"
and "us" refer to Simmons Bedding Company, a Delaware corporation, and its
subsidiaries.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Founded in 1870, we are a leading manufacturer and distributor of branded
bedding products in the United States. We sell a broad range of mattresses and
foundations under our well-recognized brand names, including Simmons(R),
Beautyrest(R), our flagship product, and BackCare(R). Over our 135-year history,
we have developed numerous innovations, including the first mass-produced
innerspring mattress, the Pocketed Coil(R) innerspring, the "Murphy Bed," the
Hide-a-Bed(R) sofa and our patented "no flip" mattress. We also pioneered the
national distribution of queen and king size mattresses and in 2001 introduced
the Olympic(R) Queen mattress, an extra-wide queen mattress. In 2004, we
introduced the HealthSmart(TM) Bed, which features a zip-off mattress top that
can be laundered or dry cleaned. For the year ended December 25, 2004, we
generated net sales of approximately $869.9 million which represents growth of
approximately 8% over the prior year.
The majority of our products are innerspring mattresses and foundations,
which comprise an estimated 80%-90% of the U.S. wholesale conventional bedding
industry, according to industry sources. We place particular emphasis on premium
products targeted to sell at higher-end retail price points of $799 and above
per queen set. Additionally, we focus on selling queen and larger size
mattresses. For the year ended December 25, 2004, we derived approximately 65%
of our sales from premium mattresses with retail price points of $799 and above
(35% from above $1,000) and approximately 83% of our sales from queen and larger
size mattresses. We believe these product categories offer faster growth and
higher gross margins than other bedding segments. Primarily as a result of these
factors, our conventional bedding average unit selling price ("AUSP") for the
year ended December 25, 2004 was approximately 49% above the industry average as
reported by the International Sleep Products Association ("ISPA").
We sell to a diverse nationwide base of approximately 3,600 retail
customers, representing over 11,000 outlets, including furniture stores,
specialty sleep shops, department stores, furniture rental stores, mass
merchandisers and juvenile specialty stores. Our sales force added over 700 net
new retail accounts from January 2001 through December 2004, broadening our
revenue base and improving customer credit quality. We support these retailers
with significant advertising and promotional spending, as well as extensive
customer service.
We also distribute branded products on a contract sales basis, with an
emphasis on premium products, directly to the hospitality industry and
government agencies. Starwood Hotels & Resorts Worldwide, Inc. ("Starwood
Hotels") has selected our Beautyrest(R) mattress as a product for their Heavenly
Bed(R) program, a luxury hotel room program targeted at their preferred customer
club members. In addition, we license selected trademarks, patents and other
intellectual property to various domestic and foreign manufacturers.
We operate 17 conventional bedding manufacturing facilities and three
juvenile bedding manufacturing facilities strategically located throughout the
United States and Puerto Rico. Unlike many of our competitors that operate as
associations of independent licensees, we have national in-house manufacturing
capabilities. We believe that there are a number of important advantages to
operating nationally, including the ability to service multi-state accounts,
maintain more consistent quality of products and leverage research and
development activities. Our just-in-time manufacturing capability enables us to
manufacture and ship approximately 95% of our orders to our retail customers
when requested within five business days of receiving their order and to
minimize our working capital requirements.
We have proven research and development capabilities. We apply extensive
research to design, develop, manufacture and market innovative sleep products to
provide consumers with a better night's sleep. We currently own 45 domestic and
196 international patents, and have 40 domestic and 60 international patent
applications pending.
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We also operate 18 retail outlet stores located throughout the United
States through our wholly owned subsidiary, World of Sleep Outlets, LLC, and 47
retail mattress stores operating under the Sleep Country USA name in Oregon and
Washington through our subsidiary, Sleep Country USA, Inc. Prior to May 1, 2004,
we also operated a chain of specialty sleep stores in Southern California.
Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL"), Fenway
Partners Capital Fund II, L.P. and its affiliates ("Fenway"), and our management
and directors currently hold 71.8%, 8.5% and 19.7%, respectively, of the voting
stock of our indirect parent, Simmons Company, after giving effect to restricted
stock issued to management under Simmons Company's equity incentive plan.
Simmons Company filed a registration statement with the Securities and
Exchange Commission ("SEC") on June 4, 2004 for an initial public offering of
its common stock. The number of shares to be offered and the price range for the
offering has not been determined. Simmons Company announced on July 19, 2004 it
was delaying the proposed initial public offering due to uncertain market
conditions.
INDUSTRY
We compete in the U.S. wholesale bedding industry, which generated sales
of approximately $5.6 billion in 2004, according to ISPA. While there are over
500 conventional bedding manufacturers in the United States according to the
U.S. Census Bureau, four companies (including Simmons) accounted for
approximately 59% of the conventional bedding industry's wholesale revenues for
2003, according to Furniture/Today, an industry publication. The remainder of
the domestic conventional bedding market primarily consists of hundreds of
smaller independent local and regional manufacturers.
The U.S. bedding industry is historically characterized by growing unit
demand, rising AUSPs and stability in various economic environments. In 2004,
ISPA estimates that total bedding industry sales increased 11.1% over the prior
year. Annual growth of total conventional bedding industry sales has averaged
approximately 6.2% over the last twenty years. During this period, there has
been just one year in which industry revenues declined (0.3% in 2001). This
stability and resistance to economic downturns is due largely to replacement
purchases, which account for approximately 80% of conventional bedding industry
sales. In addition, high shipping costs and the short lead times demanded by
mattress retailers limited imports from China to less than 1% of the U.S. market
in 2004 according to the International Trade Association.
We believe that current trends favor increased consumer spending on
mattresses. These trends are particularly favorable for sales of mattresses at
the premium end of the market and queen and larger size mattresses, two areas
where we believe we are well-positioned. We believe that the factors
contributing to growth in these areas include:
- Rapid growth in the 39-57 year old segment of the population, the
largest and fastest growing segment of the population according to
the U.S. Census Bureau, a group that tends to have higher earnings
and more discretionary income and makes a disproportionate share of
the purchases of bedding products relative to the general
population;
- Growth in the size of homes, which increased from an average of
approximately 1,725 square feet in 1983 to approximately 2,320
square feet in 2003, and the number of bedrooms in homes in the last
twenty years, according to the National Association of Home
Builders;
- Strong historical and projected growth in the number of people
purchasing second homes, which grew approximately 17% from 1990-2000
according to the U.S. Census Bureau;
- Increasing consumer awareness of the health benefits of better
sleep, as evidenced by a study conducted by the Better Sleep Council
in March 2004, in which 90% of all respondents reported that a good
mattress was essential to health and well being; and
- Greater relative profitability that the bedding category provides to
retailers, particularly in higher-end products.
As a result of these and other trends, conventional mattress units sold in
the United States at retail price points of at least $1,000, as a percent of
total conventional mattress units sold, rose from 15.5% in 2000 to 19.8% in
2003, according to ISPA. Conventional mattress units sold by us at retail points
of at least $1,000, as a percent of total conventional mattress units sold by
us, rose from 20.7% in 2000 to 34.7% in 2004. Additionally, queen and larger
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size mattress units sold in the United States, as a percent of total
conventional mattress units sold, rose from 43.3% in 2000 to 46.5% in 2003,
according to ISPA. Queen and larger size mattress units sold by us, as a percent
of total conventional mattress units sold by us, rose from 66.0% in 2000 to
72.0% in 2004.
OUR STRATEGY
Our goal is to further enhance our position as a leading manufacturer and
distributor of branded bedding products. Key elements of our strategy include:
INCREASE MARKET SHARE IN PREMIUM SEGMENTS. We are focused on capturing market
share in the higher-margin and higher-growth premium segments, which include
mattresses sold at retail price points greater than $1,000. Our research shows
that over 80% of consumers in the market for a replacement mattress indicated
that they would look for a mattress that solves sleep problems and approximately
71% indicated that they would pay 20-30% more for a mattress that would improve
the quality of their sleep. To address this demand, we work closely with our
customers to develop promotional advertising and educate consumers, so as to
compete on mattress benefits rather than price. Sales at retail price points at
or above $799 for queen sets as a percentage of our sales have increased to
approximately 65% for the year ended December 25, 2004 from 42% in fiscal year
2000. Sales at retail price points at or above $1,000 per queen set as a percent
of our sales have increased to approximately 35% for the year ended December 25,
2004 from 21% in fiscal year 1999.
CONTINUE TO INTRODUCE NEW INNOVATIVE PRODUCTS. We plan to continue our
successful record of innovation and to introduce new products designed to
increase our unit sales and AUSP. In 2000, we introduced our patented "no flip"
mattress, driving an increase in Beautyrest(R) unit sales of approximately 27%
from 1999 to 2000. In 2002, we introduced a new BackCare(R) product line, with
features such as allergy care fiber that helps reduce allergens on mattresses
and an optional LivingRight(TM) adjustable foundation. As a result, BackCare(R)
unit sales and AUSP increased by 5.1% and 36.6%, respectively, for the year
ended December 27, 2003, and we added over 750 new BackCare(R) accounts in the
same period. In December 2003, we introduced Pocketed Cable Coil(TM) technology,
providing significantly more durability and enhanced motion separation benefits,
in our new Beautyrest(R) 2004 product line. Following the introduction, the
Beautyrest(R) sales increased approximately 14% in 2004. In 2004, we introduced
our patent pending HealthSmart(TM) Bed which features a zip-off mattress top
that can be laundered or dry cleaned. The HealthSmart(TM) Bed allows consumers
to wash away germs, stains, bacteria, odors, dustmites, and perspiration; a
feature never previously available in our industry. The HealthSmart(TM) Bed is
available on our Beautyrest(R), BackCare(R), and BackCare Kids(R) product lines.
We continue to look for opportunities to expand our product portfolio,
stimulate demand, raise our overall AUSP and deliver better sleep to consumers.
INCREASE CUSTOMER PENETRATION. We seek to improve the quality of, and
selectively expand, our customer base through the following dual-pronged
approach:
Expand Within Existing Accounts. Only 46% of our retail customers carry both of
our leading lines of mattresses, Beautyrest(R) and BackCare(R), and we believe
that with focused marketing and education of the retail buyer and salesperson,
we can significantly increase our penetration levels. In addition, we believe
our new product introductions will allow us to further penetrate our existing
accounts.
Target New Accounts. Senior management and sales management review a
comprehensive potential customer list on a monthly basis to identify and target
new accounts in markets where we are pursuing greater penetration. From January
2001 through December 2004, we added over 700 net new retail accounts
representing approximately $194 million in annualized sales.
OPTIMIZE COST STRUCTURE AND MANUFACTURING NETWORK. We intend to continue
managing our cost structure while driving revenue growth. Our "Zero Waste"
initiative, which started in 2001 and is focused upon safety, quality, service
and cost, has been instrumental in generating cost savings and expanding
margins. In 2003, we began a process to optimize our manufacturing network by
replacing and repositioning existing facilities. As a result of this
manufacturing network optimization strategy, we have opened three new
conventional bedding manufacturing facilities and closed four conventional
bedding manufacturing facilities. We believe we have additional
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opportunities to leverage further our manufacturing network and our selling,
general and administrative infrastructure.
PURSUE SELECTIVE ACQUISITION OPPORTUNITIES. We license our trademarks, patents
and other intellectual property to various domestic and foreign manufacturers
and distributors. These licensees generated sales of Simmons-branded products of
over $495 million in 2004. In 2004, we acquired certain assets and liabilities
of the crib mattress and related soft goods business of Simmons Juvenile
Products, Inc., a then-current licensee of ours. As a result of this
acquisition, we now manufacture and sell crib mattresses and related soft goods
to the growing infant market. We believe there may be opportunities to
selectively acquire other licensees and bedding businesses in the future.
CONVENTIONAL BEDDING PRODUCTS
We provide our retail customers with a full range of mattress products
that are targeted to cover a breadth of marketplace price points ($199 to $9,999
per queen set) and offer consumers a wide range of mattress constructions with
varying styles, firmnesses and features which enables us to serve the majority
of traditional consumer sleep needs.
Our mattress products are built from one of the following construction
techniques: Pocketed Coil(R) (Marshall Coil) springs, Pocketed Cable Coil(TM)
springs, open coil springs and/or foam. One of these constructions, the patented
Pocketed Coil(R) spring technology was originally developed by us in 1925 and
involves springs with rows joined in such a way so as to allow each coil to
depress independently of the adjacent coils, resulting in better conformability
to the sleeping body and the reduction of motion transferred across the bed from
one partner to the other. An upgrade to this technology was our patent pending
Pocketed Cable Coil(TM) technology which was introduced in October 2003 and
utilizes stranded wire for each coil to provide significantly more durability
and enhanced motion separation benefits.
Our newest product innovation is the HealthSmart(TM) Bed which was
introduced in October 2004 and is featured at premium retail price points
beginning at $1,299 per queen set in our Beautyrest(R), BackCare(R) and BackCare
Kids(R) product lines. The HealthSmart(TM) Bed features a removable, washable
top that allows consumers to launder their mattress tops to wash away stains,
germs, bacteria, dust mites, odors and perspiration just like when they clean
their sheets. In February 2005, we launched a multi-million dollar national
advertising campaign to communicate the benefits of our HealthSmart(TM) Bed and
demonstrate its functionality.
Beautyrest(R), our flagship premium product featuring the Pocketed Coil(R)
springs, has been our primary brand since we introduced the Pocketed Coil(R) in
1925 and we expect it to continue generating the majority of our sales. In
October 2004, Simmons introduced the new Beautyrest(R) 2005 line, which offers
both the Pocketed Coil(R) and Pocketed Cable Coil(TM) technology and, at premium
price points, features the new HealthSmart(TM) Bed. We began shipping the 2005
product line in December 2004.
Beautyrest(R) World Class(TM) Exceptionale(TM), Latitudes(TM),
Dreamwell(R), Thomas O'Brien(R) for Simmons, Karen Neuburger(R) and Joseph
Abboud(R) products are extensions of the Beautyrest(R) line. We licensed the
rights to use the Thomas O'Brien(R) for Simmons, Karen Neuburger(R) and Joseph
Abboud(R) brands in 2003, 2002 and 2000, respectively. This unique construction
offers a different comfort level from the mainstream price point Beautyrest(R)
models and the combined benefits of comfort and reduced motion transfer. Many of
these luxury lines also feature upscale fabric covers.
BackCare(R), our second flagship brand, was re-introduced in October 2004
to include our patented Pocketed Coil(R) spring construction to utilize the
distinct and leveragable construction feature from our flagship Beautyrest(R)
brand. The BackCare(R) product line features the zoned coil unit, titanium
reinforced lumbar support and new zoned foams that work together to offer
support that mirrors the natural s-shape of the human spine. BackCare
Advanced(TM) offers the BackCare(R) gradient support in a series of unique
constructions featuring foam core constructions in conjunction with contour
memory foam and contour natural foam.
BackCare Kids(R) which was recently redesigned in 2004 is specifically for
the unique sleep needs of children. BackCare Kids(R) offers three benefits, an
allergy care fiber to help reduce allergens in the bed that can cause allergic
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reactions, a Moisture Ban(TM) liquid repellant, and a RiteHeight(TM) option for
bunk beds, trundle beds and day beds that are designed for a lower height
mattress.
Our Deep Sleep(R) brand was redesigned in 2004. The Deep Sleep(R) product
line is targeted at the traditional under $500 queen price points. This product
line offers comfort, durability and value. It utilizes a unique open coil
product construction in comparison to competitive more traditional open coil
units.
Every conventional mattress we manufacture features our innovative "no
flip" design which we were the first to introduce in 2000. This patented design
offers enhanced sleep benefits and product durability, along with the consumer
convenience of never having to flip the mattress.
Each of our flagship brands also features the patented Olympic(R) Queen
size, which is the first new size in mattresses distributed on a national basis
since Simmons began distributing king and queen sizes nationally in 1958, was
introduced in 2001. The Olympic(R) Queen offers consumers 10% more sleeping
surface than a traditional queen, without requiring the replacement of the
traditional queen frame with a wider frame. This product is targeted at queen
size mattress owners who would prefer a wider mattress, but are unwilling to
purchase a larger bed because of their existing queen bed frame or the size of
their bedroom. We offer specially designed Egyptian cotton sheets for our
Olympic(R) Queen mattresses which are sold by certain of our retailers and
through our internet website, www.simmons.com.
LivingRight(TM) adjustable foundations were introduced in late 2002 and
are now featured in our BackCare(R), BackCare Advanced(TM) and Beautyrest(R)
lines. LivingRight(TM) foundations broaden the traditionally older consumer
profile for adjustable beds to the broader market of all adults, reflecting the
trend towards using the bed as more than just a place to sleep (reading in bed,
working on the computer, watching television, gathering with the family, etc.).
The unique LivingRight(TM) design incorporates the benefits of adjustability in
a foundation that looks more like a standard foundation than traditional
adjustable beds.
Our Windsor Bedding Co., LLC subsidiary markets conventional bedding
products to the high-end luxury mattress category, under the Columbia(R) Fine
Bedding, Slumberland(R), and Royal Ascot(R) product lines. Our Columbia(R) Fine
Bedding products feature both full body support and gradient support designs by
utilizing a unique Pocketed Coil(R) within Pocketed Coil(R) construction and
luxurious natural fabrics and upholstery materials, such as cotton, wool, silk
and cashmere, employed in the construction of the mattress. The Columbia(R) Fine
Bedding mattresses are targeted to retail at price points ranging from $3,800 to
$6,000 per queen set.
We acquired the right to sell Slumberland(R) mattresses in the United
States in 2003. The Slumberland(R) mattresses are recipients of England's
distinguished Royal Warrants by appointment to her majesty Queen Elizabeth II
and the Queen Mother. The Slumberland(R) mattresses feature advanced linear
Pocketed Coil(R) technology, hand-tufted inner workings and luxury fabrics. The
Slumberland(R) mattresses are targeted to retail at price points ranging from
$4,999 to $9,999 per queen set.
We licensed the Royal Ascot(R) brand, which is associated with many of the
world's most prestigious goods, in 2004. The Royal Ascot(R) mattresses feature
full body support and gradient support designs and luxurious natural fabrics and
upholstery materials. The box springs are also uniquely constructed, utilizing
old world craftsmanship and leading edge springing technology. The Royal
Ascot(R) mattresses are targeted to retail at price points ranging from $4,299
to $5,299 per queen set.
We are also committed to offering our retailers and customers options in
the vibrant specialty bedding market with beds that utilize specialty visco
and/or latex. In 2003, we launched sang(TM), an all foam line, which we then
transitioned into the First Impression(R) brand in 2004. These brands feature
polyurethane foam and visco blended constructions and have been selectively
distributed within our retail base. In 2005, we intend to further expand our
specialty visco product line offerings.
JUVENILE BEDDING PRODUCTS
Our Simmons Juvenile Company, LLC ("Simmons Juvenile") subsidiary sells
Simmons branded crib mattresses that feature interlocking coil construction for
support and comfort that is durable enough to last through the toddler
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years. We sell Simmons branded soft good products, including items such as vinyl
contour changing pads and terry covers, vinyl replacement pads, and other
accessory items, through this subsidiary.
CUSTOMERS
Our strong brand names and reputation for high quality products,
innovation and service to our customers, together with the highly attractive
retail margins associated with bedding products, have enabled us to establish a
strong customer base for conventional bedding products throughout the United
States and across all major distribution channels, including furniture stores,
specialty sleep shops, department stores and rental stores. Additionally, we
distribute juvenile bedding products through mass merchandisers, furniture
stores and specialty retailers. We manufacture and supply bedding to over 11,000
outlets, representing approximately 3,600 retail customers.
We also distribute branded products on a contract sales basis directly to
institutional users of bedding products such as the hospitality industry and
certain agencies of the U.S. government. Major hospitality accounts include
Starwood Hotels, La Quinta Inns, Inc., and Best Western International, Inc. In
1999, Starwood Hotels selected our Beautyrest(R) mattress as a product for their
Heavenly Bed(R) program, a luxury hotel room program targeted at their preferred
customer club members.
Our ten largest customers accounted for approximately 30% of our product
shipments for the year ended December 25, 2004. No one customer represented more
than 10% of product shipments for the year ended December 25, 2004.
SALES, MARKETING AND ADVERTISING
Our products are sold by approximately 220 local field sales
representatives, backed by sales management at each of our manufacturing
facilities, as well as national account representatives that give direction and
support for sales to national accounts. This selling infrastructure provides
retailers with coordinated national marketing campaigns, as well as local
support tailored to the competitive environments of each individual market.
Additionally, we use 44 independent sales agents, principally in the area of
contract sales and sales of juvenile products.
Our sales support focuses on two areas:
- cooperative promotional advertising and other retail support
programs designed to complement individual retailer's marketing
programs; and
- national consumer communications designed to establish and build
brand awareness among consumers.
We develop advertising and retail sales incentive programs specifically
for individual retailers. Point-of-sale materials, including mattresses and
foundation displays that we design and supply, highlight the differentiating
features and benefits of our products. In addition, we offer training for retail
sales personnel through an internally developed sales representative training
program. We believe that our sales training and consumer education programs are
the most effective in the industry. We have designed these programs, which are
delivered on-site at our retailers' facilities, our manufacturing facilities or
our research and education center, Simmons Institute of Technology and Education
("SITE"), to teach retail floor salespeople product knowledge and sales skills.
We seek to improve our retailers' unit sales, and increase their sales of
higher-end bedding. We also help establish individual incentive programs for our
customers and their sales personnel. Our sales force is trained extensively in
advertising, merchandising and salesmanship, all of which increase the value of
the marketing support they provide to retailers. We believe that our focus on
better sleep and on the training of our sales representatives and our customers'
retail salespeople differentiates us from our competitors.
SUPPLIERS
We purchase substantially all of our conventional bedding raw materials
centrally in order to maximize economies of scale and volume discounts. The
major raw materials that we purchase are wire, spring components, lumber, foam,
insulator pads, innersprings and fabrics and other roll goods consisting of
foam, fiber and non-wovens. We obtain a large percentage of our required raw
materials from a small number of suppliers, and for the
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year ended December 25, 2004, we bought approximately 75% of our raw material
needs from ten suppliers. We believe that supplier concentration is common in
the bedding industry.
We have long-term supply agreements with several suppliers, including
Leggett & Platt, Incorporated ("L&P") and National Standard Company. In
addition, our sole approved supplier of the zippers for the Healthsmart(TM) Bed
removable mattress top is YKK, U.S.A., Inc. ("YKK"). With the exception of L&P,
National Standard Company and YKK, we believe that we can readily replace our
suppliers, if or when the need arises, within 90 days as we have already
identified and use alternative resources.
L&P supplies the majority of certain bedding components (including certain
spring components, insulator pads, wire, fiber, quilt backing and flange
material) to the U.S. bedding industry. In 2004, we purchased approximately
one-third of our raw materials from L&P. Under our agreements with L&P, we are
required to buy a majority of our requirements of certain components from it,
such as grid tops and open coil innersprings. Our agreement with L&P for grid
tops and wire expires in 2010. The agreement for innersprings may be terminated
by L&P upon five years' notice. National Standard Company is the sole supplier
available for the stranded wire used in our Pocketed Cable Coil(TM) products,
and our agreement with National Standard Company expires in 2006. Because we may
not be able to find alternative sources for some of these components on terms as
favorable to us or at all, our business, financial condition and results of
operations could be impaired if we lose L&P, National Standard or YKK as a
supplier. Further, if we do not reach committed levels of purchase, we may be
required to pay various additional payments to these suppliers or certain sales
volume rebates could be lost. If we fail to meet the minimum purchase
requirements, the various agreements with L&P will be amended to provide for
one-year terms with renewal rights, except that the grid top supply agreement
would become terminable by L&P with 180 days' notice.
SEASONALITY/OTHER
For the past several years there has not been significant seasonality in
our wholesale bedding business. Our retail bedding business, which accounted for
$81.0 million, or 9.3%, of net sales for the year ended December 25, 2004 has
historically experienced, and we expect will continue to experience, seasonal
and quarterly fluctuations in net sales and operating income, characterized by
strong sales for the months of May through September, which impact our second
and third quarter results.
MANUFACTURING AND FACILITIES
We currently operate 17 conventional bedding manufacturing facilities in
14 states and Puerto Rico and three juvenile bedding manufacturing facilities in
three states. In 2003, we relocated our Auburn, Washington conventional bedding
manufacturing facility to a new facility in Sumner, Washington and we closed our
Jacksonville, Florida conventional bedding manufacturing facility. During 2004,
we also closed our Columbus, Ohio and Piscataway, New Jersey conventional
bedding manufacturing facilities and opened two new conventional bedding
manufacturing facilities in Hazleton, Pennsylvania and Waycross, Georgia. We
manufacture most conventional bedding to order and use "just-in-time" inventory
techniques in our manufacturing processes to more efficiently serve our
customers' needs and to minimize our inventory carrying costs. We generally
schedule, produce and ship over 95% of our conventional bedding orders within
five business days of receipt of the order. This rapid delivery capability
allows us to minimize our inventory of finished products and better satisfy
customer demand for prompt shipments.
We invest substantially in new product development, enhancement of
existing products and improved operating processes, which we believe is crucial
to maintaining our strong industry position. Costs associated with the research
and development of new products amounted to approximately $3.7 million, $0.1
million, $3.0 million and $2.0 million for 2004, Successor '03, Predecessor '03
and 2002, respectively (for a discussion of Successor '03 and Predecessor '03
periods see page 13).
We keep abreast of bedding industry developments through sleep research
conducted by industry groups and by our own research performed by our marketing
and engineering departments. We also participate in the Better Sleep Council, an
industry association that promotes awareness of sleep issues, and ISPA. Our
marketing and manufacturing departments work closely with the engineering staff
to develop and test new products for marketability and durability.
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We also seek to reduce costs and improve productivity by continually
developing more efficient manufacturing and distribution processes at SITE, our
state-of-the-art 38,000 square foot research and education center in Atlanta,
Georgia. As of December 25, 2004, we had 18 engineers and technicians employed
full-time at SITE. These employees work to ensure that we maintain high quality
products by conducting product and materials testing, designing manufacturing
facilities and equipment and improving process engineering and development. We
believe that our engineering staff gives us a competitive advantage over most of
our competitors who do not have significant in-house engineering resources.
COMPETITION
While there are approximately 500 conventional bedding manufacturers in
the United States according to the U.S. Census Bureau, four companies (including
Simmons) account for approximately 59% of the industry's wholesale revenues. We
believe that we principally compete against these three competitors on the basis
of brand recognition, product selection, quality and customer service programs,
including cooperative advertising, sales force training and marketing
assistance. We believe we compare favorably to our primary competitors in each
of these areas. In addition, only Simmons and Sealy have national,
company-operated manufacturing and distribution capabilities. According to
Furniture/Today, we are the second largest bedding manufacturer in the United
States, with an estimated 15.7% market share for 2003. Because our AUSP is
approximately 49% higher than the industry average, we believe that our market
share is significantly greater in the premium segments and queen and larger size
mattresses.
The rest of the U.S. conventional bedding market consists of several
smaller national manufacturers, with the remainder being independent local and
regional manufacturers. These local and regional manufacturers generally focus
on the sale of lower price point products. While we primarily manufacture
differentiated bedding products targeted for mid- to upper-end price points, we
also offer a full line of bedding products to our retailer base in order for
these retailers to maintain their competitive positioning.
WARRANTIES AND PRODUCT RETURNS
Our conventional bedding products generally offer ten-year limited
warranties against manufacturing defects. Our juvenile bedding products
generally offer five-year to lifetime limited warranties against manufacturing
defects. We believe that our warranty terms are generally consistent with those
of our primary national competitors. The historical costs to us of honoring
warranty claims have been within management's expectations. We have also
experienced non-warranty returns for reasons generally related to order entry
errors and shipping damage. We resell our non-warranty returned products
primarily through as-is furniture dealers and our World of Sleep outlet stores.
PATENTS AND TRADEMARKS
We own many trademarks, including Simmons(R), Beautyrest(R), BackCare(R),
BackCare Kids(R), Deep Sleep(R), Olympic(R) Queen and Pocketed Coil(R), most of
which are registered in the United States and in many foreign countries. We
protect portions of our manufacturing equipment and processes under both trade
secret and patent law. We possess several patents on the equipment and processes
used to manufacture our Pocketed Coil(R) innersprings. We do not consider our
overall success to be dependent upon any particular intellectual property
rights. We cannot assure that the degree of protection offered by the various
patents, trademarks or other intellectual property will be sufficient, that
patents will be issued in respect of pending patent applications, that any
patents that have been issued or will be issued are or will be valid or
enforceable, that it will be commercially reasonable or cost effective to
enforce our patents or other intellectual property rights, or that we will be
able to protect our technological advantage upon the expiration of our patents.
LICENSING
During the late 1980's and early 1990's, we disposed of most of our
foreign operations and secondary domestic lines of business via license
arrangements. We now license internationally our Beautyrest(R) and Simmons(R)
marks and many of our trademarks, processes and patents generally on an
exclusive perpetual or long-term basis to third-party manufacturers which
produce and distribute conventional bedding products within their designated
territories.
8
These licensing agreements allow us to reduce exposure to political and economic
risk abroad by minimizing investments in those markets. We currently have 17
foreign licensees and 10 foreign sub-licensees that have rights to sell
Simmons-branded products in approximately 100 countries.
As of December 25, 2004, we had 11 domestic third-party licensees. Some of
these licensees manufacture and distribute juvenile furniture,
healthcare-related bedding and furniture, and non-bedding upholstered furniture,
primarily on licenses that are perpetual, long-term or have automatically
renewable terms. Additionally, we have licensed the Simmons(R) mark and other
trademarks, generally for limited terms, to manufacturers of occasional use
airbeds, feather and down comforters, synthetic comforter sets, pillows,
mattress pads, blankets, bed frames, futons, specialty sleep items and other
products.
In 2004, 2003 and 2002, our licensing agreements as a whole generated
royalties and technology fees of $9.6 million, $10.8 million and $9.0 million,
respectively.
EMPLOYEES
As of December 25, 2004, we had approximately 3,300 full-time employees.
Approximately 800 of these were represented by labor unions. Employees at six of
our twenty conventional and juvenile manufacturing facilities are represented by
various labor unions with separate collective bargaining agreements. Collective
bargaining agreements typically are negotiated for two- to four-year terms. Most
of our union contracts expire in 2005 or 2006.
The locations where our employees are covered by collective bargaining
agreements and the contract expiration dates are as follows:
FACILITY LABOR UNION EXPIRATION DATE
- ----------- --------------------------------------------------- ---------------
Atlanta United Steel Workers of America October 2005
Los Angeles United Steel Workers of America October 2005
San Leandro United Furniture Workers April 2006
Dallas United Steel Workers of America October 2006
Los Angeles International Brotherhood of Teamsters October 2006
Kansas City United Steel Workers of America April 2007
Honolulu International Longshoremen and Warehousemen's Union January 2009
In 2004, the United Furniture Workers labor union at our San Leandro,
California manufacturing facility and the United Steel Workers of America labor
unions at our Kansas City, Kansas and Dallas, Texas manufacturing facilities
ratified new collective bargaining agreements. The new agreements did not and
will not have a significant impact on our operating results.
We consider overall relations with our workforce to be satisfactory. We
have had no labor-related work stoppages in over thirty years.
REGULATORY MATTERS
As a manufacturer of bedding and related products, we use and dispose of a
number of substances, such as glue, lubricating oil, solvents, and other
petroleum products, that may subject us to regulation under numerous federal and
state statutes governing the environment. Among other statutes, we are subject
to the Federal Water Pollution Control Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Clean Air Act and related state statutes and regulations. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of our properties, we may be held liable, the amount of
such liability could be material and our financial condition or results of
operations could be materially adversely affected. We have undertaken the clean
up of environmental contamination at and in the vicinity of our former facility
in Jacksonville, Florida and are currently evaluating the results of those
efforts. In addition, we have submitted a revised final remediation plan for our
former facility in
9
Linden/Elizabeth, New Jersey and are waiting for a response from the New Jersey
Department of Environmental Protection. While the current estimate of such
liabilities is not material to our operations, future liability for such matters
is difficult to predict.
We have recorded a reserve based upon our best estimate to reflect our
potential liability for environmental matters. Because of the uncertainties
associated with environmental remediation, the costs incurred with respect to
the potential liabilities could exceed our recorded reserves.
Our bedding and other product lines are subject to various federal and
state laws and regulations relating to flammability, sanitation and other
standards. We believe that we are in material compliance with all such laws and
regulations.
Effective January 1, 2005, the state of California adopted new flame
retardant regulations related to manufactured mattresses and foundations sold in
California. The U.S. Consumer Product Safety Commission has stated its plans to
introduce new regulations relating to open flame resistance standards for the
mattress industry, which is currently expected to go into effect sometime in
2006 or early 2007. In addition, various state and other regulatory agencies are
also considering new laws, rules and regulations relating to open flame
resistance standards. Compliance with these new rules may increase our costs,
alter our manufacturing processes and impair the performance of our products. In
October 2004, we introduced new product solutions for distribution in California
to meet the new California standard. However, because new standards that differ
from California laws may be adopted in other jurisdictions, these new products
introduced in California will not necessarily meet all future standards.
FORWARD LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform Act
of 1995. When used in this Annual Report on Form 10-K, 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
products. 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;
- our labor relations;
- departure of key personnel;
- actions of our controlling stockholder;
10
- encroachments on our intellectual property;
- product liability claims;
- interest rate risks;
- an increase in return rates;
- our level of indebtedness;
- future acquisitions; and
- other risks and factors identified from time to time in our reports
filed with the SEC.
There may be other factors that may cause actual results to differ
materially from the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our
behalf apply only as of the date of this Annual Report on Form 10-K and are
expressly qualified in their entirety by the cautionary statements included in
this Annual Report on Form 10-K. 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.
11
ITEM 2. PROPERTIES
Our corporate offices are located in approximately 49,000 square feet of
leased office space at One Concourse Parkway, Atlanta, Georgia 30328. The
following table sets forth selected information regarding our wholesale bedding
segment manufacturing and other facilities we operated as of December 25, 2004
(square footage in thousands):
YEAR YEAR OF LEASE SQUARE
LOCATION OCCUPIED EXPIRATION FOOTAGE
- ---------------------------------------------- -------- ------------- -------
Conventional bedding manufacturing facilities:
Waycross, Georgia 2004 Owned 217.5
Mableton, Georgia (Atlanta) 1991 2007 148.3
Charlotte, North Carolina 1993 2010 175.0
Coppell, Texas (Dallas) 1998 2008 141.0
Aurora, Colorado (Denver) 1998 2008 129.0
Fredericksburg, Virginia 1994 2009 128.5
Hazleton, Pennsylvania 2004 2014 214.8
Honolulu, Hawaii 1992 2008 63.3
Janesville, Wisconsin 1982 Owned 290.2
Shawnee Mission, Kansas (Kansas City) 1997 Owned 130.0
Compton, California (Los Angeles) 1974 2005 222.0
Tolleson, Arizona (Phoenix) 1997 2007 103.4
Salt Lake City, Utah 1998 2008 77.5
San Leandro, California 1992 2007 250.6
Sumner, Washington (Seattle) 2003 2014 150.0
Agawam, Massachusetts (Springfield) 1993 2006 125.0
Trujillo Alto, Puerto Rico (San Juan) 1998 Owned 50.0
-------
Subtotal 2,616.1
Juvenile bedding manufacturing facilities:
Oshkosh, Wisconsin 2004 2005 20.0
Ontario, California 2004 2006 15.7
York, Pennsylvania 2004 2006 29.0
-------
Subtotal 64.7
Other facilities in Atlanta, Georgia:
Corporate Headquarters 2000 2011 49.0
SITE (Norcross, Georgia) 1995 2005 38.0
Management believes that our facilities, taken as a whole, have adequate
productive capacity and sufficient manufacturing equipment to conduct business
at levels exceeding current demand.
In addition, as of December 25, 2004, our wholesale bedding segment
operated 18 retail outlet stores through our World of Sleep Outlets, LLC
subsidiary.
Our retail bedding segment operates 47 retail mattress stores and two
additional offices/warehouses through our indirect subsidiary Sleep Country USA,
Inc.
12
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we have been involved in various legal proceedings. We
believe that all current litigation is routine in nature and incidental to the
conduct of our business, and that none of this litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for any class of our common
equity. As of December 25, 2004, there was one holder of record of our common
stock. As of December 25, 2004, there were 46 holders of record of class A
common stock and 126 holders of record of class B common stock of Simmons
Company, which indirectly owns 100% of our common stock.
In 2004, our indirect parent, Simmons Company, paid a dividend of $42.01
per share of Class A common stock, aggregating $162.7 million. Any payment of
future dividends and the amounts thereof will be dependent upon our earnings,
fiscal requirements and other factors deemed relevant by Simmons Company's board
of directors. Each of Simmons Bedding Company's and Simmons Company's ability to
pay dividends are restricted by, as relevant, the terms of the senior
discount notes, senior credit facility, senior unsecured term loan and the
indenture governing the senior subordinated notes.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
Set forth below is selected historical consolidated financial and other
operating data for Simmons Bedding Company. We derived our historical Statement
of Operations and Balance Sheet data for 2000, 2001, 2002, 2003 and 2004 from
our consolidated financial statements. Our capital structure changed
significantly as a result of our predecessor company (the "Predecessor Company")
being acquired by THL in December 2003 (the "Acquisition") and the related
financing. Due to required purchase accounting adjustments relating to such
Acquisition, the consolidated financial and other data for the period subsequent
to the acquisition (the "Successor" period) is not comparable to such data for
the periods prior to the acquisition (the "Predecessor" periods). We refer to
the period from December 29, 2002 through December 19, 2003 as "Predecessor '03"
and the period from December 20, 2003 through December 27, 2003 as "Successor
'03."
The accompanying selected historical consolidated financial and other
operating data contain all adjustments that, in the opinion of management, are
necessary to present fairly the financial position of the Company for the
periods presented. All adjustments in the periods presented herein are normal
and recurring in nature unless otherwise disclosed. The information presented
below should be read in conjunction with our "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our consolidated
financial statements and related notes and other financial information appearing
elsewhere herein.
13
PREDECESSOR SUCCESSOR
---------------------------------------------------------- | --------------------------
FOR THE FOR THE FOR THE FOR THE | FOR THE FOR THE
YEAR YEAR YEAR PERIOD FROM | PERIOD FROM YEAR
ENDED ENDED ENDED DEC. 29, 2002 | DEC. 20, 2003 ENDED
DEC. 30, DEC. 29, DEC. 28, THROUGH | THROUGH DEC. 25,
2000 2001 2002 DEC. 19, 2003 | DEC. 27, 2003 2004
---------- ---------- ---------- ------------- | ------------- -----------
(53 WEEKS) (52 WEEKS) (52 WEEKS) (356 DAYS) | (8 DAYS) (52 WEEKS)
(DOLLARS IN THOUSANDS) | (DOLLARS IN THOUSANDS)
|
STATEMENT OF OPERATIONS |
DATA: |
Net sales $ 699,741 $ 655,209 $ 708,595 $ 797,616 | $ 8,717 $ 869,893
Cost of products sold 414,102 379,131 369,617 408,790 | 7,147 472,252
--------- --------- --------- --------- | --------- ----------
Gross profit 285,639 276,078 338,978 388,826 | 1,570 397,641
--------- --------- --------- --------- | --------- ----------
Operating expenses: |
Selling, general and |
administrative expenses (1) 259,795 241,800 284,164 373,078 | 4,492 318,118
Amortization of intangibles 10,530 11,414 1,246 306 | 311 4,933
Licensing income (8,437) (9,501) (9,002) (10,444) | (326) (9,622)
Other (2) 7,117 10,698 20,285 23,735 | 449 3,801
--------- --------- --------- --------- | --------- ----------
269,005 254,411 296,693 386,675 | 4,926 317,230
--------- --------- --------- --------- | --------- ----------
Operating income (loss) 16,634 21,667 42,285 2,151 | (3,356) 80,411
Interest expense, net (3) 39,989 39,450 32,000 45,092 | 4,661 43,758
--------- --------- --------- --------- | --------- ----------
Income (loss) before |
income taxes and minority |
interest in loss (23,355) (17,783) 10,285 (42,941) | (8,017) 36,653
Income tax expense (benefit) (4,813) (7,676) 12,005 (8,845) | (827) 12,039
Minority interest in loss (421) (470) (1,109) - | - -
--------- --------- --------- --------- | --------- ----------
Net income (loss) $ (18,121) $ (9,637) $ (611) $ (34,096) | $ (7,190) $ 24,614
========= ========= ========= ========= | ========= ==========
|
BALANCE SHEET DATA: |
Working capital (4) $ 37,338 $ 26,320 $ 10,326 | $ 26,908 $ 18,025
Cash and cash equivalents 5,765 3,264 7,108 | 3,670 23,854
Total assets 469,378 432,175 411,031 | 1,183,119 1,301,734
Total debt 365,060 340,583 290,782 | 770,253 752,139
Total common stockholders' |
equity (deficit) (33,567) (61,321) (81,336) | 280,277 260,607
OTHER DATA: |
EBITDA (5) $ 42,452 $ 58,369 $ 82,922 $ 24,407 | $ (2,696) $ 103,636
Stock compensation expense 574 14,847 15,561 68,415 | - 3,347
Transaction related expenditures, |
including cost of products sold - - - 22,399 | 1,727 7,901
Plant opening, closing charges - - - 4,137 | 286 13,549
Management fees 2,102 2,764 2,353 2,844 | 49 1,702
Capital expenditures 15,556 5,729 7,961 8,791 | - 18,206
- ----------
(1) Includes the Predecessor Company's variable stock compensation expense
related to director, consultant and employee regular and superincentive
stock options of $0.6 million, $14.8 million, $15.6 million, and $68.4
million for the years 2000, 2001, 2002, and the Predecessor '03. The
Successor '03 and the year 2004 includes our stock compensation expense of
$0 million and $3.3 million, respectively, relating to the increase in the
value of the deemed Class A common stock of our parent, Simmons Company,
held by certain members of our
14
management in a deferred compensation plan of Simmons Company prior to the
termination of the plan in June 2004.
(2) Includes ESOP expense of $7.1 million and $2.8 million for the years 2000
and 2001, respectively; goodwill impairment charges of $7.9 million and
$20.3 million for the years 2001 and 2002, respectively; transaction
expenses related to the Acquisition of $21.5 million for the Predecessor
'03; plant closure charges of $1.3 million, $0.4 million and $3.1 million
for the Predecessor '03, the Successor '03, and the year 2004, respectively;
and other charges of $0.9 million and $0.7 million for the Predecessor '03
and the year 2004, respectively.
(3) Includes tender premium of $10.8 million for the 10.25% Series B senior
subordinated notes which were partially redeemed in connection with the
Acquisition and $8.9 million of unamortized debt issuance costs expensed
related to debt repaid in connection with the Acquisition for the
Predecessor '03.
(4) Defined as current assets (excluding cash and assets held for sale), less
current liabilities (excluding current maturities of long-term debt and
liabilities held for sale).
(5) EBITDA is a non-GAAP financial measure that is defined as net income before
interest expense, income taxes, depreciation and amortization. We use EBITDA
as a supplemental tool to measure our operating performance and, after
applying various adjustments, as a basis for determining the following:
- The allocation of our resources to our different business segments;
- The return on investment of acquisitions and major cash
expenditures;
- The compensation of our management;
- The vesting of Simmons Company's restricted stock;
- The valuation of Simmons Company; and
- Our compliance with debt covenants.
We rely on EBITDA as a supplemental tool for measuring our operating
performance because we are and have historically had a highly-leveraged
capital structure which results in significant interest expense and minimal
cash tax expense. We believe EBITDA provides useful information to the
holders of our notes and security analysts by assisting them in making
informed investment decisions as we have historically been valued and sold
based upon multiples of EBITDA. EBITDA differs from Adjusted EBITDA, which
is defined by our senior credit facility (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources").
EBITDA has important limitations as an analytical tool, and should not be
considered in isolation or as a substitute for analysis of our results as
reported under GAAP. For example, EBITDA does not reflect:
- our cash expenditures, or future requirements, for capital
expenditures or contractual commitments;
- changes in, or cash requirements for, our working capital needs;
- the significant interest expense, or the cash requirements necessary
to service interest or principal payments, on our debts;
- tax payments that represent a reduction in cash available to us; and
- any cash requirements for the assets being depreciated and amortized
that may have to be replaced in the future.
15
Because of these and other limitations, we rely primarily on our results
under GAAP and use EBITDA only supplementally. The following table sets
forth the reconciliation of our net income for the periods provided to
EBITDA:
PREDECESSOR SUCCESSOR
---------------------------------------------------------------- | -----------------------------
FOR THE FOR THE FOR THE FOR THE | FOR THE FOR THE
YEAR YEAR YEAR PERIOD FROM | PERIOD FROM YEAR
ENDED ENDED ENDED DEC. 29, 2002 | DEC. 20, 2003 ENDED
DEC. 30, DEC. 29, DEC. 28, THROUGH | THROUGH DEC. 25,
2000 2001 2002 DEC. 19, 2003 | DEC. 27, 2003 2004
----------- ----------- ----------- ------------- | ------------- -----------
|
Net income (loss) $ (18,121) $ (9,637) $ (611) $ (34,096) | $ (7,190) $ 24,614
Depreciation and |
amortization 24,800 35,711 39,335 22,059 | 656 23,084
Income taxes (4,813) (7,676) 12,005 (8,845) | (827) 12,039
Interest expense, net 39,989 39,450 32,000 45,092 | 4,661 43,758
Interest income 597 521 193 197 | 4 141
----------- ----------- ----------- ----------- | ----------- -----------
EBITDA $ 42,452 $ 58,369 $ 82,922 $ 24,407 | $ (2,696) $ 103,636
=========== =========== =========== =========== | =========== ===========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RISK FACTORS
Our business is subject to a number of important risks, including the following:
- The bedding industry is highly competitive, and if we are unable to
compete successfully, we may lose customers and our sales may
decline.
- Federal, state and local regulatory requirements relating to our
products may increase our costs, alter our manufacturing processes
and impair our product performance.
- Legal and regulatory requirements related to, among other things,
our marketing and advertising practices and our compliance with
environmental and occupational health and safety, may impose costs
or charges on us that impair our business and reduce our
profitability.
- Our new product launches may not be successful, which could cause a
decline in our market share and our level of profitability.
- We rely on a small number of suppliers, and if we experience
difficulty with a major supplier, we may have difficulty finding
alternative sources, which could disrupt our business.
- We are subject to fluctuations in the cost and availability of raw
materials, such as wire, spring components, lumber, cotton,
insulator pads, innersprings, fabrics and roll goods consisting of
foam, fiber, ticking and non-wovens, which fluctuations could
increase our costs or disrupt our production.
- Because we depend on our significant customers, a decrease or
interruption in their business with us could reduce our sales and
profits.
- A change or deterioration in labor relations or the inability to
renew our collective bargaining agreements could disrupt our
business operations and increase our costs, which could negatively
impact sales and decrease our profitability.
16
- The loss of the services of any member of our senior management team
could impair our ability to execute our business strategy and
negatively impact our business, financial condition and results of
operations.
- If we are not able to protect our trade secrets or maintain our
trademarks, patents and other intellectual property, we may not be
able to prevent competitors from developing similar products or from
marketing in a manner that capitalizes on our trademarks.
- We may face exposure to product liability claims, which could reduce
our liquidity and profitability and reduce consumer confidence in
our products.
- An increase in our return rates or an inadequacy in our warranty
reserves could reduce our liquidity and profitability.
- We are vulnerable to interest rate risk with respect to our debt,
which could lead to an increase in interest expense.
- Our levels of indebtedness.
- Risks related to future acquisitions
OVERVIEW
We are a leading manufacturer and distributor of branded bedding products
in the United States. We sell a broad range of mattresses and foundations under
our well-recognized brand names, including Beautyrest(R), our flagship product
line introduced in 1925, and BackCare(R).
Our operations are managed and reported in two segments. For the year
ended December 25, 2004, we derived over 90% of our sales from our wholesale
bedding segment, which consists primarily of the manufacture, sale and
distribution of premium branded bedding products. Our wholesale bedding segment
sells to a diverse nationwide base of approximately 3,600 retail customers
representing over 11,000 outlets, including furniture stores, specialty sleep
shops, department stores, and rental stores. Additionally, we distribute
juvenile bedding products through mass merchandisers and juvenile specialty
stores. Our wholesale bedding segment also sells mattresses to our retail
bedding segment, which as of December 25, 2004 operated 47 specialty sleep
stores in Oregon and Washington that sell to consumers principally premium
branded bedding products.
Highlights for the year 2004 included the following:
- For our wholesale bedding segment, conventional bedding sales grew
at a rate of 9.8%, which was less than the industry growth rate of
11.1%, as reported by ISPA. 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 late
October of 2004. Our growth rate was primarily attributable to the
roll-out of our 2004 Beautyrest(R) product line in January 2004. In
December 2004, we began shipping the 2005 product lines for all of
our conventional bedding products. The 2005 product lines contain
several new features including the HealthSmart(TM) Bed at retail
price points above $1,299, which features a removable mattress top
that can be zipped off the mattress and laundered or dry cleaned. We
continue to focus on selling premium products targeted to sell at
retail price points above $799 per queen set and on selling queen
and larger size mattresses. In 2004, we derived approximately 65% of
our sales from mattresses with retail price points of $799 and above
(35% from above $1,000) and approximately 83% of our sales from
queen and larger size mattresses.
- Our wholesale bedding segment was negatively impacted by inflation
in material costs. In late October 2004, we implemented a 12% price
increase on our 2004 product lines to help offset the increased
costs of materials. We anticipate that our material costs will
remain at these elevated prices for 2005, but we believe that our
new 2005 product lines are priced to address existing material costs
and anticipated inflation.
- Our wholesale bedding segment made strides toward improving our
manufacturing network by opening two new conventional bedding
manufacturing facilities in Hazleton, Pennsylvania and Waycross,
Georgia and closing our older manufacturing facilities in Columbus,
Ohio and Piscataway, New Jersey. The
17
Hazleton and Waycross facilities commenced operations in March 2004
and August 2004, respectively. In 2004, we incurred charges, which
are expected to be non-recurring, of $13.6 million related to the
opening and closing of the manufacturing facilities.
- We sold our retail specialty sleep stores located in Southern
California on May 1, 2004 to Pacific Coast Mattress, Inc. ("PCM")
for cash proceeds of $6.3 million. As a result of this sale, the
number of our retail bedding segment retail stores decreased
approximately 50%. On a comparable store basis, sales for our retail
bedding segment increased 18.6% for 2004.
- On August 27, 2004, we acquired certain assets and liabilities of
the crib mattress and related soft goods business of Simmons
Juvenile Products Company, Inc. ("Simmons Juvenile, Inc."), a
then-current licensee of ours, for $19.7 million plus contingent
consideration based upon future operating performance not to exceed
$4.4 million. This acquisition provides us access to the growing
U.S. infant market. The results of our juvenile bedding business
from the date of acquisition are included in the results of our
wholesale bedding segment.
The following provides the details of these highlights and insights into
our financial statements, including critical accounting policies and estimates
used in preparing the financial statements, a discussion of our results of
operations and our liquidity and capital resources.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with
GAAP, our management must make decisions that impact the reported amounts and
the related disclosures. Those decisions include the selection of the
appropriate accounting principles to be applied and the assumptions on which to
base estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to the allowance for doubtful accounts, impairment of long-lived
assets, impairment of goodwill, warranties, co-operative advertising and rebate
programs, variable stock compensation, income taxes, litigation and
contingencies. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Our management believes the critical accounting policies described
below are the most important to the fair presentation of our financial condition
and results. The following policies require management's more significant
judgments and estimates in the preparation of our consolidated financial
statements.
Allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. We evaluate the adequacy of the allowance
on a periodic basis. The evaluation includes consideration of "a review of"
historical loss experience, the aging of the receivable balances, adverse
situations that may affect the customer's ability to pay the receivable, and
prevailing economic conditions. If the result of the evaluation of the reserve
requirements differs from the actual aggregate allowance, adjustments are made
to the allowance. This evaluation is inherently subjective, as it requires
estimates that are susceptible to revision as more information becomes
available. Our accounts receivable balance was $85.4 million and $65.9 million,
net of the allowance for doubtful accounts of $5.1 million and $5.0 million,
respectively, as of December 25, 2004 and December 27, 2003, respectively.
Impairment of long-lived assets. We assess all our long-lived assets for
impairment whenever events or circumstances indicate their carrying value may
not be recoverable. Management assesses whether there has been an impairment by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying value of the asset. The factors considered by management in
this assessment include operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors. If an
impairment is deemed to exist, management records an impairment charge equal to
the excess of the carrying value over the fair value of the impaired assets.
This could result in a material charge to earnings.
Intangible assets. We test goodwill for impairment on an annual basis by
comparing the fair value of our reporting units to their carrying values. Fair
value is determined by the assessment of future discounted cash flows.
18
Additionally, goodwill is tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of an entity below its carrying value. These events or circumstances would
include a significant change in the business climate, legal factors, operating
performance indicators, competition, sale or disposition of a significant
portion of the business, or other factors.
As part of the adoption of SFAS 142, we performed initial valuations
during the first quarter of 2002 to determine if any impairment of goodwill
existed and determined that no impairment existed. In accordance with SFAS 142,
we tested goodwill again at December 28, 2002 for impairment by comparing the
fair value of our reporting units to their carrying values. As a result, our
retail segment recognized a goodwill impairment of $20.3 million in 2002.
Management determined that no impairment of goodwill existed as of December 27,
2003 or December 25, 2004.
We evaluate trademarks, which are considered indefinite-lived intangible
assets, for impairment at least annually or whenever events or circumstances
indicate their carrying value might be impaired. In performing this assessment,
management considers operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors. The
carrying value of trademarks is considered impaired when its carrying value
exceeds its fair market value. In such an event, an impairment loss is
recognized equal to the amount of that excess. Fair value is determined
primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or an appraisal. The determination of fair
value involves numerous assumptions by management, including expectations on
possible variations in the amounts or timing of cash flow, the risk-free
interest rate and other factors considered in managements projected future
operating results. We review the classification of trademarks as
indefinite-lived intangible assets every reporting period.
Warranty accrual. Our management must make estimates of potential future
product returns related to current period product revenue for our wholesale
segment. Management analyzes historical returns when evaluating the adequacy of
the warranty accrual. Significant management judgments and estimates must be
made and used in connection with establishing the warranty accrual in any
accounting period. Our warranty policy generally provides a ten-year
non-prorated warranty service period on all first quality conventional bedding
products currently manufactured. Our juvenile bedding products have warranty
periods ranging from five years to a lifetime. Our policy is to accrue the
estimated cost of warranty coverage at the time a sale is recorded. As of
December 25, 2004 and December 27, 2003, we had a warranty accrual of $3.7
million and $3.8 million, respectively.
Cooperative advertising and rebate programs. We enter into agreements with
our customers to provide funds for advertising and promotion of our products. We
also enter into volume and other rebate programs with certain customers whereby
funds may be rebated to the customer. When sales are made to these customers, we
record accrued liabilities pursuant to these agreements. Management regularly
assesses these liabilities based on forecasted and actual sales and claims and
management's knowledge of customer purchasing habits to determine whether all
the cooperative advertising earned will be used by the customer, whether the
cooperative advertising costs meet the requirement for classification as
selling, general and administrative expense versus a reduction of sales, and
whether the customer will meet the requirements to receive rebates. Costs of
these programs totaled $113.3 million, $0.6 million, $99.2 million and $86.4
million for the fiscal year 2004, the period from December 20, 2003 through
December 27, 2003, the period from December 29, 2002 through December 19, 2003
and 2002, respectively.
Stock compensation expense. Prior to the Acquisition, we recorded variable
stock compensation expense, related to director and employee regular stock
options, utilizing the intrinsic value method as prescribed by Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and related interpretations. Management estimated the employee service
period over which the compensation was awarded, generally four to five years.
Additionally, because the vesting of the plan options was dependent upon
achieving an annual Adjusted EBITDA target, management estimated the ultimate
number of shares that would vest. We recorded additional adjustments to variable
stock compensation expense for changes in the intrinsic value of vested regular
options in a manner similar to a stock appreciation right because the option
holder could compel us to settle the award by transferring cash or other assets
rather than our common stock. We determined the fair market value of our common
stock, including option shares, on a quarterly basis based upon a quarterly
valuation performed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
Estimates were used in determining the fair market value of our common stock.
19
In connection with the Acquisition, the stock option plans were terminated
and certain members of our management deferred $19.8 million of their proceeds
from the Acquisition into the deferred compensation plan of our indirect parent,
Simmons Company. The proceeds were deemed invested in shares of Simmons Company
Class A common stock. These shares were convertible into cash or common stock
based upon the outcome of certain events such as a change of control or initial
public offering. These shares had a put option that gave the holder the right to
cash based upon a quarterly valuation of Simmons Company's common stock
performed by Houlihan Lokey Howard and Zukin Financial Advisors, Inc. The
changes in market value of the liability were recorded as variable stock
compensation expense. The valuation of the shares was based upon our intrinsic
value, which was estimated based upon our historical and forecasted operating
results, market conditions and historical comparable transactions. The deferred
compensation plan was terminated on June 3, 2004.
In connection with the Acquisition, we adopted The Simmons Company Equity
Incentive Plan (the "Incentive Plan") to provide restricted stock awards to our
employees, directors and consultants. Restricted shares of Class B common stock
representing up to fifteen percent (15%) of our capital stock (on a fully
diluted basis) may be issued pursuant to awards under the Incentive Plan. Awards
of restricted stock are made pursuant to restricted stock agreements and are
subject to vesting and other restrictions as determined by our board of
directors. Among other things, the restricted stock agreements provide, under
certain conditions, for acceleration in vesting of the stock upon a change in
control and all restricted stock vests on the eighth anniversary of the issuance
of the restricted stock. Upon issuance of restricted stock awards, compensation
cost is measured as the excess of the fair market value of the award over the
purchase price. The entire amount of compensation cost is recorded as deferred
compensation and amortized by a charge to stock compensation expense over the
period from the date the shares are awarded to the date restrictions are
expected to lapse. In making this determination, we continually reevaluate
whether attainment of the performance goals that would accelerate the lapsing of
the restrictions is considered probable. As a result of our 2004 operating
performance, 18.75% of the restricted stock shares vested in 2004.
We recorded stock compensation expense of $3.3 million, $0 million, $68.4
million, and $15.6 million for the fiscal year 2004, the Successor '03, the
Predecessor '03 and for fiscal year 2002.
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income or expense in the period that
includes the effective date of enactment. A valuation allowance is established,
when necessary, to reduce deferred tax assets to amounts expected to be
realized.
As of December 25, 2004, we had net operating loss carryforward benefits
for federal income tax purposes of $116.5 million, including $15.3 million that
were generated by our SC Holdings, Inc. subsidiary ("Sleep Country"), that are
subject to use limitations imposed by the Internal Revenue Code, and state net
operating loss carryforwards of $60.0 million. Our net operating loss
carryforwards expire on various dates through 2023. Our management must make
estimates regarding the future realization of these net operating loss benefits.
Realization of the net operating loss carryforward benefits is dependent upon
future profitable operations and reversals of existing temporary differences.
Although realization is not assured, we believe it is more likely than not that
most of the net recorded benefits will be realized through the reduction of
future taxable income. However, due to the uncertainty regarding the realization
of certain tax loss carryforwards, as of December 25, 2004 we have recorded a
valuation allowance of $7.4 million against the deferred tax assets related to
Sleep Country's net operating loss carryforwards, our state income tax credits
and foreign income tax credits. Based on the Company's recent history of
earnings and expectation of future profits, the Company has determined that the
realization of a portion of Sleep Country's net deferred tax assets, excluding
net operating losses, is more likely than not, and, accordingly, the valuation
allowance was reduced by $4.6 million during 2004. Since the valuation allowance
was recorded as part of the Acquisition purchase accounting, the reduction of
the valuation allowance in 2004 was accounted for as a reduction of the goodwill
for the Company's retail segment.
Litigation and contingent liabilities. From time to time, Simmons and its
operations are parties to or targets of lawsuits, claims, investigations and
proceedings, including product liability, personal injury, patent and
intellectual
20
property, commercial, contract, environmental, health and safety, and employment
matters, which are handled and defended in the ordinary course of business. We
accrue a liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. We believe the amounts
reserved are adequate for such pending matters; however, results of operations
could be negatively affected by significant litigation adverse to us.
RESULTS OF OPERATIONS
GAAP does not permit combining the results of our Predecessor period
(December 29, 2002 through December 19, 2003) with our Successor period
(December 20, 2003 through December 27, 2003) in our consolidated financial
statements. Accordingly, the consolidated statements of operations included
elsewhere in this filing do not present results for the twelve months ended
December 27, 2003. However, in order to provide investors with useful
information, the following table presents historical financial information for
the Predecessor period and the Successor period and on a pro forma basis for the
year ended December 27, 2003.
The unaudited pro forma information for the year ended December 27, 2003
gives effect to the following items as if each had occurred on December 29, 2002
(the first day of our fiscal year 2003):
- the Acquisition;
- the elimination of non-recurring charges resulting directly from the
Acquisition; and
- the termination of the deferred compensation plan.
21
PREDECESSOR SUCCESSOR
------------------------------ | -----------------------------------------------
PERIOD FROM | PERIOD FROM PRO FORMA
FOR THE YEAR DEC. 29, 2002 | DEC. 20, 2003 FOR THE YEAR FOR THE YEAR
ENDED THROUGH | THROUGH ENDED ENDED
DEC. 28, 2002 DEC. 19, 2003 | DEC. 27, 2003 DEC. 27, 2003 DEC. 25, 2004
------------- ------------- | ------------- ------------- -------------
|
Net sales 100.0% 100.0% | 100.0% 100.0% 100.0%
Cost of products sold 52.2% 51.3% | 82.0% 51.1% 54.3%
----- ----- | ----- ----- -----
Gross profit 47.8% 48.7% | 18.0% 48.9% 45.7%
Selling, general and |
administrative expenses 40.1% 46.8% | 51.5% 37.8% 36.6%
Amortization of intangibles 0.2% 0.0% | 3.6% 0.6% 0.6%
Licensing income -1.3% -1.3% | -3.7% -1.3% -1.1%
Goodwill impairment 2.9% 0.0% | 0.0% 0.0% 0.0%
Plant closure charges 0.0% 0.2% | 5.2% 0.2% 0.4%
Transaction expenses 0.0% 2.8% | 0.0% 0.1% 0.1%
----- ----- | ----- ----- -----
Operating income 5.9% 0.2% | -38.6% 11.5% 9.1%
Interest expense, net 4.5% 5.7% | 53.5% 5.4% 5.0%
----- ----- | ----- ----- -----
Income (loss) before |
income taxes and |
minority interest 1.4% -5.5% | -92.1% 6.1% 4.1%
Income taxes (benefit) 1.7% -1.1% | -9.5% 1.9% 1.4%
----- ----- | ----- ----- -----
Income (loss) before |
minority interest -0.3% -4.4% | -82.6% 4.2% 2.7%
Minority interest in loss -0.2% 0.0% | 0.0% 0.0% 0.0%
----- ----- | ----- ----- -----
Net income (loss) -0.1% -4.4% | -82.6% 4.2% 2.7%
===== ===== | ===== ====== =====
The pro forma information for the year ended December 27, 2003 includes
the following adjustments resulting from the Acquisition and termination of the
deferred compensation plan:
- adjustment to cost of products sold of $(3.7) million, or (0.5)% of
net sales, to (i) reduce depreciation expense by $(2.9) 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 by $(1.7) million inventory recorded at
fair market value as a result of the Acquisition and sold during the
eight day period ended December 27, 2003; and (iii) increase
amortization of favorable leases by $0.9 million due to the step-up
to fair market value of leases;
- adjustment to selling, general and administrative expense of $(73.0)
million, or (9.1)% of net sales, to (i) reduce depreciation expense
by $(3.2) 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
$(1.4) million to reflect the change in our equity-sponsor
management agreement; and (iii) reduce variable stock compensation
expense by $(68.4) million to reflect the elimination of our stock
option plans and deferred compensation plan;
- adjustment to increase amortization of intangibles by $4.4 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 reduce interest expense, net by $(6.5) million, or
(0.8)% of net sales, to reflect the additional interest expense
associated with the new debt, less the interest expense associated
with the old debt retired and the elimination of one-time financing
charges resulting from the Transactions; and
- adjustment to increase income tax expense by $25.1 million based
upon our pro forma effective tax rate of 31% which resulted from the
elimination of non-deductible expenses associated with the
Transactions and termination of the deferred compensation plan.
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
22
compensation plan occurred on December 29, 2002 or to project our results of
operations for any future period or date.
YEAR ENDED DECEMBER 25, 2004 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 27, 2003
Net Sales. Net sales for the year ended December 25, 2004 increased
$63.6 million, or 7.9%, to $869.9 million from $806.3 million for the pro forma
year ended December 27, 2003.
Wholesale bedding segment net sales increased $67.4 million, or 9.1%,
to $808.4 million for the year ended December 25, 2004 from $741.0 million for
the pro forma year ended December 27, 2003. For the year ended December 25, 2004
and the pro forma year ended December 27, 2003, our wholesale bedding segment
net sales reflect a reduction of $66.7 million and $49.5 million, respectively,
for cash consideration paid to our customers for certain promotional programs
and volume rebates in accordance with Emerging Issues Task Force of the
Financial Accounting Standards Board 01-9, "Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor's Product" ("EITF 01-9").
Our sales reductions increased principally due to less co-op advertising
expenditures meeting the criteria of a selling expense in accordance with EITF
01-9 for the year ended December 25, 2004 compared to the pro forma year ended
December 27, 2003. The wholesale bedding segment net sales increase was
primarily due to (i) an increase in conventional bedding unit volume and average
unit selling price ("AUSP") of 3.5% and 6.1%, respectively, compared to the pro
forma year ended December 27, 2003; and (ii) the addition of $7.7 million of net
sales as a result of the acquisition of certain assets and liabilities of
Simmons Juvenile, Inc. for the year ended December 25, 2004. The increase in our
EITF 01-9 sales reductions in comparison to the prior year partially offset our
sales improvement. Our wholesale segment conventional bedding unit volume
increased due to increased Beautyrest(R) sales following the roll-out of the
Beautyrest(R) 2004 product line in the first quarter of 2004 and the addition of
new dealer accounts. Our improvements in AUSP were primarily attributable to a
shift in our sales mix toward our Beautyrest(R) branded product line following
the roll-out of the 2004 product line. Our Beautyrest(R) products generally have
a higher AUSP compared to our other significant branded product lines.
Additionally, our AUSP benefited from the 12% price increase implemented on our
2004 product line in late October 2004 to help offset inflation in material
costs and the shipment of our new 2005 product line in December 2005.
Our wholesale segment conventional bedding sales, exclusive of EITF
01-9 sales deductions, which is the methodology used by ISPA in estimating
industry sales, were up 9.8% over the prior year. In comparison, ISPA estimated
that for 2004 total U.S. bedding manufacturers' sales were up 11.1% over the
prior year, comprised of an increase in unit shipments and AUSP of 3.9% and
7.0%, respectively. We believe that our sales growth was less than the
industry, due primarily to our relatively higher sales growth in prior periods
as compared to the industry, and certain industry competitors implementing
price increases in the second and third quarters of 2004, whereas we did not
increase our prices until late October of 2004.
Our retail segment sales for the year ended December 25, 2004
decreased $16.9 million, or 17.3%, to $81.0 million from $97.9 million for the
pro forma year ended December 27, 2003. Retail segment sales were negatively
impacted by the sale of our Mattress Gallery retail operations in May 2004.
Mattress Gallery contributed $12.9 million of net sales prior to our sale of
the operations compared to $40.0 million of net sales for the pro forma year
ended December 27, 2003. On a comparable store basis, sales for our retail
stores increased 18.6% for the year ended December 25, 2004 versus the pro
forma year ended December 27, 2003. Retail segment same store sales have
benefited from increased advertising which we believe resulted in a gain in
market share.
Cost of Products Sold. Cost of products sold as a percentage of net
sales, for the year ended December 25, 2004 increased 3.2 percentage points to
54.3% from 51.1% for the pro forma year ended December 27, 2003, resulting in a
gross margin decrease to 45.7% for the year ended December 25, 2004 from 48.9%
for the pro forma year ended December 27, 2003.
Our wholesale segment gross margin decreased 2.2 percentage points to
44.6% of wholesale segment net sales for the year ended December 25, 2004 from
46.8% for the pro forma year ended December 27, 2003. Our decline in gross
margin was principally due to (i) the increase in EITF 01-9 sales reductions;
(ii) higher material costs resulting principally from inflation in prices for
steel and wood; and (iii) start-up costs for our new conventional bedding
manufacturing facilities. Our EITF 01-9 sales reductions increased 1.8
percentage points of wholesale segment net sales for the year ended December
25, 2004 compared to the prior year for the reasons mentioned above. Material
costs increased 2.3 percentage points of wholesale segment net sales for the
year ended December 25, 2004 compared to the prior year. To offset the effects
of inflation in material prices, we implemented a 12% price increase on our
2004 product lines in late October 2004 and began the roll out of our new 2005
product lines, which are priced to recover the higher material costs, in
December 2004. We incurred $5.0 million, or 0.6% of wholesale segment net
sales, of manufacturing costs associated with the opening of the Waycross,
Georgia and Hazleton, Pennsylvania manufacturing facilities in 2004. These
manufacturing costs are not expected to reoccur in future periods. Our labor
and overhead costs, as a percentage of wholesale segment net sales, decreased
0.6 percentage points as a result of (i) an increase in unit volume; and (ii)
operating one less manufacturing facility during most of the year.
Our retail segment gross margin of 46.3% of retail net sales for the
year ended December 25, 2004 decreased 4.5 percentage points versus the gross
margin of 50.8% of retail net sales for the pro forma year ended December 27,
2003. Our retail segment gross margin decreased primarily due to the selling of
inventory recorded at fair market value in connection with the Acquisition of
$3.8 million, or 4.7% of retail segment net sales for the year ended December
25, 2004. The sale of our Mattress Gallery retial operations, which had a lower
margin product sales mix than our Sleep Country USA retail operations,
partially offset the decrease in retail segment gross margins.
Selling, General and Administrative Expenses. For the year ended
December 25, 2004, selling, general and administrative expenses ("SG&A") as a
percentage of net sales decreased 1.2 percentage points, to 36.6% from 37.8%
for the pro forma year ended December 27, 2003.
As a percent of wholesale segment net sales, our wholesale segment
SG&A decreased 0.4 percentage points to 34.6% for the year ended December 25,
2004 from 35.0% for the pro forma year ended December 27, 2003. The decrease
was principally due to a reduction in both co-op advertising and
administrative compensation expenses of 1.0 and 0.6 percentage points,
respectively. Co-op advertising expenses decreased due to more payments to our
dealers not meeting the criteria of a selling expense in accordance with EITF
01-9 and, therefore, being recorded as a reduction of net sales. Our
administrative compensation expense decreased primarily as a result of a lower
bonus payout in 2004 in comparison to 2003. Partially offsetting these
reductions in SG&A expense, our distribution costs rose 0.7 percentage points
due primarily to increases in (i) miles driven to service our customers from
existing manufacturing facilities following the closing of our manufacturing
facilities in Jacksonville, Florida and Columbus, Ohio, which were closed in
December 2003 and April 2004, respectively; and (ii) average fuel costs in
comparison to the prior year.
As a percentage of retail segment sales, our retail segment SG&A
decreased 0.1 percentage point to 47.7% for the year ended December 25, 2004
from 47.8% for the pro forma year ended December 27, 2003. The decrease was
primarily attributable to (i) the sale of Mattress Gallery, which had higher
SG&A expenses as a percentage of net sales; and (ii) the growth in same store
sales which resulted in better leveraging of our fixed expenses, such as
salaries and rent. Partially offsetting the improvement in our retail segment
SG&A, our retail segment had increases in (i) advertising and promotional
expenditures which were utilized to stimulate sales and (ii) distribution costs
resulting from higher average fuel costs.
Amortization of Intangibles. For the year ended December 25, 2004,
amortization of intangibles of $4.9 million decreased $0.1 million from $5.0
million for the pro forma year ended December 27, 2003.
Licensing income. For the year ended December 25, 2004, our licensing
income decreased $1.2 million to $9.6 million from $10.8 million for the pro
forma year ended December 27, 2003. Our licensing income decreased primarily
due to a loss of licensee as a result of their filing for bankruptcy during the
second quarter of 2004.
23
Plant Closure Charges. For the year ended December 25, 2004, we
incurred $3.1 million of plant closure charges related to the closing of our
manufacturing facilities in Columbus, Ohio and Piscataway, New Jersey in April
and December, respectively. For the pro forma year ended December 27, 2003, we
incurred $1.8 million of plant closure charges related to the closing of our
manufacturing facility in Jacksonville, Florida. The plant closure charges
consisted principally of severance, employee retention payments, rent and costs
to transfer equipment. All plant closure charges related to the closure of the
Columbus, Ohio and Piscataway, New Jersey manufacturing facilities had been
expensed as of December 25, 2004.
Transaction Expenses. For the year ended December 25, 2004, we
incurred $0.7 million of transaction expenses, in the aggregate, related
principally to the Acquisition, our acquisition of certain assets and
liabilities of Simmons Juvenile, Inc., and the sale of Mattress Gallery. We
incurred $0.9 million of transaction costs for the pro forma year ended
December 27, 2003 in connection with our acquisition of Sleep Country.
Interest Expense, Net. For the year ended December 25, 2004, interest
expense, net, of $43.8 million increased $0.5 million from $43.3 million for
the pro forma year ended December 27, 2003.
Income Taxes. The combined federal, state, and foreign effective income
tax rate of 32.8% for the year ended December 25, 2004 differs from the federal
statutory rate of 35.0% primarily due to a reversal of tax reserves which we
believe are no longer needed, partially offset by the expiration of unused net
operating loss benefits and an increase in state income taxes. The combined
federal, state, and foreign effective income tax rate of 31.2% for the pro forma
year ended December 27, 2003 differed from the federal statutory rate of 35.0%
primarily due to a reduction in Sleep Country's valuation allowance on net
operating losses as a result of income it earned for the pro forma year ended
December 27, 2003.
Net Income. For the reasons set forth above, our net income decreased
$9.3 million, or 27.5%, to $24.6 million for the year ended December 25, 2004
compared to $34.0 million for the pro forma year ended December 27, 2003.
24
PRO FORMA YEAR ENDED DECEMBER 27, 2003 COMPARED TO YEAR ENDED
DECEMBER 28, 2002
Net Sales. Net sales for the pro forma year ended December 27, 2003
increased $97.7 million, or 13.8%, to $806.3 million from $708.6 million for the
year ended December 28, 2002.
Wholesale bedding segment net sales increased $82.1 million, or 12.5%, to
$741.0 million for the pro forma year ended December 27, 2003 from $659.0
million for fiscal year 2002. For the pro forma year ended December 27, 2003 and
fiscal year 2002, our wholesale bedding net sales reflect a reduction of $49.5
million and $52.4 million, respectively, for cash consideration paid to our
customers for certain promotional programs and volume rebates in accordance with
EITF 01-9. The wholesale bedding segment sales increase was primarily due to an
increase in both unit shipments and AUSP of 5.6% compared to 2002. Our AUSP
benefited from a shift in sales mix toward our higher priced Beautyrest(R) and
BackCare(R) products. Unit volume growth resulted from additional floor
placements at new and existing customers and an improved retail sales
environment in the second half of 2003.
Our pro forma year ended December 27, 2003 wholesale bedding sales,
exclusive of EITF 01-9 sales reductions, which is the methodology used by ISPA
in calculating industry sales, were up 11.4% over the prior year. In comparison,
ISPA reported that for 2003 total U.S. bedding manufacturers' sales were up 5.8%
over the prior year, comprised of an increase in unit shipments and AUSP of 1.8%
and 3.9%, respectively. According to Furniture/Today, an industry trade
publication, our 2003 industry market share was 15.7%.
Our retail segment sales for the pro forma year ended December 27, 2003
increased $26.1 million, or 36.4%, to $97.9 million from $71.8 million for
fiscal year 2002. On a comparable store basis, sales for our retail stores
increased 14.9% for the pro forma year ended December 27, 2003 versus 2002. The
retail segment sales increase was due principally to (i) the acquisition of 26
retail stores in Southern California from Mattress Discounters Corporation
("Mattress Discounters") in December 2002; (ii) an increase in advertising
expenditures which led to higher sales; and (iii) an improving retail sales
environment.
Cost of Products Sold. Cost of products sold as a percentage of net sales,
for the pro forma year ended December 27, 2003 decreased 1.1 percentage points
to 51.1% in fiscal year 2002, resulting in a gross margin increase to 48.9% for
the pro forma year ended December 27, 2003 from 47.8% for 2002
Our wholesale segment gross margin increased 0.8 percentage points to
46.8% for the pro forma year ended December 27, 2003 from 46.0% for 2002. Our
gross margin increased 1.3 percentage points due to better absorption of our
fixed manufacturing costs as a result of our unit volume growth. Additionally,
our wholesale segment gross margin improved due to a reduction in depreciation
expense of $1.9 million, or 0.3% of wholesale segment net sales, due to the
adjustment of the remaining useful lives of the property, plant and equipment in
connection with the Acquisition. Offsetting these improvements were cost
increases of (i) 1.0 percentage point due to supplier price increases for
certain raw material components without a corresponding price increase in our
Beautyrest(R) product line in 2003; and (ii) 0.3 percentage points due to higher
labor costs resulting from increased production demands resulting from our unit
volume growth.
25
Our retail segment gross margin decreased 0.2 percentage points to 50.8%
for the pro forma year ended December 27, 2003 from 51.0% for 2002. The decrease
was due to the discounting of inventory acquired from Mattress Discounters in
December 2003 and the discounting of inventory in late 2003 that was being
replaced with new product lines.
Selling, General and Administrative Expenses. For the pro forma year ended
December 27, 2003, selling, general and administrative expenses, as a percentage
of net sales decreased 2.3 percentage points to 37.8% from 40.1% in fiscal year
2002.
Our wholesale segment selling, general and administrative expenses
decreased 2.0 percentage points to 35.0% of wholesale segment net sales for the
pro forma year ended December 27, 2003 from 37.0% for fiscal year 2002. Variable
stock compensation expense decreased $15.6 million due to the termination of the
deferred compensation plan and the Predecessor stock option plans. Our pro forma
year ended December 27, 2003 includes the reduction of depreciation expense by
$2.9 million, or 0.4% of wholesale segment net sales, due to the remaining
useful lives of our property, plant and equipment being extended from an average
of three years to seven years as a result of the revaluation of the property,
plant and equipment in connection with the Acquisition. Additionally, our
selling, general and administrative expenses for the pro forma year ended
December 27, 2003 reflect a $1.4 million, or 0.2% of wholesale segment net
sales, reduction in management fees due to both the cancellation of the Fenway
management agreement and the entering into the new THL Managers V, LLC
management agreement in connection with the Acquisition. Offsetting these
improvements in our selling, general and administrative expenses, our
promotional expenditures increased $20.5 million, or 1.6 percentage points, due
to (i) more payments to customers meeting the criteria of a selling expense in
accordance with EITF 01-9 because our focus on increasing customer compliance
with our co-op advertising guidelines; and (ii) a shift in our sales mix toward
customers and products that receive more advertising and selling support
subsidies.
Our retail segment selling, general and administrative expenses decreased
8.6 percentage points to 47.8% of retail segment net sales for the pro forma
year ended December 27, 2003 from 56.4% for fiscal year 2002. This decrease was
attributable to our increase in retail sales resulting in greater leverage of
our fixed retail selling, general and administrative expenses.
Amortization of Intangibles. Amortization of intangibles decreased $16.5
million, or 76.9%, to $5.0 million for the pro forma year ended December 27,
2003 from $21.5 million in fiscal year 2002. The pro forma year ended December
27, 2003 amortization was less than the fiscal year 2002 due to our retail
segment recognizing a $20.3 million non-cash goodwill impairment charge in the
fourth quarter of 2002.
Licensing Income. For the pro forma year ended December 27, 2003, our
licensing income increased $1.8 million to $10.8 million from $9.0 million for
the year ended December 28, 2002. Our licensing income increased primarily due
to improved performance of our domestic and international licensees.
Plant Closure Charges. For the pro forma year ended December 27, 2003, we
incurred $1.8 million of plant closure charges related to the closing of our
manufacturing facility in Jacksonville, Florida. The plant closure charges
consisted principally of severance, retention, rent and costs to transfer
equipment.
Interest Expense, Net. Interest expense, net increased $11.3 million, or
35.3%, to $43.3 million for the pro forma year ended December 27, 2003 from
$32.0 million in fiscal year 2002 due to an increase in our average outstanding
borrowings for the pro forma year ended December 27, 2003 resulting from the
Acquisition. Our interest paid in pro forma 2003 was $53.6 million, a 114.6%
increase from $24.9 million paid in 2002, due principally to payments of (i)
$10.8 million in tender fees for our repurchase of $144.9 million of 10.25%
senior subordinated notes due 2009; (ii) junior subordinated PIK note interest
of $13.7 million; and (iii) $3.5 million in bridge loan commitment fees.
Income Taxes. Our combined federal, state and foreign effective income tax
expense rate of 31.2% for the pro forma year ended December 27, 2003 differed
from the federal statutory rate of 35.0% primarily because of a reduction of the
prior year valuation allowance on net operating losses due to Sleep Country's
income for the pro forma year ended December 27, 2003. Our combined federal,
state and foreign effective income tax rate of 116.7% for fiscal year 2002 was
greater than the federal statutory rate due principally to a 100% valuation
allowance for Sleep Country's operating loss in 2002.
Net Income (Loss). For the reasons set forth above, our net income was
$34.0 million for the pro forma year ended December 27, 2003 compared to a net
loss of $0.6 million for the year ended December 28, 2002.
26
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 funding for
working capital increases, capital expenditures, customer supply agreements,
principal and interest for our debt, and acquisitions. Barring any unexpected
significant external or internal developments, we expect current cash balances
on hand, cash provided by operating activities and borrowings available under
our senior credit facility to be sufficient to meet our short-term and long-term
liquidity needs.
In 2005, we anticipate that our cash flow from operations will decrease as
a result of a planned national advertising campaign associated with our
HealthSmart Bed. We have not nationally advertised our products since 2001. The
cost of the advertisements are expected to be incurred primarily in the first
and second quarter of 2005.
On December 15, 2004, our indirect parent, Simmons Company completed a
private placement for approximately $165.1 million aggregate gross proceeds from
its issuance of 10% senior discount notes due 2014 (the "Discount Notes"). The
proceeds from the offering were used to make a dividend distribution to its
class A stockholders and to pay expenses related to the sale and distribution of
the notes. No payments are due on the notes until June 15, 2010. Simmons
Company's ability to make payments on the Discount Notes is dependent on the
earnings and distributions of funds from us.
Capital expenditures totaled $18.2 million for the year ended December 25
2004. We believe that the annual capital expenditure limitations in our senior
credit facility will not significantly inhibit us from meeting our ongoing
capital expenditure needs. We anticipate approximately $15 million of
capital expenditures in 2005.
Future principal debt payments are expected to be paid out of cash flows
from operations, borrowings on our revolving credit facility, and future
refinancing of our debt. Historically we have paid minimal federal income taxes
as a result of net operating loss carryforwards; however, we expect to be
obligated to pay federal income taxes beginning in 2006.
The terms of our senior credit facility require a mandatory prepayment of
our tranche C term loan by April 2005 of $3.7 million, based upon our
Consolidated Excess Cash Flows (as defined in the senior credit facility) for
the year ended December 25, 2004. Such prepayment of debt will result in our
next quarterly principal payment being in March 2006.
27
The following table summarizes our changes in cash (in thousands):
SUCCESSOR | PREDECESSOR
---------------------------- | ------------
PRO FORMA |
YEAR ENDED PERIOD ENDED | YEAR ENDED
DECEMBER 25, DECEMBER 27, | DECEMBER 28,
2004 2003 | 2002
------------ ------------ | ------------
|
Statement of Cash Flow Data: |
Cash flows provided by (used in): |
Operating activities $ 67,932 $ 56,536 | $ 75,605
Investing activities (28,720) (826,353) | (11,421)
Financing activities (19,141) 766,155 | (60,321)
Effect of exchange rate changes on cash 113 224 | (19)
----------- ----------- | -----------
Change in cash and cash equivalents 20,184 (3,438) | 3,844
Cash and cash equivalents: |
Beginning of period 3,670 7,108 | 3,264
----------- ----------- | -----------
End of period $ 23,854 $ 3,670 | $ 7,108
=========== =========== | ===========
YEAR ENDED DECEMBER 25, 2004 COMPARED WITH THE PRO FORMA PERIOD ENDED DECEMBER
27, 2003
Cash flow from Operating Activities. Our cash flow from operations
increased primarily due to improved working capital management resulting in a
decrease in working capital of $8.9 million, and an increase in net sales. These
improvements were partially offset by (i) lower operating margins due primarily
to rising material costs; (ii) higher interest payments as a result of the
refinancing in connection with the Acquisition; and (iii) higher plant opening
and closing costs associated with the closure of our manufacturing facilities in
Columbus, Ohio and Piscataway, New Jersey and the opening of our manufacturing
facilities in Hazleton, Pennsylvania and Waycross, Georgia.
Cash flow used in Investing Activities. Our cash flows used in investing
activities decreased principally due to cash payments related to the Acquisition
of $815.9 million in the pro forma period ended December 27, 2003. Exclusive of
the Acquisition related cash payments, our cash flows used in investing
activities increased principally due to (i) an increase in capital expenditures
of $9.4 million principally as a result of the opening of two new manufacturing
facilities in 2004 and (ii) the acquisition of certain assets and liabilities of
Simmons Juvenile, Inc. for $19.7 million in 2004. Partially offsetting these
increases in cash flow used in investing activities, we received $6.3 million of
proceeds in connection with the sale of Gallery Corp and $2.1 million of
proceeds in connection with the collection of a note receivable.
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 $6.3 million plus the cancellation of all intercompany debts,
excluding current trade payables owed to Simmons. In connection with the sale,
we entered into a five-year supply agreement with PCM. Following the sale, we
continue to guarantee approximately $2.1 million of Mattress Gallery's
obligations under certain store and warehouse leases that expire over various
periods through 2010.
On August 27, 2004, our subsidiary, Simmons Juvenile Company, LLC
("Simmons Juvenile"), acquired certain assets and liabilities of the crib
mattress and related soft goods of Simmons Juvenile, Inc., a then-current
licensee of ours, for $19.7 million in cash, including transaction costs. Based
upon the operating performance of Simmons Juvenile for the six months following
the acquisition, we will expect to pay an additional amount of $3.5 million in
the second quarter of 2005. The purchase price allocation will be adjusted in
future periods to reflect this contingent consideration paid.
Cash flow from (used in) Financing Activities. Our cash flow provided by
financing activities decreased primarily due to net proceeds received in
connection with the Acquisition of $821.5 million in the pro forma period ended
December 27, 2003. Exclusive of the Acquisition related cash proceeds, our cash
flow used in financing activities decreased due to a decrease in payment on our
senior credit facility than in the prior year.
28
DEBT
Our senior credit facility is comprised of a $396.6 million term loan
facility (the "Tranche C Term Loan"), which will mature in 2011, and a $75.0
million revolving loan facility (of which approximately $64.9 million was
available for borrowings as December 25, 2004 after giving effect to $10.1
million that was reserved for standby letters of credit), which will mature in
2009. We are permitted to incur up to an additional $100.0 million of senior
secured debt at the option of participating lenders, so long as no default or
event of default under the senior secured credit facility has occurred or would
occur after giving effect to such incurrence and certain other conditions are
satisfied. The senior credit facility is guaranteed by our parent, THL-SC
Bedding Company, and all of our domestic subsidiaries. Our and the guarantors'
obligations are secured by all or substantially all of our and the guarantors'
assets, including a pledge of our stock, a pledge of stock of all our domestic
subsidiaries, and our pledge of 65% of the stock of our foreign subsidiaries. We
also have a senior unsecured term loan facility of $140.0 million, which will
mature in June 2012. The senior unsecured term loan facility is guaranteed by
THL-SC Bedding Company and all our active domestic subsidiaries.
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 the Eurodollar Rate + 250
basis points, a 25 basis point decline in our interest rate
margin;
(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.
The senior credit facility and the senior unsecured term loan bear
interest at our choice of the Eurodollar Rate or Base Rate (both as defined),
plus the following applicable interest rate margins:
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 December 25,
2004 for the Tranche C Term Loan and senior unsecured term loan were 3.97% and
5.13%, respectively.
Under the Tranche C Term Loan, quarterly amortization payments of
approximately $1.0 million are required during the first seven years, with the
balance of the facility to be repaid quarterly during the eighth year. There are
no scheduled amortization payments prior to the maturity date of the senior
unsecured term loan.
Our senior credit facility requires us to meet a minimum interest coverage
ratio and a maximum leverage ratio, and includes a maximum capital expenditures
limitation. In addition, the senior credit facility contains certain restrictive
covenants which, among other things, limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, prepayments of other indebtedness,
liens and encumbrances and other matters customarily restricted in those
agreements. The senior credit facility also contains certain customary events of
defaults, subject to cure periods as appropriate.
We are required to make prepayments of the loans outstanding under the
senior credit facility under certain circumstances, including with 100% of the
net cash proceeds of certain asset sales and casualty or condemnation events to
the extent such proceeds are not reinvested in Simmons' business within a
specified period of time and with 100% of the proceeds of certain types of debt
incurred by it. Additionally, depending on Simmons' leverage ratio, Simmons may
be required to prepay its senior secured loans with up to 50% of its excess cash
flow from each fiscal year and with up to 50% of the net cash proceeds of
certain equity issuances.
29
We are also required to make prepayments of the loans outstanding under
the senior unsecured term loan in the event of a change of control at 101% of
the unpaid principal amount thereof. Furthermore, we may be required to make an
offer to repay the senior unsecured term loans with proceeds of certain asset
sales, and any such offer required to be made within the first three years after
the closing date of the senior unsecured credit facility must be accompanied by
payment of a call premium, calculated on a sliding scale. We are not required to
use any proceeds we receive from an equity offering to repay loans outstanding
under our senior unsecured term loan facility.
Our long-term obligations contain various financial tests and covenants.
We were in compliance with such covenants as of December 25, 2004. The most
restrictive covenants relate to ratios of adjusted EBITDA to interest coverage
(interest coverage ratio) and net debt to adjusted EBITDA (leverage ratio) and
maximum capital expenditures all as defined in the senior credit facility. The
minimum interest coverage ratio and maximum leverage ratio are computed based on
our results for the last twelve months ended, adjusted for any dispositions or
acquisitions. More specifically, the senior credit facility's covenants, as
amended, require:
- a minimum interest coverage ratio, with compliance levels ranging
from an interest coverage of no less than 2.25:1.00 on December 31,
2004; 2.30:1.00 from 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 on 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 met such covenants in 2004 and expect to meet such covenants in 2005.
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.
30
The following is a calculation of our minimum interest coverage and
maximum leverage ratios under our senior credit facility as of December 25,
2004. The terms and related calculations are defined in the senior credit
facility, which is incorporated by reference as Exhibit 10.26 of this report (in
thousands, except ratios):
DECEMBER 25,
2004
-------------
Calculation of minimum cash interest coverage ratio:
Twelve months ended Adjusted EBITDA(1) $ 134,079
=========
Consolidated cash interest expense(2) $ 41,943
=========
Actual interest coverage ratio(3) 3.20x
Minimum permitted interest coverage ratio 2.25x
Calculation of maximum leverage ratio:
Consolidated indebtedness $ 752,139
Less: Cash and cash equivalents 23,854
---------
Net debt $ 728,285
=========
Adjusted EBITDA(1) $ 134,079
=========
Actual leverage ratio(4) 5.43x
Maximum permitted leverage ratio 6.85x
(1) Adjusted EBITDA for the twelve months ended December 25, 2004 adds back to
net income the following items: income taxes, interest expense,
depreciation and amortization, 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 is adjusted to include the
operating results of Simmons Juvenile Company, LLC as though we owned
Simmons Juvenile Company, LLC as of the beginning of 2004 and excludes the
operating results of Mattress Gallery as though we sold Mattress Gallery
as of the beginning of 2004.
(2) Consolidated cash interest expense, as defined in our senior credit
facility for the period ended December 25, 2004 follows (in thousands):
Interest expense, net $ 43,758
Interest income 141
--------
Gross interest expense 43,899
Less: Non-cash interest expense 1,956
--------
$ 41,943
========
(3) Represents ratio of Adjusted EBITDA to consolidated cash interest expense.
(4) Represents ratio of consolidated indebtedness less cash and cash
equivalents to Adjusted EBITDA.
Our senior unsecured term loan facility does not contain any financial
maintenance covenants, but does contain affirmative covenants similar to those
contained in our senior credit facility. Additionally, the senior unsecured
facility contains negative covenants similar to those contained in the senior
credit facility, except that certain negative covenants, including limitations
on indebtedness, asset sales and restricted junior payments.
The use of interest rate risk management instruments is required under the
terms of the senior credit facility. We are 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, such as collars and swaps.
31
In order to address interest rate risk, we have developed and implemented
a policy to utilize extended Eurodollar contracts to minimize the impact of near
term Eurodollar rate increases. On January 26, 2004, we elected to set the
interest rate at the twelve-month Eurodollar Rate for approximately $325.0
million of the senior credit facility and the $140 million senior unsecured term
loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for
approximately 84% of our floating rate debt outstanding as of December 25, 2004.
Additionally, to further address interest rate risk, we entered into an interest
rate cap agreement on February 11, 2004 for a notional amount of $170.0 million,
which capped the Eurodollar Rate at 5.0% for the period of January 26, 2005
through January 26, 2006.
On December 19, 2003, we completed a financing, which consisted of the
sale of $200.0 million of 7.875% senior subordinated notes due 2014 (the
"Notes"). The 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 Notes
mature on January 15, 2014. The Notes are subordinated in right of payment to
all our existing and future senior indebtedness.
At any time prior to January 17, 2007, we may redeem up to 40% of the
aggregate principal amount of the Notes at a price of 107.875% in connection
with an Equity Offering, as defined. With the exception of an Equity Offering,
the Notes are redeemable at our option beginning January 15, 2009 at prices
decreasing from 103.938% of the principal amount thereof to par on January 15,
2012 and thereafter. We are not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
The indenture for the Notes requires us and our 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 our assets and stock.
The Notes are fully and unconditionally guaranteed on an unsecured, senior
subordinated basis by THL-SC Bedding Company and all our active domestic
subsidiaries.
On April 12, 2004, our remaining 10.25% series B subordinated notes were
redeemed at 105.125% of the principal amount thereof for a total payment of $5.3
million.
32
The following table sets forth our contractual obligations as of December
25, 2004 (dollars in thousands):
PAYMENT DUE BY YEAR
----------------------------------------------------
CONTRACTUAL OBLIGATIONS: TOTAL 2005 2006 - 2007 2008 - 2009 THEREAFTER
- ------------------------------------ ----------- -------- ----------- ----------- ----------
Long-term debt $ 752,002 $ 4,068 $ 7,296 $ 8,926 $ 731,712
Interest payments on long-term
debt (1) 293,861 39,760 78,668 78,013 97,420
Capital lease obligations 137 56 81 - -
Operating leases - wholesale segment 57,247 15,406 22,272 11,963 7,606
Operating leases - retail segment 22,181 5,592 8,829 5,245 2,515
Component purchase commitments 25,606 14,567 11,039 - -
----------- -------- --------- -------- ---------
Total contractual obligations $ 1,151,034 $ 79,449 $ 128,185 $104,147 $ 839,253
=========== ======== ========= ======== =========
Other commercial commitments:
----------- -------- --------- -------- ---------
Standby letters of credit $ 10,127 $ 10,127 $ - $ - $ -
=========== ======== ========= ======== =========
(1) Anticipated interest payments based on current interest rates and amounts
outstanding as of December 25, 2004.
In addition, under the terms of the management agreement entered into in
connection with the Acquisition, we are required to pay an affiliate of THL an
aggregate fee of no less than $1.5 million a year. Under its terms, the
management agreement will be terminated by THL upon the consummation of an
equity offering and we will be required to pay THL a termination fee equal to
the net present value of the fees payable to THL for a period of seven years
from the date of termination.
OFF-BALANCE SHEET ARRANGEMENTS
In connection with the sale of Mattress Gallery, we entered into a
five-year supply agreement with PCM and continue to guarantee approximately $2.1
million of Mattress Gallery's obligations under certain store and warehouse
leases that expire over various periods through 2010. We have no liability
recorded for this obligation on our balance sheet as of December 25, 2004.
SEASONALITY/OTHER
For the past several years, there has not been significant seasonality in
our wholesale bedding business. Our retail bedding business, which accounted for
$81.0 million, or 9.3%, of net sales for the year ended December 25, 2004, has
historically experienced, and we expect will continue to experience, seasonal
and quarterly fluctuations in net sales and operating income. As is the case
with many bedding retailers, our retail business is subject to seasonal
influences, characterized by strong sales for the months of May through
September, which impacts our second and third quarter results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29 ("SFAS 153"). This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort,
the FASB and the IASB identified opportunities to improve financial reporting
by eliminating certain narrow differences between their existing accounting
standards. SFAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("APB 29"), that was issued in 1973. The amendments made by
SFAS 153 are based on the principle that exchanges of nonmonetary assets should
be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." Previously, APB 29
required that the accounting for an exchange of a productive asset for a
similar productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset
relinquished. The provisions in SFAS 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of this statement is not expected to have an impact on the our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123"). SFAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The cost will be measured based on the fair value of the equity or
liability instruments issued. SFAS 123R represents the culmination of a
two-year effort to respond to requests from investors and many others that the
FASB improve the accounting for share-based payment arrangements with
employees. Public entities (other than those filing as small business issuers)
will be required to apply SFAS 123R as of the first interim or annual reporting
period that begins after June 15, 2005. Public entities that file as small
business issuers will be required to apply SFAS 123R in the first interim or
annual reporting period that begins after December 15, 2005. For nonpublic
entities, SFAS 123R must be applied as of the beginning of the first annual
reporting period beginning after December 15, 2005. The scope of SFAS 123R
includes a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS 123R replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS
123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, that statement permitted entities the option of continuing to apply
the guidance in APB 25, as long as the footnotes to the financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used. Although those disclosures helped to mitigate the problems
associated with accounting under APB 25, many investors and other users of
financial statements believed that the failure to include employee compensation
costs in the income statement impaired the transparency, comparability, and
credibility of financial statements. We are currently evaluating the potential
effects of the adoption of SFAS 123R on its consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - An
amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the IASB.
As part of this effort, the FASB and the IASB identified opportunities to
improve financial reporting by eliminating certain narrow differences between
their existing accounting standards. SFAS 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead. Further, SFAS 151 requires
that allocation of fixed production overheads to conversion costs should be
based on normal capacity of the production facilities. The provisions in SFAS
151 are effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Companies must apply the standard prospectively. The
adoption of this statement is not expected to have a significant impact on our
consolidated financial statements.
In December 2004, the FASB issued two FASB Staff Positions ("FSP") that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 that was signed into law on October 22,
2004. The result of this legislation could affect how companies report their
deferred income tax balances and may require adjustments in the year ending
December 31, 2004. The first FSP is FSP FAS 109-1 and the second is FSP FAS
109-2. In FSP FAS 109-1, the FASB concludes that the tax relief (special tax
deduction for domestic manufacturing) from this legislation should be accounted
for as a "special deduction" instead of a tax rate reduction. FSP FAS 109-2
gives a company additional time to evaluate the effects of the legislation on
any plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, Accounting for Income Taxes. However, a company
must provide certain disclosures if it chooses to utilize the additional time
granted by the FASB. The guidance in these FSPs is effective December 21, 2004.
We are currently evaluating the potential effects of the American Jobs Creation
Act of 2004 on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
See Item 1 "Business -- Forward-Looking Statements" for additional information.
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.
33
Interest Rate Risk
We are exposed to market risk from changes in interest rates. In order to
address this risk, the senior credit facility requires us to adopt interest rate
protection measures on our variable rate indebtedness such that 50% of our
consolidated funded indebtedness is either fixed or protected.
In order to address interest rate risk, we have developed and implemented
a policy to utilize extended Eurodollar contracts to minimize the impact of near
term Eurodollar rate increases. For $325.0 million of the Tranche C Term Loan
and the $140.0 million senior unsecured term loan, we have set the interest rate
utilizing twelve-month Eurodollar Rate loans which fixed the Eurodollar Rate at
1.375% through January 26, 2005 for approximately 86% of floating rate debt
outstanding as of December 25, 2004. On January 26, 2005, we elected to set the
interest rate for $155.0 million of the Tranche C Term Loan and the $140.0
million senior unsecured term loan utilizing twelve-month Eurodollar Rate loans
which fixed the Eurodollar Rate at 3.25% through January 26, 2006. 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
margin, at 5.0% for the period from 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 2005, but would
result in an additional $3.5 million of interest expense in 2006.
Commodity Price Risk
The major raw materials that we purchase for production are wire, spring
components, lumber, cotton, insulator pads, innerspring, fabrics and roll goods
consisting of foam, fiber, ticking and non-wovens. The price and availability of
these raw materials are subject to market conditions affecting supply and
demand. In particular, many of our goods can be impacted by fluctuations in
petrochemical prices and steel prices. We currently do not have a hedging
program in place to manage fluctuations in commodity prices.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Simmons Bedding Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income (loss),
changes in stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Simmons Bedding Company and its
subsidiaries (the "Company") at December 25, 2004 and December 27, 2003, and
the results of their operations and their cash flows for the year ended
December 25, 2004 and the period from December 20, 2003 through December 27,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule on page 102 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
March 22, 2005
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Simmons Bedding Company
In our opinion, the accompanying consolidated statements of operations and
comprehensive loss, changes in stockholders' equity and cash flows present
fairly, in all material respects, the results of operations and cash flows of
Simmons Bedding Company and its subsidiaries (the "Company") for the period
from December 29, 2002 through December 19, 2003 and for the year ended
December 28, 2002 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule on page 102 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
March 22, 2005
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
Successor | Predecessor
-------------------------- | --------------------------
Period from | Period from
December 20, | December 29,
Year Ended 2003 through | 2002 through Year Ended
December 25, December 27, | December 19, December 28,
2004 2003 | 2003 2002
------------ ------------ | ------------ ------------
|
Net sales $ 869,893 $ 8,717 | $ 797,616 $ 708,595
Cost of products sold 472,252 7,147 | 408,790 369,617
--------- --------- | --------- ---------
Gross profit 397,641 1,570 | 388,826 338,978
--------- --------- | --------- ---------
|
Operating expenses: |
Selling, general and |
administrative expenses 318,118 4,492 | 373,078 284,164
Goodwill impairment - - | - 20,285
Plant closure charges 3,068 449 | 1,336 -
Amortization of intangibles 4,933 311 | 306 1,246
Transaction expenses 733 - | 22,399 -
Licensing income (9,622) (326) | (10,444) (9,002)
--------- --------- | --------- ---------
317,230 4,926 | 386,675 296,693
--------- --------- | --------- ---------
|
Operating income (loss) 80,411 (3,356) | 2,151 42,285
|
Interest expense, net 43,758 4,661 | 45,092 32,000
--------- --------- | --------- ---------
Income (loss) before income taxes |
and minority interest in loss 36,653 (8,017) | (42,941) 10,285
Income tax expense (benefit) 12,039 (827) | (8,845) 12,005
--------- --------- | --------- ---------
Income (loss) before minority |
interest in loss 24,614 (7,190) | (34,096) (1,720)
Minority interest in loss - - | - 1,109
--------- --------- | --------- ---------
Net income (loss) 24,614 (7,190) | (34,096) (611)
|
Other comprehensive income (loss): |
Foreign currency translation |
adjustment 113 17 | 207 (19)
--------- --------- | --------- ---------
Comprehensive income (loss) $ 24,727 $ (7,173) | $ (33,889) $ (630)
========= ========= | ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
37
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 25, December 27,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,854 $ 3,670
Accounts receivable, less allowances for doubtful receivables,
discounts, and returns of $5,131 and $4,960 85,433 65,868
Inventories 33,300 31,355
Deferred income taxes 2,445 973
Other current assets 20,204 22,616
Assets held for sale - 8,564
------------ ------------
Total current assets 165,236 133,046
------------ ------------
Property, plant and equipment, net 62,842 53,228
Goodwill 488,686 792,230
Intangible assets, net 542,983 159,198
Other assets 41,987 45,417
------------ ------------
$ 1,301,734 $ 1,183,119
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,124 $ 9,512
Accounts payable 54,380 39,956
Accrued liabilities 68,977 53,948
Liabilities held for sale - 2,064
------------ ------------
Total current liabilities 127,481 105,480
------------ ------------
Non-current liabilities:
Long-term debt 748,015 760,741
Deferred income taxes 154,775 23,719
Other 10,856 12,902
------------ ------------
Total liabilities 1,041,127 902,842
------------ ------------
Commitments and contingencies (Notes J and R)
Stockholder's equity:
Common stock, $.01 par value; 3,000 shares authorized; 100 issued 1 1
Additional paid-in capital 243,052 287,449
Retained earnings (accumulated deficit) 17,424 (7,190)
Accumulated other comprehensive income 130 17
------------ ------------
Total stockholder's equity 260,607 280,277
------------ ------------
$ 1,301,734 $ 1,183,119
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
38
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except per share amounts)
CLASS A CLASS B
------------------- ----------------- ADDITIONAL
COMMON COMMON COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL DEFICIT
---------- ------ ------- -------- ---------- -----------
PREDECESSOR
DECEMBER 29, 2001 23,752,324 $ 242 379,119 $ 4 $ - $ (53,885)
Net loss - - - - - (611)
Other comprehensive loss:
Change in foreign currency translation - - - - - -
-----------
Comprehensive loss - - - - - (611)
Increase in redemption obligation - ESOP
based on fair market value - - - - - (17,139)
Common stock repurchased - - - - - -
---------- ------ ------- -------- ---------- -----------
DECEMBER 28, 2002 23,752,324 242 379,119 4 - (71,635)
Net loss - - - - - (34,096)
Other comprehensive income:
Change in foreign currency translation - - - - - -
Comprehensive income (loss) (34,096)
Contribution of debt to an affiliate of SC Holdings, Inc. - - - - 7,916 -
Acquisition of SC Holdings,Inc. minority interest - - - - (25) -
Increase in redemption obligation - ESOP
based on fair market value - - - - (7,891) (26,772)
Common stock repurchased - - - - - -
---------- ------ ------- -------- ---------- -----------
DECEMBER 19, 2003 23,752,324 $ 242 379,119 $ 4 - $ (132,503)
========== ====== ======= ======== ========== ===========
ACCUMULATED COMMON
OTHER STOCK TOTAL
COMPREHENSIVE HELD IN STOCKHOLDERS'
INCOME TREASURY EQUITY
------------- -------- -------------
PREDECESSOR
DECEMBER 29, 2001 $ (125) $ (7,557) $ (61,321)
Net loss - (611)
Other comprehensive loss:
Change in foreign currency translation (19) - (19)
------------- -------- -------------
Comprehensive loss (19) - (630)
Increase in redemption obligation - ESOP
based on fair market value - - (17,139)
Common stock repurchased - (2,246) (2,246)
------------- -------- -------------
DECEMBER 28, 2002 (144) (9,803) (81,336)
Net loss - - (34,096)
Other comprehensive income:
Change in foreign currency translation 207 - 207
------------- -------- -------------
Comprehensive income (loss) 207 - (33,889)
Contribution of debt to an affiliate of SC Holdings, Inc. - - 7,916
Acquisition of SC Holdings,Inc. minority interest - - (25)
Increase in redemption obligation - ESOP
based on fair market value - - (34,663)
Common stock repurchased - (7,383) (7,383)
------------- -------- -------------
DECEMBER 19, 2003 $ 63 $(17,186) $ (149,380)
============= ======== =============
39
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
(In thousands, except per share amounts)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS/ OTHER TOTAL
COMMON COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES STOCK CAPITAL DEFICIT) INCOME EQUITY
------ --------- ---------- ------------ ------------- -------------
SUCCESSOR
DECEMBER 20, 2003 (reflects the new basis
of 100 common shares in connection
with the Acquisition) 100 $ 1 $ 387,837 $ - $ - $ 387,838
Deemed dividend to reflect carryover basis - - (100,388) - - (100,388)
Net loss - - - (7,190) - (7,190)
Other comprehensive income:
Change in foreign currency translation - - - - 17 17
----------- --------- ------------
Comprehensive income (loss) - - - (7,190) 17 (7,173)
--- --------- --------- ----------- --------- ------------
DECEMBER 27, 2003 100 1 $ 287,449 $ (7,190) $ 17 $ 280,277
Net income - - - 24,614 - 24,614
Other comprehensive income:
Change in foreign currency translation - - - - 113 113
----------- --------- ------------
Comprehensive income - - - 24,614 113 24,727
Termination of deferred compensation plan - - 3,308 - - 3,308
Deemed dividend to reflect carryover basis - - (47,705) - - (47,705)
--- --------- --------- ----------- --------- ------------
DECEMBER 25, 2004 100 $ 1 $ 243,052 $ 17,424 $ 130 $ 260,607
=== ========= ========= =========== ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
40
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor | Predecessor
-------------------------- | ---------------------------
Period from | Period from
December 20, | December 29,
Year Ended 2003 through | 2002 through Year Ended
December 25, December 27, | December 19, December 28,
2004 2003 | 2003 2002
------------ ------------ | ------------ -------------
|
Cash flows from operating activities: |
Net income (loss) $ 24,614 $ (7,190) | $ (34,096) $ (611)
Adjustments to reconcile net income (loss) to net |
cash provided by operating activities: |
Depreciation and amortization 23,084 656 | 22,059 19,050
Stock compensation expense 3,347 - | 68,415 15,561
Goodwill impairment charge - - | - 20,285
Provision for doubtful accounts 3,907 42 | 3,799 3,082
Provision (benefit) for deferred income taxes 11,535 (827) | (9,087) 11,109
Non-cash interest expense 1,956 62 | 9,481 3,234
Other, net - - | (249) (1,518)
Net changes in operating assets and liabilities: |
Accounts receivable (20,526) 1,448 | (4,165) (3,110)
Inventories 1,970 2,310 | (4,718) 1,359
Other current assets 68 (661) | (5,164) (6,731)
Accounts payable 16,248 354 | (3,750) 10,813
Accrued liabilities 12,903 2,136 | 1,547 14,986
Other, net (11,174) (1,823) | 15,957 (11,904)
---------- ---------- | ----------- ----------
Net cash provided by (used in) operating activities 67,932 (3,493) | 60,029 75,605
---------- ---------- | ----------- ----------
|
Cash flows from investing activities: |
Purchases of property, plant and equipment (18,206) - | (8,791) (7,961)
Purchase and development of intangible assets - - | (1,720) (3,932)
Proceeds from the sale of Gallery Corp., net 6,327 - | - -
Payments to the sellers for the Acquisition - (697,883) | - -
Payments to option holders - (73,545) | - -
Payments of Acquisition costs - (44,452) | - -
Purchase of certain assets of Simmons Juvenile |
Products Company, Inc. (19,685) - | - -
Other, net 2,844 - | 38 472
---------- ---------- | ----------- ----------
Net cash used in investing activities (28,720) (815,880) | (10,473) (11,421)
---------- ---------- | ----------- ----------
41
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Successor Predecessor
-------------------------- | --------------------------
Period from | Period from
December 20, | December 29,
Year Ended 2003 through | 2002 through Year Ended
December 25, December 27, | December 19, December 28,
2004 2003 | 2003 2002
------------ ------------ | ------------ ------------
|
Cash flows from financing activities: |
Payments of Successor Senior Credit Facility, net $ (11,675) $ - | $ - $ -
Payments of other Successor debt, net (6,439) - | - -
Repurchase of SC Holdings, Inc. minority interest and |
payment of SC Holdings, Inc. debt - - | (18,653) -
Payments of Predecessor Senior Credit Facility, net - (51,656) | (24,356) (53,061)
Payments of other Predecessor debt - - | (4,936) (5,567)
Proceeds from long-term debt - Affiliate, net - - | - 1,123
Repurchase of common stock - - | (7,383) (2,246)
Payments of Predecessor debt at Acquisition - (171,599) | - -
Proceeds from Successor debt - 748,275 | - -
Proceeds from issuance of Successor common stock - 327,553 | - -
Payments of financing costs (1,027) (31,090) | - (570)
----------- ----------- | ----------- -----------
Net cash provided by (used in) financing activities (19,141) 821,483 | (55,328) (60,321)
----------- ----------- | ----------- -----------
|
Net effect of exchange rate changes on cash 113 17 | 207 (19)
----------- ----------- | ----------- -----------
Change in cash and cash equivalents 20,184 2,127 | (5,565) 3,844
Cash and cash equivalents, beginning of period 3,670 1,543 | 7,108 3,264
----------- ----------- | ----------- -----------
Cash and cash equivalents, end of period $ 23,854 $ 3,670 | $ 1,543 $ 7,108
=========== =========== | =========== ===========
|
Supplemental cash flow information: |
Cash paid for interest $ 31,127 $ 4,136 | $ 21,345 $ 24,952
=========== =========== | =========== ===========
Cash paid for Jr. subordinated PIK note interest $ - $ 13,744 | $ - $ -
=========== =========== | =========== ===========
Cash paid for bridge loan commitment fee $ - $ 3,500 | $ - $ -
=========== =========== | =========== ===========
Cash paid for senior subordinated notes tender premium $ - $ 10,826 | $ - $ -
=========== =========== | =========== ===========
Cash paid for income taxes $ 468 $ - | $ 1,489 $ 426
=========== =========== | =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
42
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- THE COMPANY
The Company changed its name from Simmons Company to Simmons Bedding
Company and its indirect parent, THL Bedding Holding Company, changed its name
to Simmons Company effective July 14, 2004.
The Company is one of the largest bedding manufacturers in the United
States of America. The Company operates in two business 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. Prior to May 1, 2004, the retail bedding
segment also operated specialty sleep stores in Southern California.
The Company manufactures conventional mattresses, foundations, and sleep
accessories through its wholly-owned subsidiaries, The Simmons Manufacturing
Co., LLC and Simmons Caribbean Bedding, Inc. The Company manufactures crib
mattresses and related sleep accessories through its wholly-owned subsidiary
Simmons Juvenile Company, LLC. Simmons and its subsidiaries sell to a diverse
nationwide base of approximately 3,600 retail customers, representing over
11,000 outlets, including furniture stores, specialty sleep shops, department
stores, and rental stores.
Simmons also distributes branded bedding products on a contract sales
basis directly to institutional users, such as the hospitality industry and
certain agencies of the U.S. government, through the Company's wholly-owned
subsidiary, Simmons Contract Sales, LLC. The Company licenses its trademarks,
patents and other intellectual property to various domestic and foreign
manufacturers principally through its wholly-owned subsidiary, Dreamwell, Ltd.
Additionally, the Company operated 18 retail outlet stores located
throughout the United States of America through the Company's wholly-owned
subsidiary, World of Sleep Outlets, LLC and 47 retail mattress stores operating
as Sleep Country USA located in Oregon and Washington through the Company's
indirect subsidiary, Sleep Country USA, Inc. ("Sleep Country"), as of December
25, 2004.
THE ACQUISITION
In December 2003, THL Bedding Company, a wholly-owned subsidiary of THL
Bedding Holding Company (now known as Simmons Company) and an affiliate of
Thomas H. Lee Partners, L.P., acquired Simmons Holdings, Inc. 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 operating company of Simmons Holdings, Inc., then
named Simmons Company ("Predecessor Company") merged with and into Simmons
Holdings, Inc. with Simmons Holdings, Inc. continuing as the surviving
corporation (now known as 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. Following the Acquisition, the Company continues to be a
leading manufacturer and distributor of branded bedding products in the United
States. 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 segments;
- The Company's portfolio of brands;
43
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
- The Company's ability to innovate and introduce new products;
- The Company's superior manufacturing platform;
- The Company's historical and projected earnings; and
- The Company's management team and corporate culture.
The financing for the Acquisition (including the refinancing of
outstanding debt) was provided by (i) borrowings under a new $480.0 million
senior secured credit facility, consisting of a $405.0 million term loan
facility and a $75.0 million revolving credit facility, which refinanced the
Company's existing senior and subordinated loans; (ii) borrowings under a new
$140.0 million senior unsecured term loan facility; (iii) issuance of $200.0
million senior subordinated notes; and (iv) $387.8 million of capital provided
by Thomas H. Lee Equity Fund V, L.P. and its affiliates (collectively "THL"),
affiliates of Fenway Partners, Inc. ("Fenway") and management and directors of
the Company.
As a result of the Acquisition, THL, Fenway and management, including
directors, currently holds 71.8%, 8.5% and 19.7%, respectively, of Simmons
Company's voting stock, after giving effect to restricted stock issued to
management and directors under Simmons Company's Equity Incentive Plan.
In connection with the Acquisition, certain members of 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 ("Deemed Shares"). As further
described in Note K to the consolidated financial statements, this deferred
compensation plan was terminated on June 3, 2004 by Simmons Company issuing
Class A common stock to the participants of the deferred compensation plan.
Prior to the termination of the deferred compensation plan, the plan was
recorded as a liability and was marked to market based upon a quarterly
valuation of the Simmons Company's common stock and appreciation of the stock
was recorded as a non-cash stock compensation expense by the Company.
The Acquisition was accounted for as a purchase as prescribed by Statement
of Financial Accounting Standards No. 141, Business Combinations, in accordance
with Emerging Issues Task Force ("EITF") No. 88-16, Basis in Leveraged Buyout
Transactions. This guidance requires the continuing residual interest retained
by the continuing management investors 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 the Company acquired by THL and Fenway. The amount of
carryover basis determined was reflected as a deemed dividend of $148.1 million
in the opening consolidated balance sheet.
The purchase price allocation was not finalized until the second quarter
of 2004. Prior to completion of the valuation, a tentative allocation had been
made using preliminary estimates of the values of the intangibles. Based upon
the final valuation completed in the second quarter, the fair market value of
the identifiable intangible assets on the date of Acquisition was $597.3
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.
44
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
As a result, 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 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
=========== ===========
Definite-lived intangible asset classes were assigned the following
amounts and have the following weighted average amortization period (dollars
in thousands):
WEIGHTED
AVERAGE ALLOCATED
LIFE AMOUNT
-------- ---------
Patented and unpatented technology 25 $ 32,585
Contractual and non-contractual customer base 23 67,956
Non-compete agreements 3 1,832
---------
$ 102,373
=========
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 $475.7 million and $17.0
million, respectively.
45
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE B -- PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Simmons and all of its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND RECLASSIFICATIONS
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Such financial statements include estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities, and the amounts of revenues and expenses.
Actual results could differ from those estimates.
Certain amounts in the 2003 and 2002 consolidated financial statements and
related footnotes have been reclassified to conform with the current year
presentation.
FISCAL YEAR
The Company operates on a 52/53 week, fiscal year ending on the last
Saturday in December. GAAP does not permit the combining of the Successor '03
and Predecessor '03. The Successor '03 is one week and a day and the Predecessor
'03 is 50 weeks and 6 days. Fiscal years 2004 and 2002 comprised 52 weeks.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables and miscellaneous
receivables recorded net of allowances for doubtful receivables, discounts and
returns. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The Company evaluates the adequacy of the allowance
on a periodic basis. The evaluation includes historical loss experience, the
aging of the receivable balances, adverse situations that may affect the
customer's ability to pay the receivable, and prevailing economic conditions. If
the evaluation of the reserve requirements differs from the actual aggregate
allowance, adjustments are made to the allowance. This evaluation is inherently
subjective, as it requires estimates that are susceptible to revision as more
information becomes available.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or net realizable value. The cost of inventories includes raw materials, direct
labor and manufacturing overhead costs. The Company provides inventory reserves
for excess, obsolete or slow-moving inventory based on changes in customer
demand, technology developments or other economic factors. The Company allocates
certain general and administrative costs to inventory. The Company incurred
$34.0 million, not material, $32.6 million, and $34.2 million of such general &
administrative costs in 2004, Successor '03, Predecessor '03 and 2002,
respectively. The Company had $1.0 million and $1.2 million of general and
administrative costs remaining in inventory as of December 25, 2004 and December
27, 2003, respectively.
CUSTOMER SUPPLY AGREEMENTS
The Company's wholesale segment from time to time enters into long-term
customer supply agreements with its customers. Any initial cash outlay by the
Company is capitalized and amortized as a reduction to revenue over the life of
the contract and is ratably recoverable upon contract termination. Such
capitalized amounts are included in
46
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
other assets in the Company's consolidated balance sheets. Amortization expense
related to these contracts was $8.2 million, $0.2 million, $8.4 million and $4.6
million in 2004, Successor '03, Predecessor '03 and 2002, respectively.
PROPERTY, PLANT AND EQUIPMENT
The Acquisition resulted in a new basis for financial statement purposes
in the value of the Company's property, plant and equipment. Accordingly,
property, plant and equipment were adjusted to their estimated fair value and
useful lives. Depreciation expense is determined principally using the
straight-line method over the estimated useful lives for financial reporting and
accelerated methods for income tax purposes. Expenditures that substantially
increase asset values or extend useful lives are capitalized. Expenditures for
maintenance and repairs are expensed as incurred. When property items are
retired or otherwise disposed of, amounts applicable to such items are removed
from the related asset and accumulated depreciation accounts and any resulting
gain or loss is credited or charged to income. Useful lives are generally as
follows:
Buildings and improvements 10 - 45 years
Leasehold improvements 2 - 12 years
Machinery and equipment 2 - 15 years
INTANGIBLE ASSETS
Definite-lived intangible assets are amortized using the straight-line
method, which the Company believes is most appropriate, over their estimated
period of benefit, ranging from three to twenty-five years. Indefinite-lived
intangible assets, such as trademarks, are not amortized.
The Company tests goodwill for impairment on an annual basis by comparing
the fair value of the Company's reporting units to their carrying values. Fair
value is determined by the assessment of future discounted cash flows.
Additionally, goodwill is tested for impairment between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of an entity below its carrying value. These events or circumstances would
include a significant change in the business climate, legal factors, operating
performance indicators, competition, sale or disposition of a significant
portion of the business or other factors.
The Company evaluates indefinite-lived intangible assets for impairment at
least annually or whenever events or circumstances indicate their carrying value
might be impaired. In performing this assessment, management considers operating
results, trends and prospects, as well as the effects of obsolescence, demand,
competition and other economic factors. The carrying value of an
indefinite-lived intangible asset is considered impaired when its carrying value
exceeds its fair market value. In such an event, an impairment loss is
recognized equal to the amount of that excess. Fair value is determined
primarily by using either the projected cash flows discounted at a rate
commensurate with the risk involved or an appraisal. The determination of fair
value involves numerous assumptions by management, including expectations on
possible variations in the amounts of timing of cash flows, the risk-free
interest rate, and other factors considered in managements projected future
operating results. The Company reviews the useful lives of indefinite-lived
intangible assets every reporting period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews all of its long-lived assets for impairment whenever
events or circumstances indicate their carrying value may not be recoverable.
Management reviews whether there has been an impairment by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the asset. The factors considered by management in this assessment include
operating results, trends and prospects, as well as the effects of obsolescence,
demand, competition and other economic factors. If an impairment is deemed to
exist, management would record an impairment charge equal to the excess of the
carrying value over the fair value of the impaired assets.
As discussed in Note G to the consolidated financial statements, the
Company recognized an impairment charge related to its retail segment in 2002 of
$20.3 million.
47
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
DEBT ISSUANCE COSTS
The Company capitalizes costs associated with the issuance of debt and
amortizes the cost as additional interest expense over the lives of the debt
using the effective interest rate method. Amortization expense of $2.0 million,
$0.1 million, $2.4 million and $4.3 million in 2004, Successor '03, Predecessor
'03 and 2002, respectively, is included as a non-cash component of interest
expense in the accompanying Consolidated Statements of Operations. In addition,
the Company recognized a loss related to the early extinguishment of debt in
connection with the Acquisition of $7.1 million in Predecessor '03. The loss is
included as a non-cash component of interest expense in the accompanying
Consolidated Statement of Operations.
REVENUE RECOGNITION
The Company's wholesale segment recognizes revenue, net of estimated
returns, when title and risk of ownership passes, which is generally upon
delivery of shipments. An insignificant portion of the Company's wholesale
segment revenue is derived from inventory held on consignment with certain
customers. The Company recognizes revenue on inventory held on consignment when
the title and risk of ownership have transferred to the customer, which is when
the inventory held on consignment is used. The Company accrues for estimated
costs of warranties, co-op advertising costs, promotional monies and cash
discounts at the time the corresponding sales are recognized. Sales are
presented net of cash discounts, rebates, returns and certain consideration
provided to customers such as co-operative advertising costs, promotional monies
and amortization of supply agreements. The Company uses historical trend
information regarding returns to reduce sales for estimated future returns. The
Company provides an allowance for bad debts for estimated uncollectible accounts
receivable, which is included in selling, general and administrative expenses in
the accompanying Consolidated Statements of Operations.
The Company's retail segment recognizes revenue when title and risk of
ownership passes, which is upon delivery of the products to consumers. The
Company's retail segment allows consumers to exchange products within 60 days of
purchase. Historically, those returns have not been material and, accordingly,
no reserves for retail sales returns have been included in the accompanying
Consolidated Statements of Operations.
REBATES
The Company's wholesale segment provides volume rebates to certain
customers for the achievement of various purchase volume levels. The Company
recognizes a liability for the rebate at the point of revenue recognition for
the underlying revenue transactions that result in progress by the customer
towards earning the rebate. Measurement of the liability is based on the
estimated number of customers that will ultimately earn and claim the rebates or
refunds under the offer. Rebates were $18.9 million, $0.1 million, $15.7 million
and $10.4 million in 2004, Successor '03, Predecessor '03 and 2002,
respectively, and are included as a reduction of sales in the accompanying
Consolidated Statements of Operations.
PRODUCT DELIVERY COSTS
The Company's wholesale segment incurred $44.9 million, $0.4 million,
$35.9 million and $31.4 million in shipping and handling costs associated with
the delivery of finished mattress products to its customers in 2004, Successor
'03, Predecessor '03 and 2002, respectively. These costs are included in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
Product delivery costs for our retail segment are billed to the consumers
and included as a component of net sales. The Company's retail segment incurred
$6.0 million, $0.1 million, $5.1 million and $4.6 million in shipping and
handling costs associated with the delivery of finished mattress products to its
consumers in 2004, Successor '03, Predecessor '03, and 2002, respectively. These
costs are included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.
48
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
STOCK BASED EMPLOYEE COMPENSATION
In connection with the Acquisition, the stock option plans of the Company
were terminated. Prior to the Acquisition, the Company applied the intrinsic
value-based method of accounting prescribed by Accounting Principle Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations including FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation (an interpretation of APB No. 25), to
account for its previous employee stock option plans. Under this method,
compensation expense was recorded over the service period based upon the
intrinsic value of the options as they were earned by the employees. SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS 123,
the Company adopted the disclosure-only provisions and continued to apply the
intrinsic value-based method of accounting as described above. The accounting
for awards of stock-based compensation where an employee can compel the entity
to settle the award by transferring cash or other assets to employees rather
than by issuing equity instruments is substantially the same under SFAS 123 and
APB 25. Accordingly, SFAS 123 pro-forma disclosures are not presented.
In connection with the Acquisition, Simmons Company adopted the Incentive
Plan to provide restricted stock awards to employees, directors and consultants
of Simmons Bedding Company. Restricted shares of Class B common stock
representing up to fifteen percent (15%) of the capital stock of Simmons Company
(on a fully diluted basis) may be issued pursuant to awards under the Incentive
Plan. Awards of restricted stock are made pursuant to restricted stock
agreements and are subject to vesting and other restrictions as determined by
the board of directors. Among other things, the restricted stock agreements
provide, under certain conditions, for acceleration in vesting of the stock upon
a change in control and all restricted stock vests on the eighth anniversary of
the issuance of the restricted stock. Upon issuance of restricted stock awards,
compensation cost is measured as the excess of the fair market value of the
award over the purchase price. The entire amount of compensation cost is
recorded as deferred compensation and amortized by a charge to non-cash variable
stock compensation expense over the period from the date the shares are awarded
to the date restrictions are expected to lapse. In making this determination,
the Company continually reevaluates whether attainment of the performance goals
that would accelerate the lapsing of the restrictions is considered probable.
FOREIGN CURRENCY
Subsidiaries located outside the United States of America generally use
the local currency as the functional currency. Assets and liabilities are
translated at exchange rates in effect at the balance sheet date and income and
expense accounts at average exchange rates during the year. Resulting
translation adjustments are recorded directly to accumulated other comprehensive
income (loss), a separate component of stockholders' equity (deficit).
PRODUCT DEVELOPMENT COSTS
Costs associated with the development of new products and changes to
existing products are charged to expense as incurred. These costs amounted to
approximately $3.7 million, $0.1 million, $3.0 million and $2.0 million for
2004, Successor '03, Predecessor '03 and 2002.
ADVERTISING COSTS
The Company's wholesale segment records the cost of advertising, including
co-op advertising, as an expense or a reduction of net sales when incurred or no
later than when the advertisement appears or the event is run. Co-op advertising
costs and promotional monies are recorded as a selling expense when the customer
provides proof of advertising of the Company's products and the cost of the
advertisement does not exceed the payments made to the customer. Co-op
advertising costs and promotional monies are recorded as a reduction of sales
whenever the costs do not meet the criteria for classification as a selling
expense. Advertising costs which were recorded as a reduction of sales in the
accompanying Consolidated Statements of Operations were $32.3 million, not
material, $21.9 million and $34.8 million in 2004, Successor '03, Predecessor
'03 and 2002, respectively. Advertising costs which were recorded as a selling,
general and administrative expenses in the accompanying Consolidated Statements
of
49
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Operations were $72.9 million, $0.6 million, $73.7 million and $49.3 million,
respectively in 2004, Successor '03, Predecessor '03 and 2002.
The Company's retail segment records advertising costs, including
promotional materials, and media production costs to expense as incurred. Costs
for placement of advertisements and airtime are charged to expense once printed
or broadcast. Retail segment advertising expense, net of co-op advertising
receipts, aggregated $3.9 million, $0.1 million, $3.1 million and $3.6 million
in 2004, Successor '03, Predecessor '03 and 2002, respectively. Co-op
advertising receipts are recognized when vendor product is purchased.
Co-operative advertising receipts were $3.2 million, not material, $2.9 million
and $2.6 million in 2004, Successor '03, Predecessor '03, and 2002,
respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established, when necessary, to reduce deferred tax
assets to amounts expected to be realized.
WARRANTIES
The Company's wholesale segment warranty policy provides a 10-year
non-prorated warranty service period on all first quality conventional bedding
products. The Company's juvenile bedding products have warranty periods ranging
from five years to a lifetime. The Company's policy is to accrue the estimated
cost of warranty coverage at the time the sale is recorded. The following table
presents a reconciliation of the Company's warranty liability for 2004,
Successor '03, Predecessor '03 and 2002 (amounts in thousands):
December 25, | December 28,
2004 Successor '03 | Predecessor '03 2002
------------ ------------- | --------------- ------------
|
Balance at beginning of period $ 3,803 $ 3,680 | $ 3,434 $ 3,162
Additional warranties issued 5,093 16 | 3,850 3,009
Warranty settlements (4,750) (27) | (3,580) (2,984)
Revisions of estimate (446) 134 | (24) 247
------- ------- | ------- -------
Balance at end of period $ 3,700 $ 3,803 | $ 3,680 $ 3,434
======= ======= | ======= =======
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed
or capitalized when it is probable that a liability exists and the amount or
range of amounts can be reasonably estimated. Remediation costs that relate to
an existing condition caused by past operations are accrued when it is probable
that the costs will be incurred and can be reasonably estimated.
DERIVATIVE INSTRUMENTS
The Company accounts for derivative instruments, including derivative
instruments embedded in other contracts, by requiring that an entity recognize
those items as assets or liabilities in the balance sheet and measure them at
fair value. Changes in the fair value of derivatives are recorded each period in
current earnings or in other comprehensive income, depending on whether the
derivative is designated as part of a hedging relationship and, if it is,
depending on the type of the hedging relationship.
50
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SIGNIFICANT CONCENTRATIONS OF RISK
Cash and cash equivalents are maintained with several major financial
institutions in the U.S., Puerto Rico and Canada. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand. Additionally, the Company monitors the
financial condition of such institutions and considers the risk of loss remote.
The Company's wholesale bedding segment manufactures and markets sleep
products, including mattresses and foundations to retail establishments
primarily in the U.S. The wholesale bedding segment performs periodic credit
evaluations of its customers' financial condition and generally does not, in
most cases, require collateral. Shipments to the wholesale bedding segment's
five largest customers aggregated approximately 19%, 19% and 17% of total
wholesale shipments for each of 2004, 2003 and 2002, respectively, and no single
customer accounted for over 10% of the wholesale bedding segment's net sales in
any of those years.
Purchases of raw materials from one vendor represented approximately 23%,
21% and 21% of the wholesale bedding segment cost of products sold for 2004,
2003 and 2002 respectively. The wholesale bedding segment also primarily
utilizes two third-party logistics providers which, in the aggregate, accounted
for 75%, 74% and 66% of outbound wholesale shipments in 2004, 2003 and 2002,
respectively.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29 ("SFAS 153"). This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. SFAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("APB 29"), that was issued in 1973. The amendments made by SFAS
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." Previously, APB 29
required that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in SFAS 153 are effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The adoption of this statement
is not expected to have an impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123R requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the equity or liability instruments
issued. SFAS 123R represents the culmination of a two-year effort to respond to
requests from investors and many others that the FASB improve the accounting for
share-based payment arrangements with employees. Public entities (other than
those filing as small business issuers) will be required to apply SFAS 123R as
of the first interim or annual reporting period that begins after June 15, 2005.
Public entities that file as small business issuers will be required to apply
SFAS 123R in the first interim or annual reporting period that begins after
December 15, 2005. For nonpublic entities, SFAS 123R must be applied as of the
beginning of the first annual reporting period beginning after December 15,
2005. The scope of SFAS 123R includes a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS 123R
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). SFAS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that statement permitted entities the
option of continuing to apply the guidance in APB 25, as long as the footnotes
to the financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. Although those disclosures helped
to mitigate the problems associated with accounting under APB 25, many investors
and other users of financial statements believed that the failure to include
employee compensation costs in the income statement impaired the transparency,
51
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
comparability, and credibility of financial statements. The Company is currently
evaluating the potential effects of the adoption of SFAS 123R on its
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - An
amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the IASB. As
part of this effort, the FASB and the IASB identified opportunities to improve
financial reporting by eliminating certain narrow differences between their
existing accounting standards. SFAS 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs and spoilage should be expensed as
incurred and not included in overhead. Further, SFAS 151 requires that
allocation of fixed production overheads to conversion costs should be based on
normal capacity of the production facilities. The provisions in SFAS 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Companies must apply the standard prospectively. The adoption of this
statement is not expected to have a significant impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued two FASB Staff Positions ("FSP") that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 that was signed into law on October 22,
2004. The result of this legislation could affect how companies report their
deferred income tax balances and may require adjustments in the year ending
December 31, 2004. The first FSP is FSP FAS 109-1 and the second is FSP FAS
109-2. In FSP FAS 109-1, the FASB concludes that the tax relief (special tax
deduction for domestic manufacturing) from this legislation should be accounted
for as a "special deduction" instead of a tax rate reduction. FSP FAS 109-2
gives a company additional time to evaluate the effects of the legislation on
any plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, Accounting for Income Taxes. However, a company
must provide certain disclosures if it chooses to utilize the additional time
granted by the FASB. The guidance in these FSPs is effective December 21, 2004.
The Company is currently evaluating the potential effects of the American Jobs
Creation Act of 2004 on the Company's consolidated financial statements.
NOTE C -- ACQUISITIONS
On August 27, 2004, the Company's subsidiary, Simmons Juvenile Company,
LLC ("Simmons Juvenile"), acquired certain assets and liabilities of the crib
mattress and related soft goods business of Simmons Juvenile Products Company,
Inc. ("Simmons Juvenile, Inc."), a then-current 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 certain
assets of Simmons Juvenile, Inc. 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.
52
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 $ 3,665
Property, plant and equipment 23
Goodwill 697
Intangibles 18,000
--------
Total assets acquired 22,385
--------
Current liabilities (2,476)
Non-current liabilities (224)
--------
Total liabilities assumed (2,700)
--------
Purchase price $ 19,685
========
The intangible assets acquired include non-contractual customer contracts
of $8.8 million and trademarks of $9.2 million. The non-contractual customer
contracts have a weighted average life of eleven years. The trademarks have an
indefinite-life. The goodwill was assigned to the wholesale segment. The
tax-deductive goodwill was $2.9 million and is expected to be deductible for tax
purposes over 15 years. There were no pre-acquisition contingencies related to
the acquisition of certain assets of Simmons Juvenile, Inc.
The results of operations for Simmons Juvenile from August 27, 2004
through December 25, 2004 are included in the Company's results of operations
for the year ended December 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.
On February 28, 2003, the Company acquired the stock of Sleep Country from
Fenway for approximately $33.2 million, including the additional contingent
consideration resulting from the Acquisition. The Company accounted for this
acquisition as a transfer of assets within a group under common control since
the Company and Sleep Country were controlled by Fenway at the time of the
acquisition. Under this accounting methodology, the Company and Sleep Country
are combined in a manner similar to the pooling of interests method for
accounting and financial reporting purposes for the periods in which both
entities were controlled by Fenway (from March 1, 2000).
NOTE D -- 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 $6.3 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 A to the consolidated financial statements for further explanation).
Following the sale, the Company continues to guarantee approximately $2.1
million of Mattress Gallery's obligations under certain store and warehouse
leases that expire over various periods through 2010. In connection with the
sale, the Company entered into a five-year supply agreement with PCM.
In accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company reflected assets and liabilities for Mattress
Gallery as held for sale in the December 27, 2003 consolidated balance sheet.
The components of the assets and liabilities held for sale as of December 27,
2003 were as follows (amounts in thousands):
53
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
ASSETS HELD FOR SALE
Accounts receivable, net $1,522
Inventories 4,996
Other current assets 221
Property, plant and equipment, net 1,057
Other assets 768
------
Total assets held for sale $8,564
======
LIABILITIES HELD FOR SALE
Accounts payable $ 503
Other current liabilities 1,207
Other long-term liabilities 354
------
Total liabilities held for sale $2,064
======
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 period from December 20,
2003 to December 27, 2003, Mattress Gallery's net sales and net loss were $0.9
million and $(0.2) million, respectively. For the period from December 29, 2002
to December 19, 2003, Mattress Gallery's net sales and net loss were $39.1
million and $(1.1) million, respectively.
NOTE E -- INVENTORIES
Inventories consisted of the following as of December 25, 2004 and
December 27, 2003 (amounts in thousands):
2004 2003
------- -------
Raw materials $18,135 $13,005
Work-in-progress 1,236 1,099
Finished goods 9,934 12,476
Inventory held at retail stores 3,995 4,775
------- -------
$33,300 $31,355
======= =======
54
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December
25, 2004 and December 27, 2003 (amounts in thousands):
2004 2003
-------- --------
Land, building and improvements $ 22,675 $ 13,885
Leasehold improvements 8,279 4,322
Machinery and equipment 39,760 31,383
Construction in progress 1,062 3,799
-------- --------
71,776 53,389
Less accumulated depreciation (8,934) (161)
-------- --------
$ 62,842 $ 53,228
======== ========
Depreciation expense for 2004, Successor '03, Predecessor '03 and 2002 was
$9.9 million, $0.2 million, $13.3 million and $13.7 million.
NOTE G -- GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 25, 2004 and
December 27, 2003 (dollars in thousands):
2004 2003
WEIGHTED ---------------------------- ----------------------------
AVERAGE GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- -------------- ------------ -------------- ------------
Definite-lived intangible
assets:
Patents 25 $ 32,585 $(1,339) $29,994 $ (66)
Customer contracts 23 76,756 (3,278) 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 (628) 2,838 (32)
---------- ------- ------- -----
$ 111,173 $(5,245) $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
========== =======
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:
55
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
- 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.
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 $475.7 million and $17.0 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 certain assets of Simmons Juvenile,
Inc., 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 $8.8 million, with a weighted
average life of eleven years, and trademarks of $9.2 million, with an indefinite
life. The goodwill of $0.7 million related to this acquisition was assigned to
the wholesale segment.
The aggregate amortization expense associated with the definite-lived
intangible assets for the year ended December 25, 2004 was $4.9 million. The
estimated amortization expense for definite-lived intangible assets for the next
five years is as follows (amounts in thousands):
2005 $ 5,693
2006 5,669
2007 5,058
2008 5,058
2009 5,058
In connection with the acquisition of Sleep Country in 2000, the Company
recorded $40.5 million of goodwill. The goodwill represented the excess of the
purchase price over the fair value of assets acquired and was being amortized on
a straight line basis over a fifteen year period prior to the adoption of SFAS
142. In the fourth quarter of 2002, Sleep Country recognized a goodwill
impairment of $20.3 million. The review of the goodwill for impairment was
necessary due to the continued weakness in the retail economy and the failure of
Sleep Country to reach the sales and profit levels included in its original
impairment test as of January 1, 2002.
56
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE H - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 25, 2004 and
December 27, 2003 (amounts in thousands):
2004 2003
-------- ---------
Accrued wages and benefits $ 17,008 $ 20,230
Accrued advertising and incentives 29,775 21,612
Accrued interest 11,296 1,238
Other accrued expenses 10,898 10,868
-------- ---------
$ 68,977 $ 53,948
======== =========
NOTE I - LONG-TERM DEBT
Long-term debt consisted of the following at December 25, 2004 and
December 27, 2003 (amounts in thousands):
DECEMBER 25, DECEMBER 27,
2004 2003
------------ -----------
Senior credit facility:
Revolving loan $ - $ 3,275
Tranche B term loan - 405,000
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, 4.01%, due 2016 3,800 4,000
Banco santander loan, 4.34%, due 2013 1,902 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 137 878
--------- ---------
752,139 770,253
Less current portion (4,124) (9,512)
--------- ---------
$ 748,015 $ 760,741
========= =========
In connection with the Acquisition on December 19, 2003, the Company
entered into a 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 Predecessor Company's senior credit
facility, notes payable to former shareholders, a junior subordinated
payment-in-kind note, and a portion of the 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 2004.
57
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 27, 2004, the Company amended and restated the senior credit
facility to, among other things:
- - Refinance its then existing $396.6 million tranche B term loan with a
tranche C term loan priced at LIBOR + 250 basis points, a 25 basis point
decline from its existing borrowing rates;
- - Amend its existing annual capital spending limitation from $20 million to
$30 million; and
- - 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 the Company's leverage ratio is less than 5.50:1.00.
As of December 25, 2004, the Company had availability to borrow $64.9
million under the revolving credit facility after giving effect to $10.1 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
Company incurs a commitment fee of 0.5% per annum on the unused portion of its
revolving credit facility.
The terms of the Company's senior credit facility require a mandatory
prepayment of its tranche C term loan in April 2005 of $3.7 million based upon
the Consolidated Excess Cash Flows (as defined in the senior credit facility)
for the year ended December 25, 2004. Such prepayment of debt will result in the
Company's next quarterly principal payment being in March 2006.
The senior credit facility requires the Company to maintain certain
financial ratios including cash interest coverage and total leverage ratios. The
senior credit facility also contains covenants which, among other things, limit
capital expenditures, the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. As of December 25,
2004, the Company was in compliance with all of its financial covenants.
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 December 25,
2004 for the tranche C term loan and senior unsecured term loan were 3.97% and
5.125%, 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 $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 fixed the Eurodollar rate at 1.375% through January 26, 2005 for
approximately 86% of floating rate debt outstanding as of December 25, 2004. On
January 26, 2005, the Company set the interest rate for $155.0 million of the
tranche C term loan and the $140.0 million senior unsecured term loan utilizing
twelve-month Eurodollar rate loans which fixed the Eurodollar rate at 3.25%
through January 26, 2006. Additionally, to further
58
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 "Notes"). The 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 Notes mature on January 15, 2014. The Notes are
subordinated in right of payment to all existing and future senior indebtedness
of the Company.
At any time prior to January 17, 2007, the Company may redeem up to 40% of
the aggregate principal amount of the Notes at a price of 107.875% in connection
with an Equity Offering, as defined. With the exception of an Equity Offering,
the 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 Notes.
The indenture for the 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.
On December 15, 2004, the Company's indirect parent, Simmons Company
completed a private placement of 10% senior discount notes due 2014 (the
"Discount Notes") for approximately $269.0 million aggregate principal amount at
maturity. The proceeds from the offering of $165.1 million were used to make a
dividend distribution to class A shareholders of Simmons Company and to pay
expenses related to the sale and distribution of the Discount Notes. No payments
are due on the notes until June 15, 2010. Simmons Company's ability to make
payments on the Discount Notes is dependent on the earnings and distribution of
funds from the Company.
The fair value of the Company's long-term debt is estimated based on the
current rates offered for debt of similar terms and maturities. All long-term
debt approximates fair value as of December 25, 2004.
Future maturities of long-term debt as of December 25, 2004 are as follows
(amounts in thousands):
2005 $ 4,124
2006 2,889
2007 4,488
2008 4,463
2009 4,463
Thereafter 731,712
---------
$ 752,139
=========
The 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.
59
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 25, 2004
(IN THOUSANDS)
SUCCESSOR
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net sales $ (64,018) $ 920,717 $ 13,194 $ - $ 869,893
Cost of products sold 1,195 461,073 9,984 - 472,252
---------- ---------- ---------- --------- ----------
Gross profit (65,213) 459,644 3,210 - 397,641
---------- ---------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative 202,193 113,879 2,046 - 318,118
expenses
Plant closure charges - 3,068 - - 3,068
Amortization of intangibles 3,318 1,615 - - 4,933
Intercompany fees (289,562) 288,488 1,074 - -
Transaction fees 733 - - - 733
Licensing fees (1,036) (7,989) (597) - (9,622)
---------- ---------- ---------- --------- ----------
(84,354) 399,061 2,523 - 317,230
---------- ---------- ---------- --------- ----------
Operating income 19,141 60,583 687 - 80,411
Interest expense, net 42,903 795 60 - 43,758
Income from subsidiaries 35,947 - - (35,947) -
---------- ---------- ---------- --------- ----------
Income before income taxes 12,185 59,788 627 (35,947) 36,653
Income tax expense (benefit) (12,429) 24,286 182 - 12,039
---------- ---------- ---------- --------- ----------
Net income $ 24,614 $ 35,502 $ 445 $ (35,947) $ 24,614
========== ========== ========== ========= ==========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 20, 2003 THROUGH DECEMBER 27, 2003
(IN THOUSANDS)
SUCCESSOR
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net sales $ (1,363) $ 9,946 $ 134 $ - $ 8,717
Cost of products sold 26 7,472 98 - 7,596
---------- ---------- --------- ------- ---------
Gross profit (1,389) 2,474 36 - 1,121
---------- ---------- --------- ------- ---------
Operating expenses:
Selling, general and administrative
expenses 2,262 2,090 90 - 4,442
Plant closure charges - - - - -
Amortization of intangibles 305 6 - - 311
Intercompany fees 126 (134) 8 - -
Licensing fees - (276) - - (276)
---------- ---------- --------- ------- ---------
2,693 1,686 98 - 4,477
---------- ---------- --------- ------- ---------
Operating income (loss) (4,082) 788 (62) - (3,356)
Interest expense (income), net 4,537 123 1 - 4,661
Income from subsidiaries 246 - - (246) -
---------- ---------- --------- ------- ---------
Income (loss) before income taxes (8,373) 665 (63) (246) (8,017)
Income tax expense (benefit) (1,183) 355 1 - (827)
---------- ---------- --------- ------- ---------
Net income (loss) $ (7,190) $ 310 $ (64) $ (246) $ (7,190)
========== ========== ========= ======= =========
60
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 29, 2002 THROUGH DECEMBER 19, 2003
(IN THOUSANDS)
PREDECESSOR
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net sales $ (46,100) $ 832,212 $ 11,504 $ - $ 797,616
Cost of products sold 1,116 400,774 8,191 - 410,081
---------- ---------- --------- -------- -----------
Gross profit (47,216) 431,438 3,313 - 387,535
---------- ---------- --------- -------- -----------
Operating expenses:
Selling, general and administrative
expenses 257,517 113,269 2,254 - 373,040
Plant closure charges - 306 - - 306
Amortization of intangibles - - - - -
Transaction expenses 22,399 - - - 22,399
Intercompany fees (255,065) 254,101 964 - -
Licensing fees (1,007) (8,649) (705) - (10,361)
---------- ---------- --------- -------- -----------
23,844 359,027 2,513 - 385,384
---------- ---------- --------- -------- -----------
Operating income (loss) (71,060) 72,411 800 - 2,151
Interest expense (income), net 44,003 1,079 10 - 45,092
Income from subsidiaries 47,142 - - (47,142) -
---------- ---------- --------- -------- -----------
Income (loss) before income taxes (67,921) 71,332 790 (47,142) (42,941)
Income tax expense (benefit) (33,825) 24,734 246 - (8,845)
---------- ---------- --------- -------- -----------
Net income (loss) $ (34,096) $ 46,598 $ 544 $(47,142) $ (34,096)
========== ========== ========= ======== ===========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2002
(IN THOUSANDS)
PREDECESSOR
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net sales $ (48,065) $ 743,047 $ 13,613 $ - $ 708,595
Cost of products sold 492 360,019 9,106 - 369,617
---------- ---------- --------- -------- ----------
Gross profit (48,557) 383,028 4,507 - 338,978
---------- ---------- --------- -------- ----------
Operating expenses:
Selling, general and administrative
expenses 184,262 97,289 2,613 - 284,164
Goodwill impairment - 20,285 - - 20,285
Amortization of intangibles - 981 265 - 1,246
Intercompany fees (260,419) 259,321 1,098 - -
Licensing fees (874) (7,633) (495) - (9,002)
---------- ---------- --------- -------- ----------
(77,031) 370,243 3,481 - 296,693
---------- ---------- --------- -------- ----------
Operating income 28,474 12,785 1,026 - 42,285
Interest expense, net 29,142 2,827 31 - 32,000
Income from subsidiaries (1,024) - - 1,024 -
---------- ---------- --------- -------- ----------
Income (loss) before income
taxes (1,692) 9,958 995 1,024 10,285
Income tax expense (benefit) (1,081) 12,569 517 - 12,005
---------- ---------- --------- -------- ----------
Income (loss) before minority
interest (611) (2,611) 478 1,024 (1,720)
Minority interest in loss - (1,109) - - (1,109)
---------- ---------- --------- -------- ----------
Net income (loss) $ (611) $ (1,502) $ 478 $ 1,024 $ (611)
========== ========== ========= ======== ==========
61
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
AS OF DECEMBER 25, 2004
(IN THOUSANDS)
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,923 $ 7,333 $ 598 $ - $ 23,854
Accounts receivable - 82,936 2,497 - 85,433
Inventories - 32,622 678 - 33,300
Other 10,426 11,646 577 - 22,649
---------- ----------- --------- --------- ----------
Total current assets 26,349 134,537 4,350 - 165,236
---------- ----------- --------- --------- ----------
Property, plant and equipment, net 11,276 46,370 5,196 62,842
Goodwill and other intangibles, net 69,284 962,320 65 1,031,669
Other assets 20,165 21,015 807 41,987
Net investment in and advances to
(from) subsidiaries 910,119 (509,727) 1,677 (402,069) -
---------- ----------- --------- --------- ----------
$1,037,193 $ 654,515 $ 12,095 $(402,069) $1,301,734
========== =========== ========= ========= ==========
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Current maturities of long-term debt 3,655 240 229 4,124
Accounts payable and accrued
liabilities 48,409 72,352 2,596 123,357
---------- ----------- --------- --------- ----------
Total current liabilities 52,064 72,592 2,825 - 127,481
---------- ----------- --------- --------- ----------
Long-term debt 732,945 13,381 1,689 748,015
Deferred income taxes (14,353) 168,663 465 154,775
Other non-current liabilities 5,930 4,526 400 10,856
Net due to (from) subsidiaries - 366,122 - (366,122) -
---------- ----------- --------- --------- ----------
Total liabilities 776,586 625,284 5,379 (366,122) 1,041,127
---------- ----------- --------- --------- ----------
Stockholder's equity 260,607 29,231 6,716 (35,947) 260,607
---------- ----------- --------- --------- ----------
$1,037,193 $ 654,515 $ 12,095 $(402,069) $1,301,734
========== =========== ========= ========= ==========
62
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET
AS OF DECEMBER 27, 2003
(IN THOUSANDS)
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 615 $ 667 $ 2,388 $ - $ 3,670
Accounts receivable 784 62,934 2,150 - 65,868
Inventories - 30,495 860 - 31,355
Other 9,898 20,795 1,460 - 32,153
---------- ---------- --------- --------- ----------
Total current assets 11,297 114,891 6,858 - 133,046
---------- ---------- --------- --------- ----------
Property, plant and equipment, net 9,500 39,353 4,375 - 53,228
Goodwill and other intangibles, net 926,090 25,338 - - 951,428
Other assets 22,722 22,695 - - 45,417
Net investment in and advances to
(from) subsidiaries 164,895 54,868 - (219,763) -
---------- ---------- --------- --------- ----------
$1,134,504 $ 257,145 $ 11,233 $(219,763) $1,183,119
========== ========== ========= ========= ==========
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,322 $ 958 $ 232 $ - $ 9,512
Accounts payable and accrued
liabilities 12,428 79,535 4,005 - 95,968
---------- ---------- --------- --------- ----------
Total current liabilities 20,750 80,493 4,237 - 105,480
---------- ---------- --------- --------- ----------
Long-term debt 745,238 13,575 1,928 - 760,741
Deferred income taxes 24,545 (1,222) 396 - 23,719
Other non-current liabilities 9,532 2,955 415 - 12,902
Net due to (from) subsidiaries 54,162 - 706 (54,868) -
---------- ---------- --------- --------- ----------
Total liabilities 854,227 95,801 7,682 (54,868) 902,842
---------- ---------- --------- --------- ----------
Stockholder's equity 280,277 161,344 3,551 (164,895) 280,277
---------- ---------- --------- --------- ----------
$1,134,504 $ 257,145 $ 11,233 $(219,763) $1,183,119
========== ========== ========= ========= ==========
63
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 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 $ (14,875) $ 79,910 $ 2,897 $ - $ 67,932
---------- ---------- ----------- ------- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net (2,775) (14,350) (1,081) - (18,206)
Proceeds from sale of Mattress Gallery 6,327 - 6,327
Purchase of Simmons Juvenile Products (19,685) (19,685)
Other, net 2,844 - 2,844
---------- ---------- ----------- ------- ----------
Net cash used in investing
activities (13,289) (14,350) (1,081) - (28,720)
---------- ---------- ----------- ------- ----------
Cash flows from financing activities:
Repayment of long-term obligations (16,962) (910) (242) - (18,114)
Receipt from (distribution to)
subsidiaries 61,461 (57,984) (3,477) - -
Debt issuance costs (1,027) - (1,027)
---------- ---------- ----------- ------- ----------
Net cash provided by (used in) financing
activities 43,472 (58,894) (3,719) - (19,141)
---------- ---------- ----------- ------- ----------
Net effect of exchange rate change - - 113 - 113
Change in cash and cash equivalents 15,308 6,666 (1,790) - 20,184
Cash and cash equivalents:
Beginning of period 615 667 2,388 - 3,670
---------- ---------- ----------- ------- ----------
End of period $ 15,923 $ 7,333 $ 598 $ - $ 23,854
========== ========== =========== ======= ==========
64
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 20, 2003 THROUGH DECEMBER 27, 2003
(IN THOUSANDS)
SUCCESSOR
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities $ (4,624) $ 991 $ 140 $ - $ (3,493)
---------- --------- ------- ------- -----------
Cash flows from investing activities:
Payments to the sellers (697,883) - - (697,883)
Payments to option holder (73,545) - - - (73,545)
Payment of acquisition costs (44,452) - - - (44,452)
---------- --------- ------- ------- -----------
Net cash used in investing
activities (815,880) - - - (815,880)
---------- --------- ------- ------- -----------
Cash flows from financing activities:
Borrowings on long-term obligations 525,020 - - - 525,020
Equity transactions 327,553 - - - 327,553
Debt issuance costs (31,090) - - - (31,090)
---------- --------- ------- ------- -----------
Net cash provided by financing activities 821,483 - - - 821,483
---------- --------- ------- ------- -----------
Net effect of exchange rate change - - 17 - 17
Change in cash and cash equivalents 979 991 157 - 2,127
Cash and cash equivalents:
Beginning of period (364) (324) 2,231 - 1,543
---------- --------- ------- ------- -----------
End of period $ 615 $ 667 $ 2,388 $ - $ 3,670
========== ========= ======= ======= ===========
65
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 29, 2002 THROUGH DECEMBER 19, 2003
(IN THOUSANDS)
Predecessor
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash provided by operating
activities $ 35,222 $ 21,493 $ 3,314 $ - $ 60,029
---------- ---------- ------- ------- ----------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net (4,657) (4,057) (39) (8,753)
Purchase of intangible assets - (1,720) - - (1,720)
---------- ---------- ------- ------- ----------
Net cash used in investing
activities (4,657) (5,777) (39) - (10,473)
---------- ---------- ------- ------- ----------
Cash flows from financing activities:
Repayment of long-term obligations (28,846) (18,861) (238) - (47,945)
Equity transactions (4,399) - (2,984) - (7,383)
---------- ---------- ------- ------- ----------
Net cash used in financing activities (33,245) (18,861) (3,222) - (55,328)
---------- ---------- ------- ------- ----------
Net effect of exchange rate change - - 207 - 207
Change in cash and cash equivalents (2,680) (3,145) 260 - (5,565)
Cash and cash equivalents:
Beginning of period 2,316 2,821 1,971 - 7,108
---------- ---------- ------- ------- ----------
End of period $ (364) $ (324) $ 2,231 $ - $ 1,543
========== ========== ======= ======= ==========
66
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 2002
(IN THOUSANDS)
Predecessor
Issuer and Guarantors
---------------------------
Simmons
Bedding Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash provided by operating
activities $ 38,935 $ 30,605 $ 6,065 $ - $ 75,605
---------- ---------- -------- ------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net (4,804) (3,061) (96) - (7,961)
Other, net (3,460) - - - (3,460)
---------- ---------- -------- ------- -----------
Net cash used in investing
activities (8,264) (3,061) (96) - (11,421)
---------- ---------- -------- ------- -----------
Cash flows from financing activities:
Repayment of long-term obligations (49,302) (8,200) (1,126) - (58,628)
Proceeds from long-term debt 1,123 - - - 1,123
Receipt from (distribution to)
subsidiaries 23,332 (19,911) (3,421) - -
Repurchase of common stock (2,246) - - (2,246)
Payments of financing costs (570) - - - (570)
---------- ---------- -------- ------- -----------
Net cash used in financing activities (27,663) (28,111) (4,547) - (60,321)
---------- ---------- -------- ------- -----------
Net effect of exchange rate change - - (19) - (19)
Change in cash and cash equivalents 3,008 (567) 1,403 - 3,844
Cash and cash equivalents:
Beginning of period (692) 3,388 568 - 3,264
---------- ---------- -------- ------- -----------
End of period $ 2,316 $ 2,821 $ 1,971 $ - $ 7,108
========== ========== ======== ======= ===========
67
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE J -- LEASES AND OTHER COMMITMENTS
The Company leases certain manufacturing facilities, retail locations and
equipment under operating leases. The Company's commitments under capital leases
are not material enough to necessitate separate disclosure. The Company's
wholesale segment rent expense was $21.5 million, $0.5 million, $18.7 million
and $17.8 million for 2004, Successor `03, Predecessor '03 and 2002,
respectively. The Company's retail segment rent expense was $10.6 million, $0.4
million, $15.0 million and $10.6 million for 2004, Successor `03, Predecessor
'03 and 2002, respectively.
The following is a schedule of the future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 25, 2004 (amounts in thousands):
Wholesale Retail
Segment Segment
--------- -------
2005 $ 15,406 $ 5,592
2006 12,538 4,908
2007 9,734 3,921
2008 6,851 3,038
2009 5,112 2,207
Thereafter 7,606 2,515
-------- --------
$ 57,247 $ 22,181
======== ========
The Company has the option to renew certain manufacturing facility leases,
with the longest renewal period extending through 2014. Most of the operating
leases provide for increased rent through increases in general price levels.
The Company has guaranteed the payment of certain store and warehouse
leases of Mattress Gallery. The leases expire over various periods through 2010.
The aggregate amount of the unpaid lease payments as of December 25, 2004 was
$2.1 million.
The Company's wholesale segment has various purchase commitments with
certain suppliers in which the Company is committed to purchase approximately
$15 million of raw materials from these vendors in 2005. If the Company does not
reach the committed level of purchases, various additional payments could be
required to be paid to these suppliers or certain sales volume rebates could be
lost.
NOTE K -- TERMINATION OF DEFERRED COMPENSATION PLAN
In connection with the Acquisition, certain members of management deferred
$19.8 million of their proceeds from the Acquisition into a deferred
compensation plan of Simmons Company. The deferred proceeds were invested in
Deemed Shares. 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.
Simmons Company terminated the deferred compensation plan on June 3, 2004
by issuing 197,998 shares of Class A common stock in exchange for Deemed Shares
held by the participants in the deferred compensation plan. The issuance of the
Class A common stock created additional paid in capital of $3.3 million
resulting from the contribution of the deferred compensation liability of $3.3
million.
68
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE L -- LICENSING
The Company licenses internationally the Beautyrest(R) and Simmons(R)
marks and many of its other trademarks, processes and patents generally on an
exclusive long-term basis to third-party manufacturers which produce and
distribute conventional bedding products within their designated territories.
These licensing agreements allow the Company to reduce exposure to political and
economic risks abroad by minimizing investments in those markets. The Company
has seventeen foreign licensees and ten sub-licensees with operations in
Argentina, Australia, Brazil, Canada, Chile, Colombia, Dominican Republic, El
Salvador, England, France, Hong Kong, Israel, Italy, Jamaica, Japan, Korea,
Mexico, Morocco, New Zealand, Oman, Panama, Singapore, South Africa, Sweden,
Taiwan, and Venezuela. These foreign licensees have rights to sell
Simmons-branded products in approximately 100 countries.
Additionally, the Company has eleven domestic third-party licensees. Some
of these licensees manufacture and distribute juvenile furniture and
healthcare-related bedding and furniture, primarily on long-term or
automatically renewable terms. Additionally, the Company has licensed the
Simmons(R) mark and other trademarks, generally for limited terms, to
manufacturers of upholstered furniture, airbeds, feather and down comforters,
synthetic comforter sets, pillows, mattress pads, blankets, bed frames, metal
beds, futons, and other related products.
Licensing fees are recorded as earned, based upon the sales of licensed
products by the Company's licensees. For 2004, Successor `03, Predecessor '03
and 2002 the Company's licensing agreements as a whole generated royalties and
technology fees of approximately $9.6 million, $0.3 million, $10.4 million and
$9.0 million, respectively.
NOTE M -- PLANT CLOSURE CHARGES
During 2004, the Company settled obligations in connection with the
closure of manufacturing facilities completed in 2003 and 2004. Activity with
respect to these obligations is as follows (amounts in thousands):
Balance at Balance at
December 28, December 19,
2002 Adjustments Spending 2003
------------ ----------- --------- ------------
Non-cancelable lease obligations and other
facility closing costs $-- $ 359,270 $(359,270) $ --
Severance -- 214,081 -- 214,081
Other -- 763,155 (423,395) 339,760
--- ---------- --------- --------
Total $-- $1,336,506 $(782,665) $553,841
=== ========== ========= ========
_______________________________________________________________________________________________________________________
Balance at Balance at
December 19, December 27,
2003 Adjustments Spending 2003
------------ ----------- --------- ------------
Non-cancelable lease obligations and other
facility closing costs $ -- $ 64,500 $ -- $ 64,500
Severance 214,081 -- (26,827) 187,254
Other 339,760 384,485 (213,434) 510,811
-------- -------- --------- --------
Total $553,841 $448,985 $(240,261) $762,565
======== ======== ========= ========
Balance at Balance at
December 27, December 25,
2003 Adjustments Spending 2004
------------ ----------- ----------- ------------
Non-cancelable lease obligations and other
facility closing costs $ 64,500 $ 345,313 $ (267,604) $142,209
Severance 187,254 303,073 (490,327) --
Other 510,811 2,505,021 (2,601,252) 414,580
-------- ---------- ----------- --------
Total $762,565 $3,153,407 $(3,359,183) $556,789
======== ========== =========== ========
In September 2003, the Company announced its plans to optimize its
manufacturing network by opening two new manufacturing facilities in Hazleton,
Pennsylvania, and Waycross, Georgia and closing its manufacturing facility in
Jacksonville, Florida in December 2003. Additionally, the Company relocated its
manufacturing facility in Auburn, Washington to a new manufacturing facility in
Sumner, Washington in November 2003. The Company incurred plant closure charges
of approximately $0.4 million and $1.3 million in Successor '03 and Predecessor
'03, respectively of severance, retention, rent, and transfer of equipment costs
related to the closure of the Jacksonville manufacturing facility.
In 2004, as part of the Company's manufacturing optimization strategy, the
Company closed its Columbus, Ohio and Piscataway, New Jersey manufacturing
facilities in April and December, respectively. The Company incurred plant
closure charges of approximately $3.1 million of severance, retention, rent,
scrapping of inventory, and the dismantling and transfer of equipment costs in
2004 related to the closure of the Columbus and Piscataway manufacturing
facilities.
The Company opened the new manufacturing facilities in Hazleton,
Pennsylvania and Waycross, Georgia on March 15, 2004 and August 9, 2004,
respectively. The Company incurred approximately $10.5 million of non-recurring
start-up costs, net of local and state training grants, related to the openings
in 2004. The start-up costs include travel and relocation, rent, utilities,
repair and maintenance, and training expenses totaling $5.0 million which are
included in cost of products sold, and incremental distribution costs of $5.5
million 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.
69
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE N -- STOCK OPTION PLANS
Prior to the Acquisition, the Company had various incentive plans which
provided stock options for shares of common stock of the Company to directors,
executive officers, certain members of management and consultants. The stock
options were granted at prices which were equal to the market value of the
common stock on the date of grant, expired after ten years, and vested ratably
over a four or five year period based upon the achievement of an annual Adjusted
EBITDA target. The incentive plan provided for issuance of regular options
("Regular Options") and superincentive options ("Superincentive Options").
Regular Options were subject to certain time and performance vesting
restrictions and Superincentive Options vested only in connection with the
consummation of a change of control or initial public offering of the Company
and the attainment by stockholders affiliated with Fenway of certain internal
rate of return objectives.
Under APB 25, because the vesting of the plan options was dependent upon
achieving an annual Adjusted EBITDA target, the ultimate number of vested
shares, and therefore the measurement date, was not currently determinable.
Accordingly, the Company recorded estimated compensation expense as variable
stock compensation expense over the service period based upon the intrinsic
value of the options as they were earned by the employees.
Additionally, the option holders could, under certain circumstances,
require the Company to repurchase the shares underlying vested options.
Therefore, the Company recorded additional adjustments to variable stock
compensation expense for changes in the intrinsic value of vested Regular
Options in a manner similar to a stock appreciation right. The accounting for
awards of stock-based compensation where an employee can compel the entity to
settle the award by transferring cash or other assets to employees rather than
by issuing equity instruments is substantially the same under SFAS 123 and APB
25. Accordingly, SFAS 123 pro-forma disclosures were not presented.
As a result of the Acquisition, the vesting of the issued and outstanding
Regular and Superincentive stock options under the Company's various incentive
plans was accelerated. On December 19, 2003, the Company repurchased the vested
options for $95.4 million, which satisfied the accrued stock compensation
liability of the Company. The Company recorded variable stock compensation
expense of approximately $68.4 million and $15.6 million during Predecessor '03
and 2002, respectively. In conjunction with the Acquisition, all stock option
plans were terminated.
Activity for Regular and Superincentive Options (all non-qualified stock
options) during 2003 and 2002 follows:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Shares outstanding at December 29, 2001 5,518,942 $ 6.58
Granted 410,750 $ 13.45
Forfeited (862,064) $ 6.78
Cancelled (219,404) $ 4.39
---------
Shares outstanding at December 28, 2002 4,848,224 $ 7.23
Granted - $ -
Forfeited (178,125) $ 7.08
Cancelled (166,875) $ 7.11
---------
Shares outstanding at December 19, 2003 4,503,224 $ 7.24
=========
70
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE O -- INCOME TAXES
The components of the provision for income taxes are as follows (amounts
in thousands):
SUCCESSOR | PREDECESSOR
------------------ | --------------------
2004 2003 | 2003 2002
--------- ------ | -------- ---------
|
Current tax provision: |
Federal $ 110 $ - | $ - -
State 230 - | - 250
Foreign 131 - | 241 475
-------- ------ | -------- --------
471 - | 241 725
Deferred tax provision |
Federal 10,793 (762) | (8,037) 10,014
State 691 (65) | (1,055) 1,225
Foreign 51 - | 6 41
-------- ------ | -------- --------
11,535 (827) | (9,086) 11,280
-------- ------ | -------- --------
Benefit applied to reduce goodwill 33 - | - -
-------- ------ | -------- --------
Income tax expense (benefit) $ 12,039 $ (827) | $ (8,845) $ 12,005
======== ====== | ======== ========
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 2004, Successor '03, Predecessor '03, and 2002
provision for income taxes is as follows (amounts in thousands):
SUCCESSOR | PREDECESSOR
----------------------- | -----------------------
2004 2003 | 2003 2002
-------- -------- | -------- --------
|
Income taxes at federal statutory rate $ 12,828 $ (2,806) | $(15,029) $ 3,600
State income taxes, net of federal benefit 778 (67) | (705) 1,433
General business tax credits (474) - | - (1,500)
Valuation allowance, net of reversals - 159 | (1,033) 7,915
Reversal of other tax accruals (4,799) - | - -
Expired net operating loss benefits 4,113 - | - -
Deferred tax rate reduction (401) |
Non-deductible interest expense - 1,225 | 4,309 454
Foreign intercompany dividends - 630 | 1,041 -
Non-deductible transaction costs - - | 6,742 -
Tax loss benefits not previously provided - - | (4,354) -
Other, net (6) 32 | 184 103
-------- -------- | -------- --------
$ 12,039 $ (827) | $ (8,845) $ 12,005
======== ======== | ======== ========
71
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Components of the Company's net deferred income tax liability as of
December 25, 2004 and December 27, 2003 are as follows (amounts in thousands):
2004 2003
--------- ---------
Current deferred income taxes:
Accounts receivable and inventory reserves $ 799 $ 1,030
Accrued liabilities, not currently deductible 3,215 4,674
Prepaids and other assets not currently taxable (1,727) (1,790)
Inventory bases differences 158 (2,941)
--------- ---------
Current deferred income tax assets 2,445 973
Non-current deferred income taxes:
Property bases differences (5,738) (3,555)
Intangibles bases differences (193,286) (52,290)
Retirement accruals 1,394 1,578
Net operating loss carryforwards 42,605 38,303
Income tax credit carryforwards 7,319 2,183
Other noncurrent accrued liabilities, not currently deductible 302 31
Valuation allowance (7,371) (9,969)
--------- ---------
Noncurrent deferred income tax liabilities (154,775) (23,719)
--------- ---------
Net deferred income tax liability $(152,330) $ (22,746)
========= =========
As of December 25, 2004, the Company had carryforward net operating losses
for federal income tax purposes of $116.5 million, including $15.3 million of
carryforward losses generated by Sleep Country that are subject to use
limitations imposed by the Internal Revenue Code, and carryforward state net
operating losses of $60.0 million. Both the federal and state carryforward net
operating losses expire on various dates through 2023.
As of December 25, 2004, the Company had $2.6 million of general business
tax credits and $2.6 million of foreign tax credits available to offset future
payments of U.S. federal income taxes. These credits will expire in varying
amounts between 2009 and 2024. The Company also had $1.9 million of state income
tax credits, which will begin to expire in 2007, and $0.2 million of tax credits
available to offset future payments of foreign income taxes, which can be
carried forward indefinitely.
The realization of net deferred tax assets is dependent upon future
profitable operations and future reversals of existing temporary differences.
Although realization is not assured, the Company believes it is more likely than
not that most of the net recorded benefits will be realized through the
reduction of future taxable income. However, due to the uncertainty regarding
the realization of certain tax carryforwards, the Company recorded a valuation
allowance of $7.4 million against the deferred tax assets related to Sleep
Country's carryforward net operating losses and the Company's state income tax
credits and foreign income tax credits as of December 25, 2004. The Company had
a valuation allowance of $10.0 million against Sleep Country's net deferred tax
assets as of December 27, 2003. Based on the Company's recent history of
earnings and expectation of future profits, the Company has determined that the
Sleep Country's net deferred tax assets, excluding net operating losses, will
more likely than not be realized, and, accordingly, the valuation allowance was
reduced by $4.6 million during 2004. Since the valuation allowance was recorded
as part of the Acquisition purchase accounting, the reduction of the valuation
allowance in 2004 was accounted for as a reduction of the goodwill for the
Company's retail segment.
Cumulative undistributed earnings of the Company's international
subsidiaries totaled approximately $2.7 million as of December 25, 2004. Because
these earnings are to be permanently reinvested, no U.S. deferred income tax has
been recorded.
72
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE P -- RETIREMENT PLANS
SIMMONS 401(K) PLAN
The Company has a defined contribution 401(k) plan for substantially all
employees other than employees subject to collective bargaining agreements.
Employees with 12 weeks of employment who have reached age 18 are permitted to
participate in the plan. Generally, employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation. Eligible participants
may make salary deferral contributions up to 17% of eligible compensation,
subject to applicable tax limitations. The Company makes employer non-elective
contributions, currently 3% of an employee's eligible compensation, once an
employee completes one year of service. All employer non-elective contributions
are immediately vested and not subject to forfeiture.
In 2002, the Company amended the plan to provide for an additional
employer matching contribution of 50 cents on each employee dollar contributed
up to 6% of the employee's pay (subject to current tax limitations). The
additional matching contribution is provided to participants who complete 1,000
hours of service and are employed on the last day of each plan year. The
additional matching contribution will vest 20% per year over five years.
In 2004, Successor `03, Predecessor '03 and 2002, the Company made
contributions to the plan of $3.8 million, $0.1 million, $3.9 million and $3.0
million, respectively, in the aggregate.
SLEEP COUNTRY 401(K) PLAN AND PROFIT SHARING PLAN
The Company sponsors a 401(k) savings plan and profit sharing plan for all
full-time employees of Sleep Country with at least three months of service.
Annually, the Company may contribute a discretionary match based on a percentage
of the employee's 401(k) deferral. The Company's contributions to these plans
for 2004 were $0.2 million. Contributions to these plans in Successor '03,
Predecessor '03 and 2002 were not material.
OTHER PLANS
Certain union employees participate in multi-employer pension plans
sponsored by their respective unions. Amounts charged to pension cost,
representing the Company's required contributions to these plans for 2004,
Successor `03, Predecessor '03 and 2002 were $1.9 million, not material, $2.1
million and $2.0 million, respectively.
The Company had accrued $3.2 million as of December 25, 2004 and $3.0
million as of December 27, 2003 for a supplemental executive retirement plan for
a former executive. Such amounts are included in other non-current liabilities
in the accompanying consolidated balance sheets.
RETIREE HEALTH AND LIFE INSURANCE COVERAGE
The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active service period
of the employee. Such amounts are included in other non-current liabilities in
the accompanying consolidated balance sheets.
In 2000, the Company limited eligibility for retiree health care benefits
to employees who had become or did become eligible (by reaching age 55 with 15
years of service) by December 31, 2001. The Company currently allows former
non-union employees who obtained age 55 and had 15 years of service as of
December 31, 2001, and their spouses, to continue to receive health insurance
coverage under our self-insured medical plan through age 65. The premiums for
such coverage are paid by the former non-union employees. There is no current
retiree health coverage for participants age 65 and over. This plan is unfunded.
The Company also provides for the continuance of term life insurance under
our group life insurance for a grandfathered group of former employees. The
aggregate annual premiums for this coverage is not significant and are paid by
the Company. This liability is unfunded.
73
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company had an accrued postretirement benefit obligation of $0.5
million and $0.7 million as of December 25, 2004 and December 27, 2003,
respectively. In connection with the Acquisition, the accrued postretirement
benefit obligation was adjusted to the difference between the projected benefit
obligation and the fair value of the plan assets as of December 19, 2003. The
Company had postretirement benefit income of $0.2 million and $0.3 million for
2004 and Predecessor '03, respectively.
NOTE Q -- CONTINGENCIES
From time to time, the Company has been involved in various legal
proceedings. The Company believes that all other litigation is routine in nature
and incidental to the conduct of the Company's business, and that none of this
other litigation, if determined adversely to the Company, would have a material
adverse effect on the Company's financial condition or results of its
operations.
NOTE R -- RELATED PARTY TRANSACTIONS
In connection with the Transactions, the Company entered into a management
agreement ("THL management agreement") with THL pursuant to which THL renders
certain advisory and consulting services to the Company and each of its
subsidiaries. In consideration of those services, the Company agreed to pay THL
management fees equal to the greater of $1.5 million or an amount equal to 1.0%
of the consolidated earnings before interest, taxes, depreciation and
amortization of Simmons for such fiscal year, but before deduction of any such
fee. The fees are paid semi-annually.
The Company and Fenway had entered into a management agreement (the
"Fenway Advisory Agreement") pursuant to which Fenway provided strategic
advisory services to the Company. In exchange for advisory services, the Company
had agreed to pay Fenway (i) annual management fees of the greater of 0.25% of
net sales for the prior fiscal year or 2.5% of Adjusted EBITDA for the prior
fiscal year, not to exceed $3.0 million; (ii) fees in connection with the
consummation of any acquisition transactions for Fenway's assistance in
negotiating such transactions; and (iii) certain fees and expenses, including
legal and accounting fees and any out-of-pocket expenses, incurred by Fenway in
connection with providing services to the Company. In conjunction with the
Acquisition, the Fenway Advisory Agreement was terminated.
Sleep Country, Fenway and Boston Gardens Advisors, LLC ("Boston Gardens")
entered into a management agreement (the "Sleep Country Advisory Agreement")
pursuant to which Fenway and Boston Gardens provided strategic advisory services
to Sleep Country. In conjunction with the merger of Simmons Bedding Company and
Sleep Country on February 28, 2003, the Sleep Country Advisory Agreement was
terminated.
Included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations for 2004, Successor `03,
Predecessor '03 and 2002 was $1.7 million, $0.1 million, $2.8 million and $2.4
million, respectively, related to the management fees for services provided by
THL and Fenway to the Company and its subsidiaries.
In connection with the Transactions, the Company agreed to pay an
affiliate of THL a transaction fee equal to $20.0 million plus all out-of-pocket
expenses incurred by THL relating to the Transactions and the related financing.
Mr. Eitel owns a motor yacht that he made available to the Company for 25
days in 2004 for use as a venue for corporate and other functions. As
compensation for the use of Mr. Eitel's motor yacht, commencing November 1,
2003, the Company paid compensation to the captain of Mr. Eitel's motor yacht in
the amount of $80,000 per year, plus benefits. In fiscal year 2004, the total
amount of salary and benefits paid under this agreement was approximately
$92,000. On January 1, 2005, the Company ceased compensating the captain of Mr.
Eitel's motor yacht, but will continue to use the motor yacht as a venue for
corporate and other functions. Mr. Eitel will be reimbursed solely for any out
of pocket expenses associated with the functions.
74
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rousch Consulting Group, Inc., wholly owned by Edward L. Rousch, the
husband of our Executive Vice President -- Human Resources and Assistant
Secretary Rhonda C. Rousch, provided consulting services to the Company in 2004,
Predecessor '03, and 2002. The Company made aggregate payments to Rousch
Consulting Group, Inc. of approximately $156,000, $160,000 and $126,000,
inclusive of out-of-pocket expenses of approximately $30,000, $45,000 and
$14,000, respectively, in 2004, Predecessor '03, and 2002, respectively.
NOTE S -- SEGMENT INFORMATION
Operating segments are generally organized internally by whether the
products are sold to a reseller or to an end consumer. The Company operates in
two business 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, sale 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 C to the consolidated financial statements for
further explanation).
The Company evaluates segment performance and allocates resources based on
net sales and Adjusted EBITDA. Adjusted EBITDA differs from the term "EBITDA" as
it is commonly used. In addition to adjusting net income to exclude interest
expense, income taxes, depreciation and amortization, Adjusted EBITDA also
adjusts net income by excluding items or expenses not typically excluded in the
calculation of "EBITDA" such as management fees, 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 as of and for December
25, 2004, Successor '03, Predecessor '03, and December 28, 2002:
75
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUCCESSOR
DECEMBER 25, 2004
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ------------ -----------
Net sales to external customers $ 788,908 $ 80,985 $ - $ 869,893
Intersegment net sales 19,465 - (19,465) -
Adjusted EBITDA 125,845 4,598 (343) 130,100
Depreciation and amortization expense 22,084 1,100 (100) 23,084
Expenditures for long-lived assets 17,174 1,032 - 18,206
Segment assets 1,277,911 25,381 (1,558) 1,301,734
Reconciliation of EBITDA and Adjusted EBITDA to net income:
Net income $ 26,319 $ (1,462) $ (243) $ 24,614
Depreciation and amortization 22,084 1,100 (100) 23,084
Income taxes 12,191 (152) - 12,039
Interest expense, net 43,640 118 - 43,758
Interest income 141 - - 141
----------- ----------- ----------- -----------
EBITDA 104,375 (396) (343) 103,636
Plant opening, closing charges 13,549 - - 13,549
Management fees 1,702 - - 1,702
Management severance 190 - - 190
Non-cash variable stock compensation 3,347 - - 3,347
Litigation and insurance (650) - - (650)
Transaction related expenditures, including
cost of products sold 3,587 4,313 - 7,900
Other (255) 681 - 426
----------- ----------- ----------- -----------
Adjusted EBITDA $ 125,845 $ 4,598 $ (343) $ 130,100
=========== =========== =========== ===========
76
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUCCESSOR 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
----------- ----------- ----------- -----------
Net sales to external customers $ 6,509 $ 2,208 $ - $ 8,717
Intersegment net sales 346 - (346) -
Adjusted EBITDA (826) (85) 307 (604)
Depreciation and amortization expense 638 18 - 656
Expenditures for long-lived assets - - - -
Segment assets 1,142,939 38,638 1,542 1,183,119
Reconciliation of EBITDA and Adjusted EBITDA to net income:
Net income $ (6,824) $ (673) $ 307 $ (7,190)
Depreciation and amortization 638 18 - 656
Income taxes (827) - - (827)
Interest expense, net 4,657 4 - 4,661
Interest income 4 - - 4
----------- ----------- ----------- -----------
EBITDA (2,352) (651) 307 (2,696)
Variable stock compensation expense - - - -
Management fees 49 - - 49
Plant opening, closing charges 286 - - 286
Management severance - - - -
Non-recurring litigation and insurance - - - -
Transaction expenses 1,161 566 - 1,727
Other 30 - - 30
----------- ----------- ----------- -----------
Adjusted EBITDA $ (826) $ (85) $ 307 $ (604)
=========== =========== =========== ===========
77
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PREDECESSOR 2003
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
---------- --------- ------------ ---------
Net sales to external customers $ 701,935 $ 95,681 $ - $ 797,616
Intersegment net sales 32,228 - (32,228) -
Adjusted EBITDA 120,583 5,135 (818) 124,900
Depreciation and amortization expense 21,464 595 - 22,059
Expenditures for long-lived assets 7,130 1,661 - 8,791
Reconciliation of EBITDA and Adjusted
EBITDA to net income:
Net income $ (35,169) $ 1,891 $ (818) $ (34,096)
Depreciation and amortization 21,464 595 - 22,059
Income taxes (8,845) - - (8,845)
Interest expense, net 44,408 684 - 45,092
Interest income 197 - - 197
---------- --------- ------------- ---------
EBITDA 22,055 3,170 (818) 24,407
Variable stock compensation expense 68,415 - - 68,415
Transaction expenses 22,190 209 - 22,399
Plant opening, closing charges 3,057 - - 3,057
Non-recurring litigation and insurance 1,894 - - 1,894
Non-recurring retail segment charges - 432 - 432
Management fees 1,513 1,331 - 2,844
Management severance 661 - - 661
Other 791 - - 791
---------- --------- ------------ ---------
Adjusted EBITDA $ 120,576 $ 5,142 $ (818) $ 124,900
========== ========= ============ =========
78
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 28, 2002
(In thousands)
Wholesale
Bedding Retail Eliminations Totals
--------- --------- ------------ ---------
Net sales to external customers $ 636,826 $ 71,769 $ - $ 708,595
Intersegment net sales 22,131 - (22,131) -
Adjusted EBITDA 104,347 (460) (990) 102,897
Depreciation and amortization expense 18,147 1,371 (468) 19,050
Goodwill impairment - 20,285 - 20,285
Expenditures for long-lived assets 6,323 1,638 - 7,961
Segment assets 405,298 39,733 (34,000) 411,031
Reconciliation of EBITDA and Adjusted
EBITDA to net income (loss):
Net income (loss) $ 26,901 $ (26,990) $ (522) $ (611)
Depreciation and amortization, including
goodwill impairment 18,147 21,656 (468) 39,335
Income taxes 12,005 - - 12,005
Interest expense, net 29,558 2,442 - 32,000
Interest income 193 - - 193
--------- --------- ------------ ---------
EBITDA 86,804 (2,892) (990) 82,922
Variable stock compensation expense 15,561 - - 15,561
Non-recurring litigation and insurance 1,304 - - 1,304
Non-recurring retail segment charges - 148 - 148
Management fees 69 2,284 - 2,353
Other 609 - - 609
--------- --------- ------------ ---------
Adjusted EBITDA $ 104,347 $ (460) $ (990) $ 102,897
========= ========= ============ =========
In the "Eliminations" column of each period presented above, the segment
assets consist primarily of investments in subsidiaries, receivables and
payables, and gross wholesale bedding profit in ending retail inventory. The
segment operating income (loss) has been adjusted to eliminate the wholesale
bedding profit in ending retail inventory.
79
SIMMONS BEDDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE T -- SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
Although not required, following is a condensed summary of consolidated
quarterly results for 2004 and 2003. The results of operations for the 2003
fourth quarter represent the mathematical addition of the historical amounts for
the predecessor period (September 28, 2003 through December 19, 2003) and the
successor period (December 20, 2003 through December 27, 2003) and are not
indicative of the results that would have actually been obtained if the
Acquisition had occurred on September 28, 2003.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(in thousands)
2004:
Net sales $ 223,320 $ 201,795 $ 238,221 $ 206,557
Gross profit 103,455 91,550 111,171 91,465
Operating income 17,289 20,197 25,485 17,440
Net income 3,965 5,958 9,439 5,252
2003:
Net sales $ 186,615 $ 199,299 $ 217,924 $ 202,495
Gross profit 88,382 94,561 104,491 102,962
Operating income (loss) 19,908 12,591 24,361 (58,065)
Net income (loss) 7,480 3,485 15,573 (67,824)
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this item.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this annual report on Form
10-K, the Company has carried out an evaluation, under the supervision and the
participation of the Company's management, including the Company's principal
executive officer and the Company's principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on such evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective.
(b) As required by Exchange Act Rule 13a-15(d), our management, including
our principal executive officer and principal financial officer, also conducted
an evaluation of the our internal controls over financial reporting to determine
whether any changes occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting. Based on that evaluation, there has been no
such change during the period presented by this report.
(c) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
81
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT AND DIRECTORS
The directors and principal officers of Simmons, and their positions and
ages as of March 22, 2005, are as follows:
NAME AGE POSITION
- --------------------- --- -----------------------------------------------------
Charles R. Eitel 55 Chairman of the Board of Directors and
Chief Executive Officer
Robert W. Hellyer 45 President
William S. Creekmuir 49 Executive Vice President, Chief Financial
Officer, Assistant Treasurer and Assistant
Secretary
Rhonda C. Rousch 50 Executive Vice President - Human Resources
and Assistant Secretary
Robert M. Carstens 41 Senior Vice President - Manufacturing
Kevin Damewood 48 Senior Vice President - Sales and Marketing
Stephen G. Fendrich 44 President and Chief Executive Officer of
SC Holdings, Inc. and Sleep Country USA, Inc.
Kristen K. McGuffey 39 Senior Vice President, General Counsel and Secretary
W. Wade Vann 51 Senior Vice President and Chief Information Officer
Brian P. Breen 44 Vice President - Treasurer and Assistant Secretary
Earl C. Brewer 59 Vice President - Taxation and Assistant Secretary
Mark F. Chambless 47 Vice President and Corporate Controller
Timothy F. Oakhill 42 Vice President - International and Domestic Licensing
Todd M. Abbrecht 36 Director
Robin Burns-McNeill 52 Director
William P. Carmichael 61 Director
David A. Jones 55 Director
B. Joseph Messner 52 Director
Albert L. Prillaman 59 Director
Scott A. Schoen 46 Director
George R. Taylor 34 Director
82
The present principal occupations and recent employment history of each of
our executive officers and directors listed above is as follows:
Charles R. Eitel joined Simmons in January 2000 as Chairman of the Board
of Directors and Chief Executive Officer. Prior to joining Simmons, Mr. Eitel
served as President and Chief Operating Officer of Interface, Inc., a leading
global manufacturer and marketer of floor coverings, interior fabrics and
architectural raised floors. Prior to serving as Chief Operating Officer, he
held the positions of Executive Vice President of Interface, President and Chief
Executive Officer of the Floor Coverings Group, and President of Interface
Flooring Systems, Inc. Mr. Eitel is a director of Duke Realty Corporation, an
industrial real estate company (REIT) based in Indianapolis, Indiana and
American Fidelity Assurance Company in Oklahoma City, Oklahoma.
Robert W. Hellyer joined Simmons in 1995 and has served as President since
January 2001. Mr. Hellyer served as a director of Simmons from January 2001 to
August 2004. Prior to assuming his current position, Mr. Hellyer served as
Executive Vice President - Sales and Marketing, Executive Vice President -
Sales, General Manager - Janesville and Vice President of Sales - Janesville.
Prior to joining Simmons, Mr. Hellyer held various sales positions with Stearns
& Foster. Mr. Hellyer is a member of the Board of Trustees of ISPA.
William S. Creekmuir joined Simmons in April 2000 and serves as Executive
Vice President, Chief Financial Officer, Assistant Treasurer, and Assistant
Secretary. Mr. Creekmuir served as a director of Simmons from April 2000 to
August 2004. Prior to joining Simmons, Mr. Creekmuir served as Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of LADD Furniture,
Inc., a publicly traded furniture manufacturer. Prior to joining LADD in 1992,
he worked 15 years with KPMG in their audit practice, the last five years of
which he was a partner, including partner in charge of their national furniture
manufacturing practice. Mr. Creekmuir is Chairman of the Statistics Committee
for ISPA. Mr. Creekmuir is a Certified Public Accountant.
Rhonda C. Rousch joined Simmons in November 2001 and has served as
Executive Vice President - Human Resources and Assistant Secretary since October
2002. Prior to assuming her current position, Ms. Rousch served as Senior Vice
President - Human Resources and Assistant Secretary. Prior to joining Simmons,
from September 2000 to November 2001, Ms. Rousch was Vice President of Human
Resources for MW Manufacturers, Inc. Prior to September 2000, Ms. Rousch was the
Director of Organizational Readiness for Harley-Davidson, Inc.
Robert M. Carstens joined Simmons in February 1994 and serves as Senior
Vice President of Manufacturing. Mr. Carstens previously held a variety of
positions at Simmons including Vice President of Operations, and Operations
Manager in both the Piscataway, New Jersey and Atlanta, Georgia facilities. Mr.
Carstens began his bedding manufacturing career in 1983 at Sealy, Inc., where he
held various positions including Operations Manager.
Kevin Damewood joined Simmons in January 2000 and has served as Senior
Vice President - Sales and Marketing since January 2004. Prior to assuming his
current position, Mr. Damewood served as Senior Vice President - Sales beginning
in July 2001 and prior to that he served as Vice President - National Accounts.
Mr. Damewood also worked for Simmons from July 1996 to April 1999 as Vice
President - Sales for the Seattle and Salt Lake City facilities. Between April
1999 and December 2000, Mr. Damewood was employed with Premier Bedding Group as
Vice President of National Sales.
Kristen K. McGuffey joined Simmons in November 2001 and has served as
Senior Vice President - General Counsel and Secretary since August 2002. Prior
to assuming her current position, Ms. McGuffey served as Vice President -
General Counsel and Assistant Secretary. Prior to joining Simmons, from March
2000 to October 2001, Ms. McGuffey was employed by Viewlocity, Inc., with the
most recent position of Executive Vice President and General Counsel. From March
1997 to February 2000, Ms. McGuffey was a partner of and, prior to that, an
associate at Morris, Manning & Martin LLP. Prior to March 1997, Ms. McGuffey was
an associate at Paul, Hastings, Janofsky & Walker, LLP.
Stephen G. Fendrich joined Simmons in February 2003 as President and CEO
of SC Holdings, Inc. and Sleep Country USA, Inc. in connection with Simmons
acquisition of Sleep Country. Mr. Fendrich joined Sleep Country USA, Inc. in
September 2002 as President and CEO. Prior to joining Sleep Country USA, Inc.,
Mr. Fendrich was Executive Vice President of Franchise Stores for The Mattress
Firm from February 2002 to September 2002. From November 2000 to February 2002,
Mr. Fendrich performed consulting work for The Mattress Firm. From 1986 to
83
November 2000, Mr. Fendrich held various positions with The Mattress Firm
including Vice President and Chief Financial Officer and Vice President of
Finance and Real Estate. Mr. Fendrich was one of the founders of The Mattress
Firm in 1986.
W. Wade Vann joined Simmons in October 2000 and has served as Senior Vice
President of Information Technology and Chief Information Officer since January
2004. Prior to assuming his current position, Mr. Vann served as the Vice
President of Information Technology and Chief Information Officer. Prior to
joining Simmons, Mr. Vann held the position of Director of Information
Technology with Broyhill Furniture Industries from October 1992 to October 2000.
Brian P. Breen joined Simmons in July 1996 and has served as Vice
President and Treasurer since January 2002. Mr. Breen has served as Assistant
Secretary since September 2000. Prior to assuming his current position, Mr.
Breen served as Vice President and Assistant Treasurer since September 2000 and
prior to that served as Director of Financial Reporting of the Outlet Division.
Prior to joining Simmons Mr. Breen held various financial reporting positions
most recently serving as Controller for Six Flags Theme Parks. Mr. Breen is a
Certified Treasury Professional.
Earl C. Brewer joined Simmons in February 2001 as Vice President of
Taxation. Mr. Brewer has served as Assistant Secretary since April 2001. Prior
to joining Simmons, Mr. Brewer held similar positions at Oakwood Homes
Corporation from March 2000 to February 2001 and at LADD Furniture, Inc. from
October 1993 to February 2000. Mr. Brewer is a Certified Public Accountant.
Mark F. Chambless joined Simmons in May 1995 and has served as Vice
President and Corporate Controller since February 2000. Mr. Chambless is the
Principal Accounting Officer for the Company. Prior to assuming his current
position, Mr. Chambless was the Corporate Controller from November 1995 through
February 2000 and prior to that served as a Divisional Controller. Prior to
joining Simmons, Mr. Chambless worked nine years at Sealy, Inc. where he held
various positions including Plant Controller, Operations Manager and Divisional
Controller.
Timothy F. Oakhill joined Simmons in January 1997 and has served as Vice
President - International and Domestic Licensing since January 2004. Prior to
assuming his current position, Mr. Oakhill managed various Simmons brands,
including BackCare(R) and Deep Sleep(R) from January 1997 to August 2003 and
Beautyrest(R) from August 2003 to January 2004. Prior to joining Simmons, Mr.
Oakhill served as Marketing Manager for Eastman-Kodak Company and as an account
supervisor for Bates Worldwide.
Todd M. Abbrecht has been a director of Simmons since December 2003,
following the consummation of the Acquisition. Mr. Abbrecht is a Managing
Director of Thomas H. Lee Partners, which he joined in 1992. Prior to joining
the firm, Mr. Abbrecht was in the mergers and acquisitions department of Credit
Suisse First Boston. Mr. Abbrecht is a director of Michael Foods, Inc., National
Waterworks, Inc. and Warner Chilcott Corporation.
Robin Burns-McNeill became a director of Simmons in December 2004. From
July 1998 to July 2004, Ms. Burns-McNeill was President and Chief Executive
Officer of Victoria Secret Beauty and Intimate Beauty Corporation. Prior to
that, from January 1990 to May 1998, Ms. Burns-McNeill was President and Chief
Executive Officer of Estee Lauder Inc. North America. In February 1998, Ms.
Burns-McNeill became President of Donna Karan Cosmetics. Ms. Burns-McNeill is a
director of S.C. Johnson, Inc. and serves on the Board of Trustees for the
Fashion Institute of Technology College.
William P. Carmichael became a director of Simmons in May 2004. Mr.
Carmichael co-founded The Succession Fund in 1998. Prior to forming the
Succession Fund, Mr. Carmichael had 26 years of experience in various financial
positions with global consumer product companies, including Senior Vice
President with Sara Lee Corporation, Senior Vice President and Chief Financial
Officer of Beatrice Foods Company, and Vice President of Esmark, Inc. Mr.
Carmichael is a director of Cobra Electronics Corporation, The Finish Line,
Spectrum Brands, Inc., Hatteras Securities Fund and Chairman of the Nation Funds
(Bank of America advised mutual funds). Mr. Carmichael is a Certified Public
Accountant.
84
David A. Jones has been a director of Simmons since December 2003,
following the consummation of the Acquisition. Mr. Jones has served as the
Chairman of the Board of Directors and Chief Executive Officer of Spectrum
Brands, Inc. since September 1996. From 1996 to April 1998, he also served as
President. From 1995 to 1996, Mr. Jones was President, Chief Executive Officer
and Chairman of the Board of Directors of Thermoscan, Inc. Mr. Jones currently
is a director of Tyson Foods, Inc. and Pentair, Inc.
B. Joseph Messner became a director of Simmons in August 2004. Mr. Messner
is Chairman of the Board of Directors and Chief Executive Officer of Bushnell
Performance Optics, a company that Wind Point Partners, a Chicago based Private
Equity Group, and Mr. Messner acquired in 1999. Mr. Messner was President and
CEO of First Alert, Inc. from 1996 through 1999. Mr. Messner is a member of Wind
Point Partners Executive Advisor Group.
Albert L. Prillaman has been a director of Simmons since December 2003,
following the consummation of the Acquisition. Mr. Prillaman is Chairman of the
Board Directors of Stanley Furniture Company, Inc., where he previously served
as both President and Chief Executive Officer. Mr. Prillaman is a past Chairman
of the Board of the American Furniture Manufacturers Association.
Scott A. Schoen has been a director of Simmons since December 2003,
following the consummation of the Acquisition. Mr. Schoen is co-President of
Thomas H. Lee Partners, which he joined in 1986. Prior to joining the firm, Mr.
Schoen was in the Private Finance Department of Goldman, Sachs & Co. Mr. Schoen
is a director of AXIS Capital Holdings Limited, Refco Group Ltd., Syratech
Corporation, TransWestern Publishing, L.P., Spectrum Brands, Inc. and Wyndham
International. Mr. Schoen is a Vice Chairman of the Board and a member of the
Executive Committee of the United Way of Massachusetts Bay. He is also a member
of the Advisory Board of the Yale School of Management and the Yale Development
Board.
George R. Taylor has been a director of Simmons since December 2003,
following the consummation of the Acquisition. Mr. Taylor is a Vice President at
Thomas H. Lee Partners, which he joined in 1996. Prior to joining the firm, Mr.
Taylor was at ABS Capital Partners. Mr. Taylor is a director of Progressive
Moulded Products, Ltd. and Syratech Corporation.
Each of our directors will hold office until his successor has been
elected and qualified. Our executive officers are elected by and serve at the
discretion of our Board of Directors. There are no family relationships between
any of our directors or executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors of Simmons Company has established an audit
committee, a compensation committee and a nominating and governance committee.
The members of the audit committee are Messrs. Carmichael, Jones,
Prillaman and Taylor. The members of the compensation committee are Messrs.
Abbrecht, Eitel and Schoen. The members of the nominating and governance
committee are Messrs. Abbrecht, Eitel, Messner and Schoen. The audit committee
oversees management regarding the conduct and integrity of our financial
reporting, systems of internal accounting and financial and disclosure controls.
The audit committee reviews the qualifications, engagement, compensation,
independence and performance of our independent auditors, their conduct of the
annual audit and their engagement for any other services. The audit committee
also oversees management regarding our legal and regulatory compliance and the
preparation of an annual audit committee report for the annual proxy statement
as required by the SEC. In addition, the board of directors for Simmons Company
has determined that William P. Carmichael is an "audit committee financial
expert" as defined by the SEC rules.
The compensation committee is responsible for the general compensation
policies of the Company, and in particular is responsible for setting and
administering the policies that govern executive compensation, including
determining and approving the compensation of our CEO and other senior executive
officers; reviewing and approving management incentive compensation policies and
programs; reviewing and approving equity compensation programs and exercising
discretion over the administration of such programs and producing an annual
compensation committee report.
85
The purpose of the nominating and governance committee is to identify,
screen and review individuals qualified to serve as directors and recommending
to the board of directors, for Simmons Company, THL-SC Bedding Company and us,
candidates for nomination for election at annual meetings of the stockholders or
to fill board vacancies; overseeing our policies and procedures for the receipt
of stockholder suggestions regarding board composition and recommendations of
candidates for nomination by the board; developing, recommending to the board
approval of, if appropriate, and overseeing implementation of the Simmons
Company's and its subsidiaries' corporate governance guidelines and principles
including the Simmons Code of Ethics for Chief Executive and Senior Financial
Officers ("Code of Ethics") and the Simmons Code of Conduct and Ethics; and
reviewing on a regular basis the overall corporate governance of the Company and
recommending improvements when necessary.
From time to time, the board of directors may contemplate establishing
other committees.
DIRECTOR COMPENSATION
All members of our board of directors are reimbursed for their usual and
customary expenses incurred in connection with attending all board and other
committee meetings. Non-employee directors, Ms. Burns-McNeill and Messrs.
Carmichael, Jones, Messner and Prillaman receive director fees of $25,000 per
year and can obtain ten free mattress sets per year. During 2004, Messrs.
Carmichael and Jones received free mattresses that were valued at $7,476 and
$3,045, respectively. Each of the non-employee directors have been granted 2,500
shares of Class B common stock of Simmons Company, which stock is subject to
time and performance-based vesting. The Company pays the directors' federal and
state taxes associated with grants of Class B common stock where the fair market
value of the stock exceeds the purchase price.
CODE OF ETHICS
We have a Code of Ethics within the meaning of 17 CFR Section 229.406,
that applies to the Company's Chief Executive Officer, Chief Financial Officer
and Corporate Controller. If the Company makes an amendment to the Code of
Ethics, or grants a waiver from a provision of the Code of Ethics to the Chief
Executive Officer, Chief Financial Officer, or Corporate Controller, then the
Company will make any required disclosure of such amendment or waiver on the
Company's website (www.simmons.com) or in a current report on Form 8-K filed
with the SEC.
86
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in the previous
three years by our Chief Executive Officer and each of our other four most
highly compensated executive officers during the past year (the "Named Executive
Officers"). The compensation arrangements for each of these officers that are
currently in effect are described under the caption "Employment Arrangements"
below. The bonuses set forth below include amounts earned in the year shown but
paid in the subsequent year.
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------
------------------------------------------------ RESTRICTED ALL OTHER
OTHER STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) ($) (#) ($) (11)
------------------------------ ---- --------- --------- ----------------- ------------- ------- ------------
Charles R. Eitel 2004 $ 675,000 $ 322,933 $ 72,460 (1) - - $ 38,562
Chairman, Chief 2003 585,717 558,249 29,200,225 (1) 1,835 (2) - 44,534
Executive Officer 2002 562,083 613,039 27,962 (1) - - 58,946
Robert W. Hellyer 2004 450,000 188,378 22,860 (3) - - 20,596
President 2003 323,440 233,680 11,271,565 (3) 1,262 (4) - 23,462
2002 311,000 258,915 22,842 (3) - - 36,156
William S. Creekmuir 2004 370,000 132,761 343,124 (5) - - 25,707
Executive Vice President - 2003 311,000 224,692 10,955,069 (5) 1,147 (6) - 27,924
Chief Financial Officer 2002 300,000 249,758 213,713 (5) - - 36,164
Stephen G. Fendrich 2004 264,423 243,650 179,282 (7) 125 (8) - 3,705
President and Chief 2003 250,000 198,750 34,385 (7) - - 4,448
Executive Officer of Sleep 2002 56,731 - 3,749 (7) - - -
Country
Kevin Damewood 2004 236,205 60,034 42,708 (9) 57,900 (10) - 19,895
Senior Vice President - 2003 208,750 95,111 2,050,345 (9) 69 (10) - 13,700
Sales and Marketing 2002 193,750 93,607 - (9) - - 26,212
----------
(1) Such amounts principally include (i) exercise of stock options held in
predecessor company that were held by The Charles R. Eitel Revocable
Trust, of which Mr. Eitel is trustee, of $29,177,145 in 2003; (ii) a car
allowance of $12,000 in 2004, 2003 and 2002; (iii) club membership fees of
$10,684, $11,080, and $6,800 in 2004, 2003 and 2002; and (iv) personal use
of the corporate jet of $49,776 in 2004. These items were taxable to Mr.
Eitel.
(2) Represents a restricted stock grant of 183,529 shares of Class B common
stock awarded in connection with the Acquisition. The shares are held by
The Charles R. Eitel Revocable Trust, of which Mr. Eitel is the trustee.
The shares vest ratably over a four year period based upon the Company
meeting certain performance targets or all the shares vest on the eighth
anniversary of the issuance of the shares. Additionally, vesting of the
shares is accelerated upon a change in control as defined in the Incentive
Plan.
(3) Such amounts principally include (i) exercise of stock options held in
the predecessor company of $11,254,286 in 2003; and (ii) a car allowance
of $9,000 in 2004, 2003 and 2002. These items were taxable to Mr. Hellyer.
(4) Represents a restricted stock grant of 126,176 shares of Class B common
stock awarded in connection with the Acquisition. The shares vest ratably
over a four year period based upon the Company meeting certain performance
targets or all the shares vest on the eighth anniversary of the issuance
of the shares. Additionally, vesting of the shares is accelerated upon a
change in control as defined in the Incentive Plan.
87
(5) Such amounts principally include (i) exercise of stock options held in
predecessor company of $10,806,350 in 2003; (ii) a car allowance of $9,000
in 2004, 2003 and 2002; (iii) commute and temporary housing expenses of
$16,852 in 2002; (iv) moving expenses of $120,000 in 2002; and (v)
reimbursement of mortgage costs and selling expenses related to the sale
of Mr. Creekmuir's personal residence of $333,306, $80,409 and $29,187 in
2004, 2003 and 2002, respectively. These items were taxable to Mr.
Creekmuir. The personal income tax impact of certain commute and temporary
housing expenses and moving expenses was assumed by Simmons which resulted
in additional compensation of $35,443, $59,310 and $38,674 in 2004, 2003
and 2002, respectively.
(6) Represents a restricted stock grant of 126,176 shares of Class B common
stock awarded in connection with the Acquisition. The shares vest ratably
over a four year period based upon the Company meeting certain performance
targets or all the shares vest on the eighth anniversary of the issuance
of the shares. Additionally, vesting of the shares is accelerated upon a
change in control as defined in the Incentive Plan.
(7) Such amounts principally include (i) commute and temporary housing
expenses of $6,392, $27,185 and $3,749 in 2004, 2003 and 2002; (ii)
selling expenses related to the sale of Mr. Fendrich's personal residence
of $165,456 in 2004; and (iii) a car allowance of $7,200 in 2004 and 2003.
(8) Represents a restricted stock grant of 12,500 shares of Class B common
stock. The shares vest ratably over a four year period based upon Sleep
Country USA, Inc. meeting certain performance targets or all the shares
vest on the eighth anniversary of the issuance of the shares.
Additionally, vesting of the shares is accelerated upon a change in
control as defined in the Incentive Plan.
(9) Such amounts principally include (i) exercise of stock options held in
predecessor company of $2,050,345 in 2003 and (ii) reimbursement for the
payment of taxes of $42,708 related to the purchase of Class B common
stock below fair market value in connection with a restricted stock grant
award in 2004.
(10) Represents a restricted stock grant of 10,000 and 6,880 shares of Class
B common stock in 2004 and 2003, respectively. The shares vest ratably
over a four year period based upon the Company meeting certain performance
targets or all the shares vest on the eighth anniversary of the issuance
of the shares. Additionally, vesting of the shares is accelerated upon a
change in control as defined in the Incentive Plan.
(11) All other compensation amounts include:
(a) contributions to our ESOP in 2002 in the amount of $16,170 for Mr.
Eitel; $17,147 for Mr. Hellyer; $14,229 for Mr. Creekmuir; and $14,193
for Mr. Damewood, respectively;
(b) contributions to Sleep Country's Profit Sharing Plan for Mr. Fendrich;
(c) contributions to our 401(k) plan in 2004, 2003 and 2002, respectively,
in the amounts of $16,000, $12,000 and $11,058 for Mr. Eitel; $13,000,
$12,000 and $10,875 for Mr. Hellyer; $13,000, $12,000 and $11,000 for
Mr. Creekmuir; and $13,000, $11,890 and $11,000 for Mr. Damewood; and
(d) premiums for term life insurance and long-term disability insurance in
2004, 2003 and 2002, respectively, in the amounts of $16,708, $22,268
and $21,724 for Mr. Eitel; $5,992, $7,845 and $5,591 for Mr. Hellyer;
$10,158, $10,899 and $8,340 for Mr. Creekmuir; and $6,895, $1,700 and
$1,323 for Mr. Damewood. These premiums were taxable to Messrs. Eitel,
Hellyer, Creekmuir, and Damewood. The personal income tax impact of
these items were assumed by Simmons for Messrs. Eitel, Hellyer and
Creekmuir, which resulted in additional compensation in 2004, 2003 and
2002, respectively, in the amounts of $5,854, $10,266 and $9,994 for
Mr. Eitel; $2,548, $3,617 and $2,543 for Mr. Hellyer; and $1,604,
$5,025 and $3,845 for Mr. Creekmuir.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no options granted in fiscal year 2004. In connection with the
Acquisition, all option plans were terminated.
EMPLOYMENT ARRANGEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN
CONTROL ARRANGEMENTS
Executive Employment Agreements. Each of the members of our senior
leadership team ("SLT"), which includes Charles Eitel, William Creekmuir, Robert
Hellyer and Rhonda Rousch, have entered into executive employment agreements
with Simmons Company and Simmons Bedding Company on substantially similar terms
to their previous existing arrangements. The agreements have two-year terms with
evergreen renewal provisions and contain usual and customary restrictive
covenants, including two-year non-competition provisions, non-disclosure of
proprietary information provisions, provisions relating to non-solicitation/no
hire of employees or customers and non-disparagement provisions. In the event of
a termination without "cause" or departure for "good reason," the terminated
senior executives are entitled to severance equal to two years salary plus an
amount equal to their pro-rated bonus for the year of termination.
Put/Call Arrangements. Under Simmons Company's Securityholders' Agreement,
Simmons Company has the right to purchase for fair market value a management
stockholder's Class A common stock upon termination of such management
stockholder's employment for any reason; provided that, if such employee is
terminated for "cause" or voluntarily quits, Simmons Company may repurchase such
shares at the lower of fair market value and cost. In addition, upon termination
of one of the members of the SLT by Simmons Company without "cause" or by the
employee for "good reason," such employee may require Simmons to repurchase
shares of Class A common stock held by them for fair market value. With respect
to other employee holders of Class A Common Stock, if such employee is
terminated without "cause," then such employee may require Simmons Company to
repurchase shares of Class A Common Stock held by such employee for the lower of
fair market value and cost. Fair market value will be initially determined by
the board of directors of Simmons Company. Under restricted stock agreements,
upon termination of employment for any reason, Simmons Company has the right to
repurchase such terminated employee's Class B common stock.
EMPLOYEE BENEFIT PLANS
The Incentive Plan was adopted in connection with the Transactions and is
used to attract and retain the best available personnel, to provide additional
incentive to persons who provide services to us, and to promote the success of
our business. The Incentive Plan is administered by the board of directors of
Simmons Company or, at its election, by one or more committees consisting of one
or more members who have been appointed by that board of directors. The board of
directors of Simmons Company is authorized to grant options, restricted stock or
other awards to our employees, directors, and consultants or any direct or
indirect corporate or other subsidiary in which we own at least 50% of the
outstanding equity interests. Restricted shares of Class B common stock
representing up to fifteen percent (15%) of the capital stock of Simmons Company
(on a fully diluted basis) may be issued pursuant to awards under the Incentive
Plan. Awards of restricted stock shall be made pursuant to restricted stock
agreements and may be subject to vesting and other restrictions as determined by
the board of directors of Simmons Company, or a committee of the board. Among
other things, the restricted stock agreements provide, under certain conditions,
for acceleration in vesting of the stock upon a change in control and all
restricted stock vests on the eight anniversary of the issuance of the
restricted stock. See "Certain Relationships and Related Party Transactions --
Restricted Stock Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions regarding the Company's executive officers are made
by the compensation committee of the board of directors for Simmons Company. The
members of the compensation committee as of December 25, 2004 are Messrs.
Abbrecht, Eitel, and Schoen. Mr. Eitel is our chairman of the board and Chief
Executive Officer. Mr. Eitel cannot vote on his own compensation.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee is responsible for the general compensation
policies of the Company, and in particular is responsible for setting and
administering the policies that govern executive compensation. The compensation
committee evaluates the performance of the SLT and determines the compensation
levels for the same.
The objective of the compensation committee is to establish policies and
programs to attract and retain key executives, and to reward performance by
these executives which benefit the Company. The primary elements of executive
compensation are base salary, annual cash bonus and restricted stock awards. The
salary is based on factors such as the individual executive officer's level of
responsibility, and a comparison to similar positions in the Company and in
comparable companies. The annual cash bonuses are currently based on the
Company's performance measured against attainment of financial objectives.
Restricted stock awards have vesting schedules tied to the achievement of
certain financial objectives of the Company and are intended to align
management's interests with those of the Company and its stockholders in
promoting the long-term growth of the Company. Further information on each of
these compensation elements follows.
SALARIES
With respect to the Mr. Eitel, each member of the board of directors
assesses his performance and this information is then summarized for the
compensation committee. The compensation committee then adjusts the Mr. Eitel's
base salary based on this performance assessment and external market equity.
Other members of the SLT are reviewed annually by Mr. Eitel and Mr. Eitel makes
a recommendation of a salary adjustment to the compensation committee.
Competitive compensation data is also a major factor in establishing the salary
of each member of the SLT, but no precise formula is applied in the
consideration of this data. The compensation committee's review and final
determination of the salaries for the members of the SLT takes place annually.
For the other executive officers, base salaries are adjusted annually by
the SLT, following a review by the member of the SLT to whom the executive
officer reports. In the course of the review, performance of the individual with
respect to specific objectives is evaluated, as are any increases in
responsibility, and competitive salaries, internally and externally, for similar
positions. The specific objectives for each executive officer are set by the
particular SLT member to whom the executive officer reports, and will vary
annually for each executive position based on the objectives of the Company. The
performance review is based on individual competencies and contributions and
therefore the performance of the Company does not weigh heavily in the result.
Annually, the compensation committee reviews a listing of all officers base
salaries and annual increases.
ANNUAL CASH BONUSES
Certain of our employees are eligible, pursuant to their offers of
employment, to receive annual cash bonuses based on the Company's performance
measured against attainment of financial objectives.
RESTRICTED STOCK AWARDS
The Company has adopted the Incentive Plan to provide incentives to the
management and independent directors of the Company and its affiliates by
granting them restricted stock awards of Class B common stock of Simmons
Company. These restricted stock awards granted to our management are intended to
provide an incentive to for management to continue their employment over a long
term, and to align their interests with the Simmons Company by providing a stake
in the same. The compensation committee recommends grants to the board which
determines whether such grants are appropriate. In making such recommendations,
the compensation committee takes into account the total number of shares
available for grant, prior grants outstanding, and estimated requirements for
future grants. Individual awards take into account the manager's contributions
to the Company and its affiliates, scope of responsibilities, strategies and
operational goals, and salary. In recommending a restricted stock award for Mr.
Eitel, the compensation committee weighs all of the above factors, but also
recognizes his critical role in developing strategies for the long-term benefit
of the Company. Restricted stock awards are an important element in
90
attracting and retaining capable executives at all levels, and this is
particularly so in the case of our chief executive officer.
OTHER BENEFITS
Periodically, the compensation committee assesses the other benefits
provided to executive officers and other managers of the Company and its
affiliates.
The compensation committee continually reviews the Company and its
affiliates' compensation programs to ensure the overall package is competitive,
balanced, and that proper incentives and rewards are provided.
Compensation Committee:
Todd M. Abbrecht
Charles R. Eitel
Scott A. Schoen
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our indirect parent, Simmons Company, by: (1) each person or entity
owning any class of Simmons Company's outstanding securities and (2) each member
of the board of directors, each of our named executive officers, each member of
our management committee and our executive officers as a group. Simmons
Company's outstanding securities consisted of 3,870,833.66 shares of Class A
common stock as of March 1, 2005. We have also authorized 688,235 shares of
Class B common stock, of which 687,707 shares were outstanding as of March 1,
2005 for issuance pursuant to the restricted stock agreement under the Incentive
Plan. See "Certain Relationships and Related Party Transactions -- Amended and
Restated Certificate of Incorporation of Simmons Company." The Class A common
stock and Class B common stock generally have identical voting rights. To our
knowledge, each such stockholder has sole voting and investment power as to the
common stock shown unless otherwise noted. Beneficial ownership of the common
stock listed in the table has been determined in accordance with the applicable
rules and regulations promulgated under the Securities Exchange Act of 1934, as
amended.
PERCENTAGE PERCENTAGE
CLASS A OF CLASS A CLASS B OF CLASS B
COMMON COMMON COMMON COMMON PERCENT
NAME AND ADDRESS STOCK STOCK STOCK STOCK OF TOTAL
- -------------------------------------- ------------ ---------- ------- ---------- --------
Principal Securityholders:
Thomas H. Lee Partners L.P. and
Affiliates (1) 3,270,940.05 84.5% - -% 71.8%
Fenway Partners Capital Fund II,
L.P. and Affiliates (2) 387,837.03 10.0 - - 8.5
Directors and Executive Officers:
Charles R. Eitel (3) 50,000.00 1.3 183,529 26.7 5.1
Robert W. Hellyer (3)(4) 34,534.52 * 126,176 18.3 3.5
William S. Creekmuir (3)(4) 32,382.75 * 114,706 16.7 3.2
Stephen G. Fendrich (3)(4) - - 12,500 1.8 *
Kevin Damewood (3)(4) 6,143.78 * 16,880 2.5 *
Todd M. Abbrecht (1) 3,270,940.05 84.5 - - 71.8
Robin Burns-McNeill (3) - - 2,500 * *
William P. Carmichael (3) - - 2,500 * *
David A. Jones (3) 2,000.00 * 2,500 * *
B. Joseph Messner (3) - - 2,500 * *
Albert L. Prillaman (3) 2,500.00 * 2,500 * *
Scott A. Schoen (1) 3,270,940.05 84.5 - - 71.8
George R. Taylor (1) 3,270,940.05 84.5 - - 71.8
All directors and executive officers
as a group (13 persons)(1)(4) 3,427,160.32 88.5% 555,764 80.8% 87.4%
- ------------------
* less than 1%
(1) Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P.,
Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V.
L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee
Nominee Trust, Putnam Investments Holdings, LLC, Putnam Investments
Employees' Securities Company I, LLC, and Putnam Investments Employees'
Securities Company II, LLC, Thomas H. Lee Equity Fund V, L.P. and Thomas
H. Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose
general partner is THL
92
Equity Advisors V, LLC, a Delaware limited liability company. Thomas H.
Lee Equity (Cayman) Fund V, L.P. is an exempted limited partnership formed
under the laws of the Cayman Islands, whose general partner is THL Equity
Advisors V, LLC, a Delaware limited liability company registered in the
Cayman Islands as a foreign company. Thomas H. Lee Advisors, LLC, a
Delaware limited liability company, is the general partner of Thomas H.
Lee Partners, a Delaware limited partnership, which is the sole member of
THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited Partnership
(f/k/a THL-CCI Limited Partnership) is a Massachusetts limited
partnership, whose general partner is THL Investment Management Corp., a
Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust
with US Bank, N.A. serving as Trustee. Thomas H. Lee, a Managing Director
of Thomas H. Lee Advisors, LLC, has voting and investment control over
common shares owned of record by the 1997 Thomas H. Lee Nominee Trust.
Scott A. Schoen is co-President of Thomas H. Lee Advisors, LLC. Todd M.
Abbrecht is a Managing Director of Thomas H. Lee Advisors, LLC. George R.
Taylor is a Vice President of Thomas H. Lee Advisors, LLC. Each of Messrs.
Schoen, Abbrecht and Taylor may be deemed to beneficially own Class A
Common Stock held of record by Thomas H. Lee Equity Fund V, L.P., Thomas
H. Lee Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V.
L.P. Each of these individuals disclaims beneficial ownership of such
units except to the extent of their pecuniary interest therein.
The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel
Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee
Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Scott
A. Schoen, Todd M. Abbrecht and George R. Taylor is 75 State Street,
Boston, MA 02109. Putnam Investments Holdings LLC, Putnam Investments
Employees' Securities Company I, LLC and Putnam Investments Employees'
Securities Company II, LLC are co-investment entities of Thomas H. Lee
Partners and each disclaims beneficial ownership of any securities other
than the securities held directly by such entity. The address for the
Putnam entities is One Post Office Square, Boston, MA 02109.
(2) Includes interest owned by Simmons Holdings, LLC; FPIP, LLC and FPIP
Trust, LLC. The address for Fenway Capital Fund II, L.P. is 152 West 57th
Street, 59th Floor, New York, New York 10019.
(3) The address of Charles R. Eitel, Robert W. Hellyer, William S. Creekmuir,
Stephen G. Fendrich, Kevin Damewood, David A. Jones, William P.
Carmichael, B. Joseph Messner, Albert L. Prillaman, and Robin
Burns-McNeill is c/o Simmons Bedding Company, One Concourse Parkway, Suite
800, Atlanta, Georgia 30328.
(4) Pursuant to a shareholders agreement, Mr. Eitel has the voting power of
the employees and executive officers as to the common stock shown.
93
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to the management agreement entered into in connection with the
Acquisition, THL Managers V, LLC renders certain advisory and consulting
services to the Company and each of its subsidiaries. In consideration of those
services, the Company has agreed to pay to THL Managers V, LLC, an affiliate of
Thomas H. Lee Partners, semi-annually, an aggregate per annum management fee
equal to the greater of:
- $1,500,000; or
- an amount equal to 1.0% of the consolidated earnings before
interest, taxes, depreciation and amortization of Simmons for such
fiscal year, but before deduction of any such fee. We paid
management fees, inclusive of expenses, of $1.7 million in 2004.
The Company also agreed to indemnify THL Managers V, LLC and its
affiliates from and against all losses, claims, damages and liabilities arising
out of or related to the performance by Thomas H. Lee Partners Managers V, LLC
of the services pursuant to the management agreement.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SIMMONS COMPANY
The Amended and Restated Certificate of Incorporation of Simmons Company,
our indirect parent, contains, among other provisions, the following terms:
Description of the Capital Stock of Simmons Company. Simmons Company has
two classes of common stock -- Class A common stock and Class B common stock.
The Class A common stock is held by THL, Fenway Partners, directors and those
members of management who elected to acquire such shares in connection with the
Acquisition. The Class A common stock earns a preferred return of 6% per annum.
Each holder of Class A common stock is entitled to one vote (or a fraction
thereof) for each share (or fraction thereof) of Class A common stock owned by
such holder. Simmons Company is also authorized to issue Class B common stock,
which has identical rights to the Class A common stock, except with respect to
distributions (as described below). The Class B common stock is restricted and
subject to vesting as described in restricted stock agreements with the holders.
Each holder of Class B common stock is entitled to one vote (or a fraction
thereof) for each share (or fraction thereof) of Class B common stock issued to
such holder.
The Class A common stock and Class B common stock will be entitled to
receive distributions in the following priority:
- holders of Class A common stock will be entitled to receive an
amount equal to a 6% cumulative, compounding quarterly, preferred
return on their invested capital;
- holders of Class A common stock will be entitled to receive a return
of their invested capital; and
- holders of the Class A common stock and Class B common stock will be
entitled to share in all remaining distributions on a pro rata basis
based on the aggregate outstanding shares of Class A common stock
and Class B common stock.
94
SECURITYHOLDERS' AGREEMENT
Pursuant to the Securityholders' Agreement entered into in connection with
the Acquisition, securities of Simmons Company are subject to certain
restrictions on transfer, other than certain exempt transfers as defined in the
Securityholders' Agreement, as well as the other provisions described below.
The Securityholders' Agreement provides that all parties to the agreement
will vote all their shares to elect and continue in office the board of
directors of Simmons Company, consisting of up to nine directors composed of:
- five persons designated by THL;
- one person who will be the Chief Executive Officer of Simmons
Company; and
- up to three independent persons designated by the nominating and
governance committee.
The Securityholders' Agreement also provides:
- holders of Class A Common Stock with customary "tag-along" rights
with respect to transfers of shares of Simmons Company beneficially
owned by THL;
- Simmons Company and then THL with a "right of first refusal" with
respect to transfers of shares of Simmons Company held by the
management stockholders and Fenway Partners;
- holders of Class A Common Stock with customary "preemptive rights";
- THL with "drag-along" rights with respect to all shares of Class A
common stock and Class B common stock in a sale of Simmons Company
or its subsidiaries; and
- four Simmons senior managers holding Class A Common Stock with the
right to "put" all or a portion of their shares to Simmons Company
at fair market value if terminated without cause or for good reason.
- Simmons Company the right to purchase all or a portion of a
terminated management stockholder's shares of Simmons Company; and
- employees, other than the four Simmons senior managers, holding
Class A Common Stock right to "put" all or a portion of their shares
to Simmons Company at the lower of fair market value and cost if
terminated without cause.
Upon a public offering, the fair market value of Simmons Company will be
determined by its board of directors. The shares of Class A common stock will be
exchanged for shares of Class B common stock with the number of shares of Class
B common stock to be based upon the value of the Class A common stock at the
time of the offering. To the extent we have cash available and to the extent not
restricted by market conditions related to the offering, the holders of Class A
common stock will be entitled to receive in cash, unless otherwise determined by
the board of directors of Simmons Company, an amount up to their original
investment plus the 6% accrued yield. Any amounts received in cash by the
holders of Class A common stock will reduce the value of the Class A common
stock used to compute the number of shares of Class B common stock to be issued
in such exchange.
EQUITY REGISTRATION RIGHTS AGREEMENT
THL is entitled to request up to four registrations of the Class A common
stock of Simmons Company under the Securities Act at any time after the closing
of the Acquisition. In connection therewith, each signatory of the registration
rights agreement agrees that it will vote, or cause to be voted, all common
stock over which such person has power to vote to effect any stock split deemed
necessary to facilitate the effectiveness of a requested registration. All
holders of vested common stock are entitled to piggyback rights on any
registration by Simmons Company.
95
DEFERRED COMPENSATION PLAN
Certain members of management who were entitled to receive option proceeds
in connection with the Acquisition elected to become participants in a deferred
compensation plan whereby deferred compensation accounts deemed to be invested
in Class A common stock (although no actual Class A common stock will be
purchased) and track distributions to be made to the holders of Class A common
stock. The participants in the deferred compensation plan elected to terminate
the plan on June 3, 2004 and received a distribution of Class A common stock
equivalent to their deemed Class A common stock.
CONSULTING SERVICES
During 2004, Rousch Consulting Group, Inc. provided consulting services to
Simmons Bedding Company for aggregate payments of approximately $156,000,
inclusive of out-of-pocket expenses of approximately $30,000. Rousch
Consulting Group, Inc. is wholly owned by Edward L. Rousch, husband of our
Executive Vice President -- Human Resources and Assistant Secretary, Rhonda C.
Rousch.
During 2004, Edge of the World Creative, LLC provided consulting and
entertainment services to Simmons Bedding Company for aggregate payments of
approximately $55 thousand. The daughter of Mr. Eitel is a member and acting
manager of Edge of the World Creative, LLC and her share of the consulting fee
was approximately $18,000.
TRANSACTIONS WITH MR. EITEL
Mr. Eitel owns a motor yacht, which he made available to Simmons Bedding
Company for 25 days during 2004 as a venue for corporate and other functions. As
compensation for the use of Mr. Eitel's motor yacht, we paid compensation to the
captain of Mr. Eitel's motor yacht in the amount of $80,000, plus benefits of
$12,159. On January 1, 2005, we ceased compensating the captain of Mr. Eitel's
motor yacht, but will continue to use the motor yacht as a venue for corporate
and other functions. Mr. Eitel will be reimbursed solely for any out of pocket
expenses associated with the functions.
EMPLOYMENT OF RELATED PARTIES
A son and a son-in-law of Mr. Eitel were employed by Simmons Bedding
Company during fiscal year 2004, and each of them received compensation that
exceeded $60,000. In each case, their compensation and qualifications were
commensurate with others who hold equivalent positions with Simmons Bedding
Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees were billed to us by our principal accountants,
PricewaterhouseCoopers LLP, for audit services related to the two most recent
fiscal years and for other professional services billed in the most recent two
fiscal years were as follows:
2004 2003
----------- ----------
Audit Fees $ 354,250 $ 215,929
Audit-Related Fees 865,915 327,275
Tax Fees 210,933 450,217
All Other Fees 1,400 1,400
----------- ----------
Total $ 1,432,498 $ 994,821
=========== ==========
Audit-Related Fees consist of assurance and related services that are reasonably
related to the performance of the audit or review of Simmons Company or Simmons
Bedding Company financial statements. This category includes fees related to
debt and equity offerings, due diligence related to mergers and acquisitions,
and accounting consultations about the application of GAAP to proposed
transactions.
Tax Fees consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice, and tax planning.
96
All Other Fees consist of licensing fees paid in connection with the use of
PricewaterhouseCoopers accounting and research software.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
The Audit Committee is responsible for appointing, setting compensation,
and overseeing the work of the independent auditor. The Audit Committee has
established a policy regarding pre-approval of all audit and permissible
non-audit services provided by the independent auditor. The Audit Committee has
approved the pre-authorization of audit and non-audit services up to $50,000.
97
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) The following consolidated financial statements of Simmons Bedding
Company and its subsidiaries are included in Part II, Item 8:
Report of Independent Accountants
Consolidated Statements of Operations for the year ended December
25, 2004, period from December 20, 2003 through December 27, 2003,
period from December 29, 2002 through December 19, 2003 and for the
year ended December 28, 2002
Consolidated Balance Sheets at December 25, 2004 and December 27,
2003
Consolidated Statement of Changes in Stockholder's Equity (Deficit)
for the year ended December 25, 2004, period from December 20, 2003
through December 27, 2003, period from December 29, 2002 through
December 19, 2003 and for the year ended December 28, 2002
Consolidated Statements of Cash Flows for the year ended December
25, 2004, period from December 20, 2003 through December 27, 2003,
period from December 29, 2002 through December 19, 2003 and for the
year ended December 28, 2002
Notes to the consolidated financial statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation Accounts
(a)(3) The exhibits to this report are listed in section (b) of Item 14 below.
(b) Exhibits:
The following exhibits are filed with or incorporated by reference into
this Form 10-K. For the purposes of this exhibit index, references to "the
Registrant" include Simmons Bedding Company, both prior to and following
the transactions that occurred on December 19, 2003. The exhibits which
are denominated by an asterisk (*) were previously filed as a part of, and
are hereby incorporated by reference from either the (i) Registration
Statement on Form S-4 under the Securities Act of 1933 for the Registrant,
File No. 333-76723 (referred to as "1999 S-4"), (ii) Registration
Statement on Form S-4 under the Securities Act of 1933 for the Registrant,
File No. 333-113861 (referred to as "2004 S-4"), (iii) Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 (referred to as
"9/30/00 10-Q"), (iv) Annual Report on Form 10-K for the year ended
December 29, 2001 (referred to as "2001 10-K"), (v) Quarterly Report on
Form 10-Q for the quarter ended March 30, 2002 (referred to as "3/30/02
10-Q"), (vi) Quarterly Report on Form 10-Q for the quarter ended June 29,
2002 (referred to as "6/29/02 10-Q"), (vii) Quarterly Report on Form 10-Q
for the quarter ended September 28, 2002 (referred to as "9/28/02 10-Q"),
(viii) Annual Report on Form 10-K for the year ended December 28, 2002
(referred to as "2002 10-K"), (ix) Annual Report on Form 10-K for the year
ended December 27, 2003 (referred to as "2003 10-K") or (x) Current Report
on Form 8-K filed September 2, 2004 (referred to as "9/02/04 8-K").
Exhibits filed herewith have been denoted by a pound sign (#).
98
EXHIBIT INDEX
Number Description
*2.1 Agreement and Plan of Merger dated as of December 19, 2003, by and
between THL Bedding Company and Simmons Holdings, Inc. (2003 10-K)
*2.2 Agreement and Plan of Merger dated as of December 19, 2003, by and
between Simmons Company and Simmons Holdings, Inc. (2003 10-K)
#3.1 Amended and Restated Certificate of Incorporation of Simmons Bedding
Company.
*3.2 Certificate of Ownership and Merger of Simmons Company with and into
Simmons Holdings, Inc. (2003 10-K)
*3.3 By-laws of Simmons Bedding Company. (2003 10-K)
*4.1 Indenture dated as of December 19, 2003, among Simmons Bedding Company
(f/k/a THL Bedding Company), the Guarantors party thereto and Wells
Fargo Bank Minnesota, National Association, as trustee. (2003 10-K)
*10.1 Labor Agreement between the Company and The United Steel Workers, Local
No. 2401 for all production at the Atlanta, Georgia plant of the
Company excluding office workers, supervisors, foremen, inspectors,
watchmen, plant guards, departmental coordinators, carload checkers or
persons in any way identified with management for the period from
October 16, 2001 to October 15, 2005 (2001 10-K).
*10.2 Labor Agreement between the Company and The United Steel Workers, Local
No. 515U for all employees at the Los Angeles, California plant of the
Company excluding executives, sales employees, office workers, and
supervisors for the period from October 16, 2001 to October 15, 2005
(2001 10-K).
*10.3 Lease Agreement at Concourse between Concourse I, Ltd., as Landlord,
and the Company, as Tenant, dated as of April 20, 2000, as amended
(9/30/00 10-Q).
*10.4 Lease between Beaver Ruin Business Center-Phase V between St. Paul
Properties, Inc., as Landlord, and the Company, as Tenant, dated as of
October 19, 1994, as amended by Addendum to Lease, dated as of
September 1, 1995 (1999 S-4).
*10.5 Loan Agreement, dated as of November 1, 1982, between the City of
Janesville, Wisconsin and the Company, as successor by merger to
Simmons Manufacturing Company, Inc., relating to $9,700,000 City of
Janesville, Wisconsin Industrial Development Revenue Bond, Series A
(1999 S-4).
*10.6 Loan Agreement between the City of Shawnee and the Company relating to
the Indenture of Trust between City of Shawnee, Kansas and State Street
Bank and Trust Company of Missouri, N.A., as Trustee, dated as of
December 1, 1996 relating to $5,000,000 Private Activity Revenue Bonds,
Series 1996 (1999 S-4).
*10.7 Loan Agreement dated as of December 12, 1997 between Simmons Caribbean
Bedding, Inc. and Banco Santander Puerto Rico (1999 S-4).
*10.8 Simmons Retirement Savings Plan adopted February 1, 1987, as amended
and restated January 1, 2002 (3/30/02 10-Q).
*10.8.1 First Amendment to the Simmons Retirement Savings Plan effective for
years beginning after December 31, 2001 (3/30/02 10-Q).
99
*10.9 Retirement Plan for Simmons Company Employees adopted October 31, 1987,
as amended and restated May 1, 1997 (3/30/02 10-Q).
*10.9.1 First Amendment to the Retirement Plan for Simmons Company Employees
effective for years ending after December 31, 2001 (3/30/02 10-Q).
*10.10 Stock Purchase Agreement dated as of November 17, 2003, by and among
Simmons Holdings, Inc., THL Bedding Company and the sellers named
therein. (2003 10-K)
*10.11 ESOP Stock Sale Agreement dated as of November 21, 2003, by and among
Simmons Holdings, Inc., State Street Bank and Trust Company, solely in
its capacity as trustee, of the Simmons Company Employee Stock
Ownership Trust, and THL Bedding Company. (2003 10-K)
*10.12 Amendment to Employee Stock Ownership Plan Trust Agreement dated as of
December 16, 2003, between Simmons Company and State Street Bank and
Trust Company, as trustee under the Trust Agreement. (2003 10-K)
*10.13 Management Agreement dated as of December 19, 2003, by and between
Simmons Company and THL Managers V, LLC. (2003 10-K)
*10.14 Senior Manager Restricted Stock Agreement dated as of December 19,
2003, between THL Bedding Company and Charles R. Eitel. (2003 10-K)
*10.15 Senior Manager Restricted Stock Agreement dated as of December 19,
2003, between THL Bedding Company and Robert W. Hellyer. (2003 10-K)
*10.16 Senior Manager Restricted Stock Agreement dated as of December 19,
2003, between THL Bedding Company and William S. Creekmuir. (2003 10-K)
*10.17 Senior Manager Restricted Stock Agreement dated as of December 19,
2003, between THL Bedding Company and Rhonda C. Rousch. (2003 10-K)
*10.18 Restricted Stock Agreement dated as of December 19, 2003, between THL
Bedding Holding Company and the Persons named therein. (2003 10-K)
*10.19 THL Bedding Holding Company Equity Incentive Plan. (2003 10-K)
*10.20 THL Bedding Holding Company Deferred Compensation Plan. (2003 10-K)
*10.21 Employment Agreement dated as of December 19, 2003, among THL Bedding
Holding Company, Simmons Company and Charles R. Eitel. (2003 10-K)
*10.22 Employment Agreement dated as of December 19, 2003, among THL Bedding
Holding Company, Simmons Company and Robert W. Hellyer. (2003 10-K)
*10.23 Employment Agreement dated as of December 19, 2003, among THL Bedding
Holding Company, Simmons Company and William S. Creekmuir. (2003 10-K)
*10.24 Employment Agreement dated as of December 19, 2003, among THL Bedding
Holding Company, Simmons Company and Rhonda C. Rousch. (2003 10-K)
*10.25 Management Subscription and Stock Purchase Agreement dated as of
December 19, 2003, by and among THL Bedding Holding Company and the
Persons named therein. (2003 10-K)
*10.26 Amended and Restated Credit and Guaranty Agreement, dated as of August
27, 2004, among Simmons Bedding Company, as Company, THL-SC Bedding
Company and certain subsidiaries of the Company, as Guarantors, the
financial institutions listed therein, as Lenders, UBS Securities LLC,
as Joint Lead Arranger and as Co-Syndication Agent, Deutsche Bank AG,
New
100
York Branch, as Administrative Agent and Collateral Agent, General
Electric Capital Corporation, as Co-Documentation Agent, CIT Lending
Services Corporation, as Co-Documentation Agent, and Goldman Sachs
Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger and as
Co-Syndication Agent (9/02/04 8-K)
*10.27 Senior Unsecured Term Loan and Guaranty Agreement, dated December 19,
2003, among THL Bedding Company, as Company, THL-SC Bedding Company and
certain subsidiaries of the Company, as Guarantors, the financial
institutions listed therein, as Lenders, Goldman Sachs Credit Partners
L.P., as Sole Bookrunner, a Joint Lead Arranger and as Co-Syndication
Agent, UBS Securities LLC, as Joint Lead Arranger and as Co-Syndication
Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent.
(2003 10-K)
*10.28 Assumption Agreement, dated December 19, 2003, made by Simmons
Holdings, Inc., Simmons Company and certain subsidiaries of Simmons, as
Guarantors, in favor of Deutsche Bank, AG, New York Branch, as
Administrative Agent for banks and other financial institutions or
entities, the Lenders, parties to the Credit Agreement and Term Loan
Agreement. (2003 10-K)
*10.29 Pledge and Security Agreement dated December 19, 2003, between each of
the grantors party thereto and Deutsche Bank AG, New York Branch, as
the Collateral Agent. (2003 10-K)
*10.30 2002 Stock Option Plan (2002 10-K)
*10.31 Simmons Company Employee Stock Ownership Plan adopted January 31, 1998,
as amended and restated December 29, 2001 (3/30/02 10-Q).
*10.31.1 First Amendment to the Simmons Company Employee Stock Ownership Plan
effective for years ending after December 31, 2001 (3/30/02 10-Q)
#12.1 Computation of ratio of earnings to fixed charges
#21.1 Subsidiaries of Simmons Bedding Company
#31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
#31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
#32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
#32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101
SIMMONS BEDDING COMPANY
SCHEDULE II -- VALUATION ACCOUNTS
VALUATION ACCOUNTS
COL. B COL. E
BALANCE AT BALANCE AT
COL. A BEGINNING OF COL. C COL. D END OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
- ----------------------------------- ------------ --------- ---------- ----------
Fiscal year ended December 25, 2004
Doubtful accounts $ 2,920 $ 2,479 $ 2,911 $ 2,488
Discounts and returns, net 2,040 604 - 2,644
------- ------- ------- -------
$ 4,960 $ 3,083 $ 2,911 $ 5,132
======= ======= ======= =======
For the period from December 20, 2003
to December 27, 2003
Doubtful accounts $ 2,867 $ 1,110 $ 1,057 $ 2,920
Discounts and returns, net 2,040 0 0 2,040
------- ------- ------- -------
$ 4,907 $ 1,110 $ 1,057 $ 4,960
======= ======= ======= =======
_______________________________________________________________________________________
For the period from December 29, 2002
to December 19, 2003
Doubtful accounts $ 3,134 $ 2,730 $ 2,997 $ 2,867
Discounts and returns, net 2,152 - 112 2,040
------- ------- ------- -------
$ 5,286 $ 2,730 $ 3,109 $ 4,907
======= ======= ======= =======
Fiscal year ended December 28, 2002
Doubtful accounts $ 1,879 $ 3,082 $ 1,827 $ 3,134
Discounts and returns, net 2,885 - 733 2,152
------- ------- ------- -------
$ 4,764 $ 3,082 $ 2,560 $ 5,286
======= ======= ======= =======
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIMMONS BEDDING COMPANY
(Registrant)
March 22, 2005 By: /s/ William S. Creekmuir
----------------------------------------
William S. Creekmuir, Executive Vice
President,
Chief Financial Officer,
Assistant Treasurer and Assistant Secretary
(Principal Financial Officer)
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William S. Creekmuir, jointly and
severally, his attorneys-in-fact, each with full power of substitution, for him
in any and all capacities, to sign any and all amendments to this Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact or his substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Charles R. Eitel March 22, 2005
- ------------------------------------------------------
Charles R. Eitel, Chairman of the Board of Directors;
Director; and Chief Executive Officer
(Principal Executive Officer)
/s/ Todd M. Abbrecht March 22, 2005
- ------------------------------------------------------
Todd M. Abbrecht, Director
/s/ Robin Burns-McNeill March 22, 2005
- ------------------------------------------------------
Robin Burns-McNeill, Director
/s/ William P. Carmichael March 22, 2005
- ------------------------------------------------------
William P. Carmichael, Director
/s/ David A. Jones March 22, 2005
- ------------------------------------------------------
David A. Jones, Director
/s/ B. Joseph Messner March 22, 2005
- ------------------------------------------------------
B. Joseph Messner, Director
/s/ Albert L. Prillaman March 22, 2005
- ------------------------------------------------------
Albert L. Prillaman, Director
/s/ Scott A. Schoen March 22, 2005
- ------------------------------------------------------
Scott A. Schoen, Director
/s/ George R. Taylor March 22, 2005
- ------------------------------------------------------
George R. Taylor, Director
/s/ Mark F. Chambless March 22, 2005
- ------------------------------------------------------
Mark F. Chambless, Vice President &
Corporate Controller; (Principal Accounting Officer)
103