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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-76723
---------
SIMMONS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1007444
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 800, Atlanta, Georgia 30328-5369
- -------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
The number of shares of the registrant's common stock outstanding as of
August 6, 2002 was 31,964,452.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
Quarter Ended Six Months Ended
------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 154,527 $ 143,916 $ 331,774 $ 306,311
Cost of products sold 81,799 87,586 175,562 189,427
--------- --------- --------- ---------
Gross margin 72,728 56,330 156,212 116,884
Operating expenses:
Selling, general and administrative expenses 54,707 46,009 117,904 93,345
Non-cash variable stock compensation expense 6,358 1,751 9,485 4,978
ESOP expense - 653 - 1,292
Amortization of intangibles 311 2,107 1,008 4,215
--------- --------- --------- ---------
61,376 50,520 128,397 103,830
--------- --------- --------- ---------
Operating income 11,352 5,810 27,815 13,054
Interest expense, net 6,464 8,194 13,269 16,669
Other expense, net 450 608 784 1,257
--------- --------- --------- ---------
Income (loss) before income taxes 4,438 (2,992) 13,762 (4,872)
Income tax expense (benefit) 1,731 (1,296) 5,367 (2,197)
--------- --------- --------- ---------
Net income (loss) 2,707 (1,696) 8,395 (2,675)
Other comprehensive income (loss):
Foreign currency translation adjustment 7 44 22 (8)
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,714 $ (1,652) $ 8,417 $ (2,682)
========= ========= ========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 29, December 29,
2002 2001*
---- -----
ASSETS
Current assets:
Cash and cash equivalents $ 2,841 $ 1,209
Accounts receivable, less allowances for doubtful
receivables, discounts, returns and allowances
of $6,129 and $4,695 68,695 70,896
Inventories 22,184 24,400
Deferred income taxes 6,507 5,296
Other current assets 15,669 15,415
-------- --------
Total current assets 115,896 117,216
-------- --------
Property, plant and equipment, net 40,518 45,276
Goodwill, net 172,643 172,643
Intangible assets, net 5,767 3,800
Deferred income taxes 28,589 34,706
Other assets 14,199 12,025
-------- --------
$377,612 $385,666
======== ========
*Derived from the Company's 2001 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 29, December 29,
2002 2001*
---- -----
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 582 $ 12,147
Accounts payable 31,102 29,306
Accrued wages and benefits 15,907 13,410
Accrued advertising and incentives 15,460 16,783
Accrued interest 5,111 5,785
Other accrued expenses 10,521 10,787
--------- ---------
Total current liabilities 78,683 88,218
--------- ---------
Non-current liabilities:
Long-term debt 269,101 283,767
Post retirement benefit obligations other than pensions 4,221 4,221
Accrued stock compensation 20,851 12,324
Other 13,704 11,375
--------- ---------
Total liabilities 386,560 399,905
--------- ---------
Commitments and contingencies
Redemption obligation - ESOP 56,389 44,079
Common stockholder's deficit:
Common stock, $.01 par value; 50,000 shares
authorized; 31,964 issued and outstanding 320 320
Accumulated deficit (65,554) (58,513)
Accumulated other comprehensive loss (103) (125)
--------- ---------
Total common stockholder's deficit (65,337) (58,318)
--------- ---------
$ 377,612 $ 385,666
========= =========
*Derived from the Company's 2001 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
--------------------
June 29, June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ 8,395 $ (2,675)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 9,352 12,059
ESOP expense - 1,293
Provision for bad debts 1,434 3,863
Provision for deferred income taxes 4,906 (2,231)
Non-cash interest expense 1,272 1,014
Non-cash variable stock option compensation expense 9,485 4,978
Other, net (115) 280
Net changes in operating assets and liabilities:
Accounts receivable 767 (2,111)
Inventories 2,216 (83)
Other current assets (2,258) (799)
Accounts payable 1,796 (5,860)
Accrued liabilities 446 (5,503)
Other, net (2,074) (3,084)
-------- --------
Net cash provided by operating activities 35,622 1,142
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,794) (2,806)
Proceeds from disposals of property, plant and equipment, net 212 9
Purchase of trademarks (2,963) -
-------- --------
Net cash used in investing activities (4,545) (2,797)
-------- --------
Cash flows from financing activities:
Distribution to Simmons Holdings (3,126) (283)
Proceeds from (payments of) Senior Credit Facility, net (26,140) 1,013
Payments on other long-term debt (188) (198)
Payments of financing costs - (696)
-------- --------
Net cash used in financing activities (29,454) (164)
-------- --------
Net effect of exchange rate changes on cash 9 (8)
-------- --------
Change in cash and cash equivalents 1,632 (1,827)
Cash and cash equivalents, beginning of period 1,209 3,061
-------- --------
Cash and cash equivalents, end of period $ 2,841 $ 1,234
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
Simmons Company and Subsidiaries
Consolidated Statements of Changes in Common Stockholder's Deficit
(in thousands, except share amounts)
Accumulated Total
Additional Other
Common Common Paid-In Accumulated Comprehensive Stockholder's
Shares Stock Capital Deficit (Loss) Income Deficit
------ ----- ------- ------- ------------- -------
Balance at December 30, 2000 31,964,452 $ 320 - $ (36,658) $ (64) $ (36,402)
Net loss - - - (1,132) - (1,132)
Other comprehensive loss:
Change in foreign currency
translation - - - - (61) (61)
---------- ---------- ----------
Comprehensive loss - - - (1,132) (61) (1,193)
Excess of ESOP expense at fair
market value over cost - - 1,743 - - 1,743
Increase in redemption
obligation - ESOP based on
fair market value - - (1,456) (17,726) - (19,182)
Distributions to Holdings - - (287) (2,997) - (3,284)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 29, 2001 31,964,452 320 - (58,513) (125) (58,318)
Net income - - - 8,395 - 8,395
Other comprehensive income:
Change in foreign currency
translation
- - - - 22 22
---------- ---------- ----------
Comprehensive income - - - 8,395 22 8,417
Increase in redemption
obligation - ESOP based on
fair market value - - - (12,310) - (12,310)
Distributions to Holdings - - - (3,126) - (3,126)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 29, 2002
(unaudited) 31,964,452 $ 320 $ - $ (65,554) $ (103) $ (66,337)
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
For purposes of this report the "Company" refers to Simmons Company and
its subsidiaries, collectively. The Condensed Consolidated Financial Statements
of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying unaudited condensed consolidated
financial statements contain all adjustments, which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of June 29, 2002, and its results of operations and cash flows for
the periods presented herein. All adjustments in the periods presented herein
are normal and recurring in nature unless otherwise disclosed. These unaudited
condensed consolidated financial statements should be read together with the
Company's Annual Report on Form 10-K for the year ended December 29, 2001.
Operating results for the period ended June 29, 2002, are not necessarily
indicative of future results that may be expected for the year ending December
28, 2002.
Effective December 30, 2001 (the first day of fiscal 2002), the Company
adopted the provisions of Emerging Issues Task Force ("EITF") Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products ("EITF 01-9"). EITF 01-9 codifies and reconciles the Task
Force consensuses on all or specific aspects of EITF Issues No. 00-14,
Accounting for Certain Sales Incentives ("EITF 00-14"), No. 00-22, Accounting
for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentives
Offers, and Offers for Free Products or Services to be Delivered in the Future
("EITF 00-22"), and No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products ("EITF 00-25"), and
identifies other related interpretive issues. EITF 01-9 requires certain selling
expenses incurred by the Company, not previously reclassified, to be classified
as reductions of sales. The Company adopted the provisions of EITF 00-22 on
December 31, 2000. The Company has historically classified certain costs such as
co-operative advertising, promotional money, and amortization of supply
agreements covered by the provisions of EITF 01-9 as selling expenses which were
recorded in selling, general and administrative expenses. The adoption of the
remaining items included in EITF 01-9 (EITF 00-14 and EITF 00-25) resulted in a
reduction in both net sales and selling, general and administrative expenses of
$10.8 million for the quarter and $15.4 million for the six months ended June
29, 2002 and $16.6 million for the quarter and $33.8 million for the six months
ended June 30, 2001. As reclassifications, these changes did not affect the
Company's financial position or results of operations.
Certain reclassifications of previously reported financial information
were made to conform to the current presentation.
7
2. Inventories
A summary of inventory follows (amounts in thousands):
June 29, December 29,
2002 2001
---- ----
Raw materials $10,556 $13,263
Work in progress 988 1,029
Finished goods 10,640 10,108
------- -------
$22,184 $24,400
======= =======
3. Intangible Assets, Net
A summary of intangible assets, net follows (amounts in thousands):
June 29, 2002 December 29, 2001
----------------- --------------------- ---------------- -----------------
Gross Carrying Accumulated Amount Gross Carrying
Amount Amortization Amortization Accumulated
------ ------------ ------------ -----------
Amortized
intangible assets
Patents $17,471 $(17,057) $17,454 $(16,045)
------- -------- ------- --------
Total $17,471 $(17,057) $17,454 $(16,045)
======= ======== ======= ========
Unamortized intangible
assets
Trademark $ 5,353 $ 2,391
-------- -------
Total $ 5,353 $ 2,391
======== =======
Net income, exclusive of amortization expense (including any related
tax effects) recognized in the second quarter and first six months of 2002 and
2001 related to goodwill, is as follows (amounts in thousands):
For the quarters ended For the six months ended
------------------------------- --------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------- -------------- ---------------- -------------
Reported net income (loss) $ 2,707 $(1,696) $ 8,395 $ (2,675)
Add back: goodwill amortization - 1,409 - 2,818
------- ------- ------- --------
Adjusted net income $ 2,707 $ (287) $ 8,395 $ 143
======= ======= ======= ========
8
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- --------------------------------------------------------------------------------
4. Long-Term Debt
A summary of long-term debt follows (amounts in thousands):
June 29, December 29,
2002 2001
---- ----
Senior Credit Agreement:
Revolving Loan Facility $ 650 $ -
Tranche A Term Loan 22,949 30,061
Tranche B Term Loan 50,243 65,762
Tranche C Term Loan 29,081 33,249
---------- ----------
Total Senior Credit Facility 102,923 129,072
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 4.52%, due 2016 4,400 4,400
Banco Santander Loan, 3.91% 2,436 2,524
10.25% Series Subordinated Notes due 2009 150,000 150,000
Other, including capital lease obligations 224 218
---------- ----------
269,683 295,914
Less current portion (582) (12,147)
---------- ----------
$ 269,101 $ 283,767
========== ==========
The 10.25% Series B Senior Subordinated Notes ("New Notes") bear
interest at the rate of 10.25% per annum and are payable semi-annually in cash
in arrears on March 15 and September 15. The New Notes are subordinated in right
of payment to all existing and future senior indebtedness of the Company.
The New Notes are redeemable at the option of the Company on and after
March 15, 2004 at prices decreasing from 105.125% of the principal amount
thereof to par on March 15, 2007 and thereafter. The Company is required to
redeem the outstanding notes based upon certain events as described in the
indenture for the New Notes.
The indenture for the New Notes requires the Company to comply with
certain restrictive covenants, including a restriction on dividends and
limitations on the incurrence of indebtedness, certain payments and
distributions, and sales of the Company's assets and stock.
The New Notes are fully and unconditionally guaranteed on an unsecured,
senior subordinated basis by all of our active domestic subsidiaries. Exclusive
of the allocation of the debt and related interest of the Company, the total
sales, total assets, cash flow from operations, income before income taxes, and
stockholder's equity of the two active non-guarantor international subsidiaries
combined was $5.6 million, $7.4 million, $0.6 million, $0.4 million, and $6.2
million, respectively, as of and for the six months ended June 29, 2002.
The Senior Credit Facility, as amended, provided for loans of up to
$250.0 million, consisting of a Term Loan Facility of $190.0 million and a
Revolving Loan Facility of $60.0
9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- --------------------------------------------------------------------------------
million. Following the prepayments made in fiscal 1999 from the proceeds of a
private offering of 10.25% Series B Senior Subordinated Notes due 2009, the Term
Loan Facility was reduced to approximately $166.0 million. Our indebtedness
under the Senior Credit Facility bears interest at a floating rate, is
guaranteed by Simmons Holdings, Inc., our parent company ("Simmons Holdings"),
and all of our active domestic subsidiaries, and is collateralized by
substantially all of our assets.
The terms of the Senior Credit Facility required a mandatory prepayment
in March 2002 of $11.6 million of the Company's outstanding term loans based
upon the Company's Consolidated Excess Cash Flows (as defined in the Senior
Credit Facility) for the year ended December 29, 2001. Such prepayment of term
debt was allocated as follows: Term A - $2.7 million; Term B - $5.9 million; and
Term C - $3.0 million. Additionally, in the second quarter of 2002, we
voluntarily prepaid $15.2 million of outstanding term debt allocated as follows:
Term A - $3.1 million; Term B - $10.6 million; and Term C - $1.5 million.
As a result of the improved operating performance of the Company and
declining debt balances in the first quarter of 2002, on May 14, 2002 our
interest rate margin for the Revolver and Tranche A term loans under the Senior
Credit Facility declined 25 basis points. Based upon further operating
performance improvement in the second quarter of 2002 and a further reduction of
debt, effective August 9, 2002 our interest rate margin for Revolver and Tranche
A term loans under the Senior Credit Facility will decline an additional 25
basis points. Following the August 9, 2002 interest rate margin reduction,
borrowings under the Senior Credit Facility will bear interest at our choice of
LIBOR or Prime plus the following applicable interest rate margins as follows:
LIBOR Prime
------------------ -----------------
Revolving Loan Facility 2.00% 1.00%
Tranche A Term Loan 2.00% 1.00%
Tranche B Term Loan 3.25% 2.25%
Tranche C Term Loan 3.50% 2.50%
The weighted average interest rates per annum in effect as of June 29,
2002 for the Revolving Loan Facility, Tranche A term, Tranche B term and Tranche
C term loans were 4.13%, 4.42%, 5.31% and 5.52%, respectively.
To minimize the impact of near term LIBOR base rate increases, on May
29, 2002 the Company elected to set its interest rate at the six-month LIBOR
rate for approximately $59.0 million of its bank term loan debt, which fixed the
LIBOR base rate at 2.125% through November 22, 2002 for approximately 54% of
floating rate debt outstanding as of June 29, 2002.
At June 29, 2002, the amount under the Revolving Credit Facility that
was available to be drawn was $55.3 million, after giving effect to $0.7 million
in borrowings and $4.0 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
10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- --------------------------------------------------------------------------------
letters of credit. The Company also may utilize the remaining availability under
the Revolving Credit Facility to fund acquisitions and capital expenditures.
The Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge, cash interest coverage and 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 June 29, 2002, we
were in compliance with the financial covenants contained in all of our credit
facilities.
5. Contingencies
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.
6. Accounting Pronouncements
The results for the quarter and six months ended June 30, 2002, include
the effect of adopting Statement of Financial Accounting Standards ("SFAS") No.
141 ("SFAS 141"), Business Combinations, and SFAS No. 142 ("SFAS 142"), Goodwill
and Other Intangible Assets, which resulted in a $1.4 million and $2.8 million,
respectively, reduction in amortization of intangibles. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles are
now evaluated against this new criteria. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. These items are not amortized into results of operations, but
instead reviewed for impairment and written down through charges to results of
operations in the periods in which their recorded value of goodwill is more than
their fair value. The provisions of each statement, which also apply to
intangible assets acquired prior to June 30, 2001, were adopted by the Company
on December 30, 2001. Upon adoption of SFAS 142, the Company completed its
impairment testing and did not recognize an impairment charge. For the quarter
and six months ended June 30, 2001, amortization of goodwill and intangibles of
$2.1 million and $4.2 million, respectively, would have been $0.7 million for
the quarter and $1.4 million for the six months had SFAS 142 been adopted
effective with the beginning of fiscal 2001.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), effective for the Company in January 2002.
SFAS 143 addresses financial accounting and reporting of obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
with a corresponding increase in the carrying value of the related asset.
Entities should subsequently
11
- --------------------------------------------------------------------------------
charge the retirement cost to expense using a systematic and rational method
over the related asset's useful life and adjust the fair value of the liability
resulting from the passage of time through charges to interest expense. The
Company does not expect the adoption of SFAS 143 to have a material impact on
the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), superseded SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions as it related to the disposal of a segment of
a business. SFAS 144 clarifies and revises existing guidance on accounting for
impairment of plant, property and equipment, amortizable intangibles and other
long-lived assets not specifically addressed in other accounting literature.
SFAS 144 also broadens the presentation of discontinued operations to include a
component of an entity rather than only a segment of a business. The Company
adopted this statement on December 30, 2001 (the first day of fiscal 2002) on a
prospective basis. Adoption of this pronouncement did not have a significant
impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). This statement rescinds SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, SFAS No. 64, Extinguishment of Debt made
to satisfy Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers. This statement also amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. SFAS 145 is
effective for fiscal years beginning after, transactions entered into after and
financial statements issued on or subsequent to May 15, 2002. The Company
adopted the provisions of this pronouncement for related transactions subsequent
to May 15, 2002. Adoption of this pronouncement did not have a significant
impact on the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or
Disposal Activities ("SFAS 146"). SFAS 146 addresses the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred-compensation contract.
SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring), and requires
liabilities associated with exit and disposal activities to be expensed as
incurred. SFAS 146 is effective for exit or disposal activities of the
Company that are initiated after December 31, 2002.
12
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of net sales
to certain items included in the Condensed Consolidated Statements of
Operations:
Quarter Ended Six Months Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 52.9% 60.9% 52.9% 61.8%
----- ----- ----- -----
Gross margin 47.1% 39.1% 47.1% 38.2%
Selling, general and administrative expenses 35.4% 32.0% 35.5% 30.5%
Non-cash variable stock compensation expense 4.1% 1.2% 2.9% 1.6%
ESOP expense - % 0.4% - % 0.4%
Amortization of intangibles 0.2% 1.5% 0.3% 1.4%
----- ----- ----- -----
Operating income 7.4% 4.0% 8.4% 4.3%
Interest expense, net 4.2% 5.7% 4.0% 5.5%
Other expense, net 0.3% 0.4% 0.3% 0.4%
----- ----- ----- -----
Income (loss) before income taxes 2.9% (2.1)% 4.1% (1.6)%
Income tax expense (benefit) 1.1% (0.9)% 1.6% (0.7)%
----- ----- ----- -----
Net income (loss) 1.8% (1.2)% 2.5% (0.9)%
===== ===== ===== =====
QUARTER ENDED JUNE 29, 2002 AS COMPARED TO QUARTER ENDED JUNE 30, 2001
Net Sales. Net sales for the quarter ended June 29, 2002 increased
$10.6 million, or 9.1%, to $154.5 million from $143.9 million for the second
quarter of 2001. The increase was primarily due to (i) a 12.9%, or $19.1
million, increase in bedding average unit selling price due principally to a
shift in sales mix to higher priced products; (ii) the opening of new
distribution over the last year; and (iii) a reclassification for the quarter
ended June 30, 2001 of $16.6 million of co-operative advertising, promotional
money and amortization of supply agreement expenses from selling, general and
administrative expense to a reduction of revenue resulting from the adoption of
EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products. The comparable sales reduction for the second
quarter of 2002 resulting from the adoption of EITF 01-9 was only $10.8 million
due to the Company's adoption of a more stringent proof of advertising policy
late in 2001. The increase in net sales for the second quarter of 2002 was
offset in part by a decrease in bedding unit sales volume of 8.6% due to (i) the
general economic slowdown; and (ii) the loss of high volume/low margin business
as a result of bankruptcy and subsequent liquidation of several major customers.
The aggregate net sales decline for customers which have filed for bankruptcy
and gone out of business for the quarter ended June 30, 2002 versus the second
quarter of 2001 totaled $3.5 million.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the quarter ended June 29, 2002 decreased 8.0 percentage points to
52.9% from 60.9% in the second quarter
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
2002. The second quarter gross margin improvement to 47.1% in 2002 from 39.1% in
2001 reflects (i) the above mentioned increase in the bedding average unit
selling price; (ii) the above mentioned lower EITF 01-9 related sales reductions
in the second quarter of 2002 versus the second quarter of 2001; (iii) lower
material costs due in part to our "Zero Waste" cost reduction initiative which
began in 2001; and (iv) lower labor costs due to management of factory headcount
and labor hours. The average factory worker headcount for the second quarter of
2002 was 10.7% lower than for the second quarter of 2001. Exclusive of the above
mentioned reclassified expenses resulting from the adoption of EITF 01-9, our
gross margin increased 5.1 percentage points to 50.5% for the quarter ended June
29, 2002 from 45.4% in the second quarter of 2001.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended June
29, 2002 increased 3.4 percentage points to 35.4% from 32.0% in the second
quarter of 2001. The increase from the second quarter of 2001 is principally
attributable to the adoption of EITF 01-9 which resulted in certain costs, such
as co-operative advertising, promotional money, and amortization of supply
agreements that have historically been characterized as selling, general and
administrative expenses, being characterized as a reduction of revenue. As
previously mentioned there was a greater decrease of such costs in the second
quarter of 2001 than in the second quarter of 2002. For the quarters ended June
29, 2002 and June 30, 2001, the total of such costs which were reclassified were
$10.8 million and $16.6 million, respectively. Exclusive of the above mentioned
reclassified expenses, selling, general and administrative expenses, as a
percentage of net sales, for the quarter ended June 29, 2002 increased 0.6
percentage points to 39.6% in 2002 from 39.0% in 2001. This increase is
primarily attributable to the (i) reclassification of certain expenditures
related to our retail operations; (ii) increase in co-operative advertising due
to the shift in sales mix toward products that have higher subsidies; and (iii)
2001 second quarter expenses having been reduced by the recognition of a
non-recurring $1.5 million gain from the partial settlement of the obligation
under our retiree health benefit plan.
Non-cash variable stock compensation. Non-cash variable stock
compensation expense for the quarter ended June 29, 2002 increased $4.6 million
to $6.4 million from $1.8 million for the second quarter of 2001. The increase
is attributable to an increase in the number of vested stock options outstanding
at June 29, 2002 versus June 30, 2001 and a 15.7% increase in the underlying
value of Simmons Holdings' common stock during the second quarter of 2002.
ESOP Expense. In fiscal year 2001, we allocated the remaining ESOP
shares to plan participants. Therefore, beginning with the first quarter of
2002, we no longer incur an expense associated with the ESOP plan.
Amortization of Intangibles. Amortization of goodwill and intangibles
decreased $1.8 million to $0.3 million for the quarter ended June 29, 2002 from
$2.1 million in the second quarter of 2001 due principally to the adoption of
SFAS 142 at the beginning of our 2002 fiscal year. As a result of the adoption
of SFAS 142, we discontinued the amortization of goodwill and performed a
transitional test of goodwill for impairment, which resulted in no impairment
charge. Had this pronouncement been adopted at the beginning of 2001,
amortization of goodwill and intangibles would have been $0.7 million in the
second quarter of 2001.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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Interest Expense, Net. Interest expense, net, decreased $1.7 million,
or 21.1%, to approximately $6.5 million for the quarter ended June 29, 2002 from
$8.2 million in the second quarter of 2001 due to lower Prime and LIBOR base
rates, lower interest rate margins under our Senior Credit Facility borrowings,
and decreased average outstanding borrowings.
Other Expense, Net. Other expense, net, decreased $0.1 million to $0.5
million for the quarter ended June 29, 2002 compared to $0.6 million in the
second quarter of 2001.
Income Tax Benefit. Our effective tax rates of 39.0% and 43.3% for the
quarters ended June 29, 2002 and June 30, 2001, respectively, differ from the
federal statutory rate primarily because of state taxes and in 2001 non
tax-deductible amortization of goodwill.
Net Income. For the reasons set forth above, we had net income of $2.7
million for the quarter ended June 29, 2002 compared to a net loss of $1.7
million in second quarter of 2001.
EBITDA. For the reasons set forth above, we had an EBITDA of $15.8
million, or 10.2% of net sales, for the quarter ended June 29, 2002 compared to
$13.4 million, or 9.3% of net sales, for the second quarter of 2001. Our
Adjusted EBITDA, as defined by our Senior Credit Facility, increased 45.7% to
$22.2 million from $15.3 million in 2001 as set forth below:
Quarter Ended
--------------------
June 29, June 30,
2002 2001
------- -------
EBITDA $15,837 $13,399
Non-cash variable stock compensation 6,358 1,751
Interest income 47 118
------- -------
Adjusted EBITDA(a) $22,242 $15,268
======= =======
As a percentage of net sales, our Adjusted EBITDA improved 3.8
percentage points to 14.4% in 2002 from 10.6% in 2001.
(a) EBITDA represents earnings before interest expense, income tax
expense, extraordinary item, depreciation and amortization, ESOP expense,
management fees and other non-operating charges. Adjusted EBITDA, as defined by
our Senior Credit Facility, also permits the "add back" of interest income and
certain non-cash charges, such as non-cash variable stock compensation.
Management believes that EBITDA is a widely accepted financial indicator of a
company's ability to service or incur debt and a similar measure is utilized for
purposes of the covenants contained in the Senior Credit Facility and the
Indenture. EBITDA and Adjusted EBITDA are not measurements of operating
performance calculated in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") and should not be
considered substitutes for operating income, net income, cash flows from
operating activities, or other statements of operations or cash flow data
prepared in accordance with US GAAP, or as measures of profitability or
liquidity. EBITDA and Adjusted EBITDA may not be indicative of our historical
operating results, nor are they meant to be predictive of potential future
results. In addition, EBITDA and Adjusted EBITDA as defined here are not
presentations accepted by the Commission. Accordingly, any presentation of
EBITDA or Adjusted EBITDA or any information concerning EBITDA or Adjusted
EBITDA which may be included in a future filing with the Commission may be
substantially different than the presentation included herein. Our calculation
of EBITDA and Adjusted EBITDA may not be comparable to those recorded by other
companies.
SIX MONTHS ENDED JUNE 29, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Sales. Net sales for the six months ended June 29, 2002 increased
$25.5 million, or 8.3%, to $331.8 million from $306.3 million for the first six
months of 2001. The increase was primarily due to (i) a 13.7%, or $41.8 million,
increase in bedding average unit selling price due principally to a shift in
sales mix to higher priced products; (ii) the opening of new distribution over
the last year; and (iii) a reclassification for the six months ended June 30,
2001 of $33.8 million of co-operative advertising, promotional money and
amortization of supply agreement expenses from selling, general and
administrative expense to a reduction of revenue resulting from the adoption of
EITF 01-9. The comparable sales reduction for the six months of 2002 resulting
from the adoption of EITF 01-9 was only $15.4 million due to the Company's
adoption of a more stringent proof of advertising policy late in 2001. The
increase in net sales for the first six months of 2002 was offset in part by a
decrease in bedding unit sales volume of 11.8% due to (i) the general economic
slowdown; and (ii) the loss of high volume/low margin business as a
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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result of bankruptcy and subsequent liquidation of several major customers. The
aggregate net sales decline for customers which have filed for bankruptcy and
gone out of business for the six months ended June 30, 2002 versus the first six
months of 2001 totaled $14.4 million.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the six months ended June 29, 2002 decreased 8.9 percentage points to
52.9% from 61.8% in the first six months of 2002. The six months gross margin
improvement to 47.1% in 2002 from 38.2% in 2001 reflects (i) the above mentioned
increase in the bedding average unit selling price; (ii) the above mentioned
lower EITF 01-9 related sales reductions in the first six months of 2002 versus
the first six months of 2001; (iii) lower material costs due in part to our
"Zero Waste" cost reduction initiative which began in 2001; and (iv) lower labor
costs due to management of factory headcount and labor hours. The average
factory worker headcount for the first six months of 2002 was 12.6% lower than
first six months of 2001. Exclusive of the above mentioned reclassified expenses
resulting from the adoption of EITF 01-9, our gross margin increased 5.1
percentage points to 49.4% for the six months ended June 29, 2002 from 44.3% for
the first six months of 2001.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the six months ended
June 29, 2002 increased 5.0 percentage points to 35.5% from 30.5% in the first
six months of 2001. The increase from the first six months of 2001 is
principally attributable to the adoption of EITF 01-9 which resulted in certain
costs, such as co-operative advertising, promotional money, and amortization of
supply agreements that have historically been characterized as selling, general
and administrative expenses, being characterized as a reduction of revenue. As
previously mentioned, there was a greater decrease of such costs in the first
six months of 2001 than in the first six months of 2002. For the six months
ended June 29, 2002 and June 30, 2001, the total of such costs which were
reclassified were $15.4 million and $33.8 million, respectively. Exclusive of
the above mentioned reclassified expenses, selling, general and administrative
expenses, as a percentage of net sales, for the six months ended June 29, 2002
increased 1.0 percentage point to 38.4% in 2002 from 37.4% in 2001. This
increase is primarily attributable to the (i) reclassification of certain
expenditures related to our retail operations; (ii) increase in co-operative
advertising due to the shift in sales mix toward products that have higher
subsidies; and (iii) 2001 second quarter expenses having been reduced by the
recognition of a non-recurring $1.5 million gain from the partial settlement of
the obligation under our retiree health benefit plan.
Non-cash variable stock compensation. Non-cash variable stock
compensation expense for the six months ended June 29, 2002 increased $4.5
million to $9.5 million from $5.0 million for the first six months of 2001. The
increase is attributable to an increase in the number of vested stock options
outstanding at June 29, 2002 versus June 30, 2001 and a 27.9% increase in the
underlying value of Simmons Holdings' common stock during the first six months
of 2002.
ESOP Expense. In fiscal year 2001, we allocated the remaining ESOP
shares to plan participants. Therefore, beginning with the first quarter of
2002, we no longer incur an expense associated with the ESOP plan.
Amortization of Intangibles. Amortization of goodwill and intangibles
decreased $3.2 million to $1.0 million for the six months ended June 29, 2002
from $4.2 million in the first six
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
months of 2001 due principally to the adoption of SFAS 142 at the beginning of
our 2002 fiscal year. As a result of the adoption of SFAS 142, we discontinued
the amortization of goodwill and performed a transitional test of goodwill for
impairment, which resulted in no impairment charge. Had this pronouncement been
adopted at the beginning of 2001, amortization of goodwill and intangibles would
have been $1.4 million for the first six months of 2001.
Interest Expense, Net. Interest expense, net, decreased $3.4 million,
or 20.4%, to approximately $13.3 million for the six months ended June 29, 2002
from $16.7 million in the first six months of 2001 due to lower Prime and LIBOR
base rates, lowered interest rate margins under our Senior Credit Facility
borrowings, and decreased average outstanding borrowings.
Other Expense, Net. Other expense, net, decreased $0.5 million to $0.8
million for the six months ended June 29, 2002 compared to $1.3 million in the
first six months of 2001.
Income Tax Benefit. Our effective tax rates of 39.0% and 45.1% for the
six months ended June 29, 2002 and June 30, 2001 differ from the federal
statutory rate primarily because of state taxes and in 2001 non tax-deductible
amortization of goodwill.
Net Income. For the reasons set forth above, we had net income of $8.4
million for the six months ended June 29, 2002 compared to a net loss of $2.7
million in first six months of 2001.
EBITDA. For the reasons set forth above, we had an EBITDA of $37.2
million, or 10.7% of net sales, for the six months ended June 29, 2002 compared
to $27.0 million, or 7.9% of net sales, for the first six months of 2001. Our
Adjusted EBITDA, as defined by our Senior Credit Facility, increased 45.3% to
$46.7 million from $32.2 million in 2001 as set forth below:
Six Months Ended
------------------------
June 29, June 30,
2002 2001
---- ----
EBITDA $37,167 $26,961
Non-cash variable stock compensation 9,485 4,978
Interest income 86 234
------- -------
Adjusted EBITDA(a) $46,738 $32,173
======= =======
As a percentage of net sales, our Adjusted EBITDA improved 3.6
percentage points to 14.1% in 2002 from 10.5% in 2001.
(a) EBITDA represents earnings before interest expense, income tax
expense, extraordinary item, depreciation and amortization, ESOP expense,
management fees and other non-operating charges. Adjusted EBITDA, as defined by
our Senior Credit Facility, also permits the "add back" of interest income and
certain non-cash charges, such as non-cash variable stock compensation.
Management believes that EBITDA is a widely accepted financial indicator of a
company's ability to service or incur debt and a similar measure is utilized for
purposes of the covenants contained in the Senior Credit Facility and the
Indenture. EBITDA and Adjusted EBITDA are not measurements of operating
performance calculated in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") and should not be
considered substitutes for operating income, net income, cash flows from
operating activities, or other statements of operations or cash flow data
prepared in accordance with US GAAP, or as measures of profitability or
liquidity. EBITDA and Adjusted EBITDA may not be indicative of our historical
operating results, nor are they meant to be predictive of potential future
results. In addition, EBITDA and Adjusted EBITDA as defined here are not
presentations accepted by the Commission. Accordingly, any presentation of
EBITDA or Adjusted EBITDA or any information concerning EBITDA or Adjusted
EBITDA which may be included in a future filing with the Commission may be
substantially different than the presentation included herein. Our calculation
of EBITDA and Adjusted EBITDA may not be comparable to those recorded by other
companies.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash to fund liquidity needs are (i) net cash provided
by operating activities and (ii) borrowings available under our Senior Credit
Facility. Our primary use of funds consists of payments of principal and
interest for our debt, capital expenditures and funding for working capital
increases. In the first six months of 2002, our total debt declined by $26.2
million, compared to a total debt increase of $0.8 million in the first six
months of 2001.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Our operating activities provided cash of $35.6 million in the first six months
of 2002 compared to $1.1 million provided in the first six months of 2001. The
following items principally account for this increase: (i) net income of $8.4
million for the first six months of 2002 versus a $2.7 million net loss in the
first six months of 2001; (ii) non-cash variable stock compensation expense
increase of $4.5 million for the first six months of 2002 versus the comparable
period of 2001; (iii) an aggregate operating assets decrease and liabilities
increase of $0.5 million for the first six months of 2002 versus an operating
assets increase and liabilities decrease of $18.0 million for the first six
months of 2001; and (iv) deferred income tax expense of $5.4 million for the
first six months of 2002 versus a $2.2 million deferred income tax benefit for
the first six months of 2001. Due to the utilization of net operating loss
carryforwards, we do not expect to make significant cash payments for federal
or state income taxes in 2002.
Our capital expenditures totaled $1.8 million for the six months ended June 29,
2002. We expect to spend an aggregate of approximately $10.0 million for capital
expenditures in fiscal year 2002. We believe that annual capital expenditure
limitations in our Senior Credit Facility will not significantly inhibit us from
meeting our ongoing capital expenditure needs.
During the first quarter of 2002, we reacquired rights to certain trademarks
from a licensee for $3.0 million, including transaction fees.
The terms of the Senior Credit Facility required a mandatory prepayment in March
2002 of $11.6 million of the Company's outstanding term loans based upon the
Company's Consolidated Excess Cash Flows (as defined in the Senior Credit
Facility) for the year ended December 29, 2001. Such prepayment of term debt was
allocated as follows: Term A - $2.7 million; Term B - $5.9 million; and Term C -
$3.0 million. Additionally, in the second quarter of 2002, we voluntarily
prepaid $15.2 million of outstanding term debt allocated as follows: Term A -
$3.1 million; Term B - $10.6 million; and Term C - $1.5 million.
As of June 29, 2002, we had borrowings of $0.7 million and availability to
borrow $55.4 million under our Revolving Credit Facility. We were in compliance
with the financial covenants contained in all of our credit facilities as of
June 29, 2002.
SEASONALITY/OTHER
Our sales volume is somewhat seasonal, with sales generally lower during the
first quarter of each year than in the remaining three quarters of the year.
Historically, our working capital borrowings have increased during the first
half of each year and have decreased in the second half of each year. We also
usually experience a seasonal fluctuation in profitability, with our gross
profit percentage during the first quarter of each year usually slightly lower
than those obtained in the remaining part of the year. We believe that
seasonality of profitability is a factor that generally affects the conventional
bedding industry, and that it is primarily due to retailers' emphasis in the
first quarter on price reductions and promotional bedding and manufacturers'
emphasis on close-outs of the prior year's product lines. These two factors
together usually result in lower profit margins and can negatively impact sales
as retailers reduce orders in anticipation of the new product line. However,
since we did not close out our Beautyrest(R) 2000 line at the beginning of 2001,
we consequently did not experience a lower profit margin in the first quarter of
2001. We believe the
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
close-out of the Beautyrest(R) 2000 product line in the fourth quarter of 2001
and the introduction of the Beautyrest(R) 2002 had a negative effect on fourth
quarter 2001 sales and a positive effect on first quarter 2002 sales.
ACCOUNTING PRONOUNCEMENTS
The results for the quarter and six months ended June 30, 2002, include the
effect of adopting Statement of Financial Accounting Standards ("SFAS") No. 141
("SFAS 141"), Business Combinations, and SFAS No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets, which resulted in a $1.4 million and $2.8 million,
respectively, reduction in amortization of intangibles. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles are
now evaluated against this new criteria. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. These items are not amortized into results of operations, but
instead reviewed for impairment and written down through charges to results of
operations in the periods in which their recorded value of goodwill is more than
their fair value. The provisions of each statement, which also apply to
intangible assets acquired prior to June 30, 2001, were adopted by the Company
on December 30, 2001. Upon adoption of SFAS 142, the Company completed its
impairment testing and did not recognize an impairment charge. For the quarter
and six months ended June 30, 2001, amortization of goodwill and intangibles of
$2.1 million and $4.2 million, respectively, would have been $0.7 million for
the quarter and $1.4 million for the six months had SFAS 142 been adopted
effective with the beginning of fiscal 2001.
Effective December 30, 2001 (the first day of fiscal 2002), the Company adopted
the provisions of Emerging Issues Task Force ("EITF") Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products ("EITF 01-9"). EITF 01-9 codifies and reconciles the Task Force
consensuses on all or specific aspects of EITF Issues No. 00-14, Accounting for
Certain Sales Incentives ("EITF 00-14"), No. 00-22, Accounting for 'Points' and
Certain Other Time-Based or Volume-Based Sales Incentives Offers, and Offers for
Free Products or Services to be Delivered in the Future ("EITF 00-22"), and No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products ("EITF 00-25"), and identifies other related
interpretive issues. EITF 01-9 requires certain selling expenses incurred by the
Company, not previously reclassified, to be classified as reductions of sales.
The Company adopted the provisions of EITF 00-22 on December 31, 2000. The
Company has historically classified certain costs such as co-operative
advertising, promotional money, and amortization of supply agreements covered by
the provisions of EITF 01-9 as selling expenses which were recorded in selling,
general and administrative expenses. The adoption of the remaining items
included in EITF 01-9 (EITF 00-14 and EITF 00-25) resulted in a reduction in
both net sales and selling, general and administrative expenses of $10.8 million
for the quarter and $15.4 million for the six months ended June 29, 2002 and
$16.6 million for the quarter and $33.8 million for the six months ended June
30, 2001. As reclassifications, these changes did not affect the Company's
financial position or results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"), effective for
the Company in January 2002. SFAS 143 addresses financial accounting and
reporting of obligations associated
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
with a corresponding increase in the carrying value of the related asset.
Entities should subsequently charge the retirement cost to expense using a
systematic and rational method over the related asset's useful life and adjust
the fair value of the liability resulting from the passage of time through
charges to interest expense. The Company does not expect the adoption of SFAS
143 to have a material impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), superseded SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions as it related to the disposal of a segment of a business. SFAS 144
clarifies and revises existing guidance on accounting for impairment of plant,
property and equipment, amortizable intangibles and other long-lived assets not
specifically addressed in other accounting literature. SFAS 144 also broadens
the presentation of discontinued operations to include a component of an entity
rather than only a segment of a business. The Company adopted this statement on
December 30, 2001 (the first day of fiscal 2002) on a prospective basis.
Adoption of this pronouncement did not have a significant impact on the
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, SFAS No. 64, Extinguishment of Debt made to satisfy
Sinking-Fund Requirements, and SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement also amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the accounting for sale-leaseback
transactions and the accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. SFAS 145 is
effective for fiscal years beginning after, transactions entered into after and
financial statements issued on or subsequent to May 15, 2002. The Company
adopted the provisions of this pronouncement for related transactions subsequent
to May 15, 2002. Adoption of this pronouncement did not have a significant
impact on the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities ("SFAS 146"). SFAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and requires liabilities associated
with exit and disposal activities to be expensed as incurred. SFAS 146 will be
effective for exit or disposal activities of the Company that are initiated
after December 31, 2002.
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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FORWARD LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995. When used in this Quarterly Report on Form 10-Q, the words "believes,"
"anticipates," "expects," "intends," "projects" and similar expressions are used
to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future financial and operating results, including expected benefits from our
Better Sleep Through Science(R) philosophy. Any forward-looking statements
contained in this report represent 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, anticipated
sales growth, success of new products, increased market share, reduction of
manufacturing costs, generation of free cash flow and reduction of debt, changes
in consumer confidence or demand, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission, including the Form 10-K for 2001 and the Form 10-Qs for the first,
second, and third quarters of 2001 and the first quarter of 2002. The Company
undertakes no obligation to update or revise any forward-looking statements,
either to reflect new developments, or for any other reason.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information relative to our market risk sensitive instruments by major
category at December 29, 2001 is presented under Item 7A of our Annual Report on
Form 10-K for the fiscal year ended December 29, 2001. Except as set forth
below, there have been no material changes to this information as of June 29,
2002.
Since our obligations under the Senior Credit Facility bear interest at
floating rates, we are sensitive to changes in prevailing interest rates. During
the quarter ended March 30, 2002, the interest rate swap and collars used to
manage our long-term debt interest rate exposure expired, resulting in a $0.1
million mark-to-market gain on expiration. To minimize the impact of near term
LIBOR base rate increases, on May 29, 2002 the Company elected to set its
interest rate at the six-month LIBOR rate for approximately $59.0 million of its
bank term loan debt, which fixed the LIBOR base rate at 2.125% through November
22, 2002 for approximately 54% of floating rate debt outstanding as of June 29,
2002.
22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.38 Labor Agreement between the Company and The United
Furniture Workers of America, Local No. 262 for all
employees at the San Leandro, California plant of the
Company excluding executives, sales employees, office
workers, supervisors, foremen, timekeepers, watchmen,
Teamsters or persons in any way identified with
management for the period from April 1, 2002 to April
1, 2004.
99.1 Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On May 10, 2002, the Company filed with the Commission a Form
8-K which reported under Item 9 the Press Release dated May 9,
2002 announcing the results of operations for the first
quarter of 2002.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, Simmons Company has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SIMMONS COMPANY
By: /s/ William S. Creekmuir
------------------------------------------------------------------
William S. Creekmuir
Executive Vice President & Chief Financial Officer
Date: August 6, 2002
24