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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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
November 5, 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 Nine Months Ended
------------- -----------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 182,515 $ 160,927 $ 514,289 $ 467,238
Cost of products sold 96,517 95,192 272,079 284,620
--------- --------- --------- ---------
Gross profit 85,998 65,735 242,210 182,618
Operating expenses:
Selling, general and administrative expenses 61,255 44,037 179,159 137,379
Non-cash variable stock compensation expense 2,076 543 11,561 5,521
ESOP expense -- 647 -- 1,940
Amortization of intangibles 5 2,106 1,013 6,322
--------- --------- --------- ---------
63,336 47,333 191,733 151,162
--------- --------- --------- ---------
Operating income 22,662 18,402 50,477 31,456
Interest expense, net 6,293 7,722 19,562 24,398
Other expense, net 493 1,550 1,277 2,799
--------- --------- --------- ---------
Income before income taxes 15,876 9,130 29,638 4,259
Income tax expense 6,238 3,987 11,605 1,790
--------- --------- --------- ---------
Net income 9,638 5,143 18,033 2,469
Other comprehensive income (loss):
Foreign currency translation adjustment (50) (44) (28) (52)
--------- --------- --------- ---------
Comprehensive income $ 9,588 $ 5,099 $ 18,005 $ 2,417
========= ========= ========= =========
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)
September 28, December 29,
2002 2001*
---- -----
ASSETS
Current assets:
Cash and cash equivalents $ 1,680 $ 1,209
Accounts receivable, less allowances for doubtful
receivables, discounts, and returns of $6,357 and
$4,695 81,325 70,896
Inventories 19,894 24,400
Deferred income taxes 7,516 5,296
Other current assets 18,682 15,415
-------- --------
Total current assets 129,097 117,216
-------- --------
Property, plant and equipment, net 39,207 45,276
Goodwill, net 172,643 172,643
Intangible assets, net 5,761 3,800
Deferred income taxes 21,920 34,706
Other assets 13,527 12,025
-------- --------
$382,155 $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)
September 28, December 29,
2002 2001*
---- -----
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 543 $ 12,147
Accounts payable 35,672 29,306
Accrued wages and benefits 19,077 13,410
Accrued advertising and incentives 20,881 16,783
Accrued interest 1,684 5,785
Other accrued expenses 9,432 10,787
--------- ---------
Total current liabilities 87,289 88,218
--------- ---------
Non-current liabilities:
Long-term debt 253,625 283,767
Post retirement benefit obligations other than pensions 4,239 4,221
Accrued stock compensation 22,480 12,324
Other 14,038 11,375
--------- ---------
Total liabilities 381,671 399,905
--------- ---------
Commitments and contingencies
Redemption obligation - ESOP 57,403 44,079
Common stockholder's deficit:
Common stock, $.01 par value; 50,000 shares
authorized; 31,964 issued and outstanding 320 320
Accumulated deficit (57,086) (58,513)
Accumulated other comprehensive loss (153) (125)
--------- ---------
Total common stockholder's deficit (56,919) (58,318)
--------- ---------
$ 382,155 $ 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)
Nine Months Ended
----------------------------
September 28, September 29,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 18,033 $ 2,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,711 17,566
ESOP expense -- 1,940
Provision for accounts receivable 1,662 5,078
Provision for deferred income taxes 10,566 1,444
Non-cash interest expense 1,982 1,528
Non-cash variable stock option compensation expense 11,561 5,521
Other, net (115) 1,125
Net changes in operating assets and liabilities:
Accounts receivable (12,091) (2,285)
Inventories 4,506 1,336
Other current assets (6,441) (2,948)
Accounts payable 6,366 (5,003)
Accrued liabilities 4,521 (6,485)
Other, net (2,207) (993)
-------- --------
Net cash provided by operating activities 52,054 20,293
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (3,623) (4,003)
Proceeds from disposals of property, plant and equipment, net 168 187
Purchase of trademarks (2,963) --
-------- --------
Net cash used in investing activities (6,418) (3,816)
-------- --------
Cash flows from financing activities:
Distributions to Simmons Holdings (3,282) (3,145)
Payments of Senior Credit Facility, net (41,571) (10,781)
Payments on other long-term debt (272) (272)
Payments of financing costs -- (706)
-------- --------
Net cash used in financing activities (45,125) (14,904)
-------- --------
Net effect of exchange rate changes on cash (40) (52)
-------- --------
Change in cash and cash equivalents 471 1,521
Cash and cash equivalents, beginning of period 1,209 3,061
-------- --------
Cash and cash equivalents, end of period $ 1,680 $ 4,582
======== ========
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)
(Unaudited)
Accumulated
Additional Other Total
Common Common Paid-In Accumulated Comprehensive Stockholder's
Shares Stock Capital Deficit (Loss) Income Deficit
---------- ---------- ---------- ---------- ---------- ----------
Balances 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)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 29, 2001* 31,964,452 320 -- (58,513) (125) (58,318)
Net income -- -- -- 18,033 -- 18,033
Other comprehensive loss:
Change in foreign currency
translation -- -- -- -- (28) (28)
---------- ---------- ----------
Comprehensive income -- -- -- 18,033 (153) 18,005
Increase in redemption
obligation - ESOP based on
fair market value -- -- -- (13,324) -- (13,324)
Distributions to Holdings -- -- -- (3,282) -- (3,282)
---------- ---------- ---------- ---------- ---------- ----------
Balances at September 28, 2002 31,964,452 $ 320 $ -- $ (57,086) $ (153) $ (56,919)
========== ========== ========== ========== ========== ==========
*Derived from the Company's 2000 and 2001 audited Consolidated Financial
Statements.
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 - Continued
(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 September 28, 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 periods ended September 28, 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. Certain costs, such as co-operative advertising, promotional
money, and amortization of supply agreements, were historically recorded in
selling, general and administrative expenses but are now classified as a
reduction of net sales under the provisions of EITF 01-9. The adoption of EITF
01-9 resulted in a reduction in both net sales and selling, general and
administrative expenses of $11.0 million and $26.4 million for the quarter and
nine months ended September 28, 2002 and $16.7 million and $50.5 million for the
quarter and nine months ended September 29, 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
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
2. Inventories
A summary of inventory follows (amounts in thousands):
September 28, December 29,
2002 2001
---- ----
Raw materials $ 9,138 $13,263
Work in progress 845 1,029
Finished goods 9,911 10,108
------- -------
$19,894 $24,400
======= =======
3. Intangible Assets, Net
A summary of intangible assets, net follows (amounts in thousands):
September 28, 2002 December 29, 2001
----------------- --------------------- ---------------- -----------------
Gross
Gross Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------- ------------
Amortized
intangible assets
Patents $17,441 $(17,033) $17,454 $(16,045)
------ ------- ------ -------
Total $17,441 $(17,033) $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 third quarter and first nine months of 2002 and
2001 related to goodwill, is as follows (amounts in thousands):
For the quarters ended For the nine months ended
------------------------------------------- -----------------------------------------
September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001
-------------------- ------------------- ------------------ -------------------
Reported net income $9,638 $5,143 $18,033 $2,469
Add back: goodwill
amortization -- 1,409 -- 4,228
------ ------ ------- ------
Adjusted net income $9,638 $6,552 $18,033 $6,697
===== ===== ====== =====
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):
September 28, December 29,
2002 2001
---- ----
Senior Credit Agreement:
Revolving Loan Facility $ 1,650 $ --
Tranche A Term Loan 19,300 30,061
Tranche B Term Loan 47,568 65,762
Tranche C Term Loan 19,006 33,249
--------- ---------
Total Senior Credit Facility 87,524 129,072
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% 2,364 2,524
10.25% Series B Senior Subordinated Notes,
due 2009 150,000 150,000
Other, including capital lease obligations 180 218
--------- ---------
254,168 295,914
Less current portion (543) (12,147)
--------- ---------
$ 253,625 $ 283,767
========= =========
The 10.25% Series B Senior Subordinated Notes due 2009 ("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 three active non-guarantor international
subsidiaries combined was $8.4 million, $7.3 million, $28 thousand, $0.5
million, and $6.3 million, respectively, as of and for the nine months ended
September 28, 2002.
9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
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 (the "Revolver") of $60.0 million. Following the
prepayments made in fiscal 1999 from the proceeds of a private offering of the
New Notes, 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 ("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 first nine months of 2002, we
voluntarily prepaid $31.6 million of outstanding term debt allocated as follows:
Term A - $6.7 million; Term B - $13.3 million; and Term C - $11.6 million.
As a result of the improved operating performance of the Company and
declining debt balances in the first six months of 2002, on August 9, 2002 our
interest rate margin for the Revolver and Tranche A term loans under the Senior
Credit Facility declined 25 basis points. Borrowings under the Senior Credit
Facility 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 September
28, 2002 for the Revolver, Tranche A term, Tranche B term and Tranche C term
loans were 5.75%, 4.24%, 5.36% and 5.64%, 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 64% of
floating rate debt outstanding as of September 28, 2002.
At September 28, 2002, the amount under the Revolver that was available
to be drawn was $54.6 million, after giving effect to $1.7 million in borrowings
and $3.7 million that was reserved for the Company's reimbursement obligations
with respect to outstanding letters of credit. The remaining availability under
the Revolver 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 Revolver to fund
acquisitions and capital expenditures.
10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
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 September 28,
2002, we were in compliance with the financial covenants contained in all of our
credit facilities.
Effective October 21, 2002, the Company amended its Senior Credit
Facility:
- to permit the Company to repurchase (in the open market) up to
$20 million of outstanding New Notes;
- to permit the Company to repurchase Holdings' Junior
Subordinated PIK Notes as permitted by the indenture for the
New Notes;
- to modify the definition of Consolidated Excess Free Cash Flow
and deduct $9.3 million from the fiscal year 2002 excess free
cash flow mandatory payment;
- to permit restricted payments (as defined in the Senior Credit
Facility) of $6 million to deceased, terminated or retired
management shareholders in fiscal year 2002;
- to allow for a $7.5 million investment in an international
captive insurance company;
- to eliminate the requirement that the Company must fix the
interest rate on at least 50% of the principal amount of
outstanding term loans;
- to increase the annual asset sale basket from $3 million to
$10 million;
- to adjust the definition of Management Fees and increase the
overall cap to $3 million from $2.25 million;
- to provide an option for a 12 month LIBOR interest rate period
in the Revolver and the Tranche A term loan; and
- to provide for more restrictive financial covenants.
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. Related Party Transactions
For the quarter and nine months ended September 28, 2002, we had sales
of approximately $3.3 million and $7.7 million, respectively, of finished
mattress products pursuant to our supply agreement with SC Holdings, Inc., an
entity controlled by affiliates of Fenway Partners, Inc. ("Fenway"). For the
quarter and nine months ended September 29, 2001, we had sales of approximately
$2.9 million and $10.3 million, respectively, to SC Holdings, Inc. Two directors
11
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
of the Company are directors of such entity. We believe that the terms on which
mattresses are supplied to this related party are not materially less favorable
than those that might reasonably be obtained in a comparable transaction at such
time at an arm's length basis from a person that is not an affiliate or related
party.
The Company, Holdings and Fenway have entered into a management
agreement (the "Fenway Advisory Agreement") pursuant to which Fenway provides
strategic advisory services to the Company. In exchange for such services, the
Company has 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. Included in other expense in
the accompanying Consolidated Statements of Operations is $0.5 million and $1.4
million for the quarter and nine months ended September 28, 2002 and $0.7
million and $1.7 million for the quarter and nine months ended September 29,
2001 related to the Fenway Advisory Agreement.
The Company entered into an agreement with Holdings pursuant to which
the Company agreed to reimburse Holdings for certain expenses incident to
Holdings' ownership of the Company's capital stock for as long as Holdings and
the Company file consolidated federal income tax returns. Such expenses include
franchise taxes and other fees required to maintain Holdings' corporate
existence; operating costs incurred by Holdings attributable to its ownership of
the Company's capital stock not to exceed $0.9 million per fiscal year; federal,
state and local taxes paid by Holdings and attributable to income of the Company
and its subsidiaries other than taxes arising from the sale or exchange by
Holdings of the Company's common stock; the purchase price of capital stock or
options to purchase capital stock of Holdings owned by former employees of the
Company or its subsidiaries, including interest expense on related notes payable
to the former employees for any unpaid purchase price, generally not to exceed
$2.5 million per year, except for 2002 in which these payments cannot exceed
$6.0 million, permitted under the Senior Credit Facility, as amended, and
subject to limitations under the indenture for the New Notes; and registration
expenses incurred by Holdings incident to a registration of any capital stock of
Holdings under the Securities Act.
6. Accounting Pronouncements
The results for the quarter and nine months ended September 28, 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 $4.2 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
12
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
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 (beginning of fiscal 2002). Upon adoption of
SFAS 142, the Company completed its impairment testing and did not recognize an
impairment charge. For the quarter and nine months ended September 29, 2001,
amortization of goodwill and intangibles of $2.1 million and $6.3 million,
respectively, would have been $0.7 million for the quarter and $2.1 million for
the nine 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 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. Adoption of this pronouncement did not have a
material impact on the consolidated financial statements.
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 material 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
13
to May 15, 2002. Adoption of this pronouncement did not have a material 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. The Company does not expect the
adoption of SFAS 146 to have a material impact on the Company's financial
position or results of operations.
14
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 Nine Months Ended
---------------------------- ------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 52.9% 59.2% 52.9% 60.9%
---- ---- ------ ----
Gross profit 47.1% 40.8% 47.1% 39.1%
Selling, general and administrative expenses 33.6% 27.4% 34.8% 29.4%
Non-cash variable stock compensation expense 1.1% 0.3% 2.3% 1.2%
ESOP expense - % 0.4% - % 0.4%
Amortization of intangibles 0.0% 1.3% 0.2% 1.4%
--- --- --- ---
Operating income 12.4% 11.4% 9.8% 6.7%
Interest expense, net 3.4% 4.8% 3.8% 5.2%
Other expense, net 0.3% 1.0% 0.3% 0.6%
--- ---- --- ----
Income before income taxes 8.7% 5.6% 5.7% 0.9%
Income tax expense 3.4% 2.5% 2.2% 0.4%
--- --- --- ---
Net income 5.3% 3.1% 3.5% 0.5%
=== === === ===
QUARTER ENDED SEPTEMBER 28, 2002 AS COMPARED TO QUARTER ENDED SEPTEMBER 29, 2001
Net Sales. Net sales for the quarter ended September 28, 2002 increased
$21.6 million, or 13.4%, to $182.5 million from $160.9 million for the third
quarter of 2001. The increase was primarily due to (i) a 9.5%, or $16.9 million,
increase in bedding average unit selling price due principally to a shift in
sales mix to higher priced products; (ii) new customers added over the last
year; and (iii) a reclassification for the quarter ended September 29, 2001 of
$16.7 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, at the beginning of fiscal year 2002. The sales reduction for the
third quarter of 2002 resulting from the adoption of EITF 01-9 was only $11.0
million due to the Company's adoption of a more stringent proof of advertising
policy late in 2001 compared to $16.7 million for the third quarter of 2001. Net
sales, exclusive of EITF 01-9 reclassifications, for the quarter ended September
28, 2002 increased $15.9 million, or 8.9%, compared to the quarter ended
September 29, 2001. The increase in net sales for the third quarter of 2002 was
offset in part by a decrease in bedding unit sales volume of 2.3% due largely to
the general economic slowdown.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the quarter ended September 28, 2002 decreased 6.3 percentage points to
52.9% from 59.2% in the third quarter 2001. The third quarter gross margin
improvement to 47.1% in 2002 from 40.8% in 2001
15
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ------------------------------------------------------------------------------
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
third quarter of 2002 versus the third 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 third quarter of 2002
was 5.7% lower than for the third quarter of 2001. Exclusive of the above
mentioned reclassified expenses resulting from the adoption of EITF 01-9, our
gross margin increased 3.7 percentage points to 50.1% for the quarter ended
September 28, 2002 from 46.4% in the third quarter of 2001.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended
September 28, 2002 increased 6.2 percentage points to 33.6% from 27.4% in the
third quarter of 2001. The increase from the third 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 amount of such costs reclassified in
the third quarter of 2001 than in the third quarter of 2002. For the quarters
ended September 28, 2002 and September 29, 2001, the total of such costs which
were reclassified were $11.0 million and $16.7 million, respectively. Selling,
general and administrative expenses, inclusive of the expenses characterized as
a reduction of revenue, as a percentage of net sales, for the quarter ended
September 28, 2002 increased 3.1 percentage points to 37.3% in 2002 from 34.2%
in 2001. This increase is primarily attributable to the (i) reclassification of
certain expenditures related to our retail operations; (ii) an increase in print
media expenditures which occurred in the third quarter of 2002 that did not
occur in 2001; and (iii) an increase in co-operative advertising expenditures
due to the shift in sales mix toward products that have higher subsidies.
Non-cash variable stock compensation. Non-cash variable stock
compensation expense for the quarter ended September 28, 2002 increased $1.6
million to $2.1 million from $0.5 million for the third quarter of 2001. The
increase was attributable to an increase in the number of vested stock options
outstanding at September 28, 2002 versus September 29, 2001 and a 2.3% increase
in the underlying value of Holdings' common stock during the third 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 $2.1 million in the third quarter ended September 28, 2002 from $2.1
million in the third 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 third quarter of
2001.
16
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Interest Expense, Net. Interest expense, net, decreased $1.4 million,
or 18.5%, to approximately $6.3 million for the quarter ended September 28, 2002
from $7.7 million in the third quarter of 2001. The decrease in interest expense
resulted from 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 $1.1 million
primarily due to the write-off in the third quarter of 2001 of $0.8 million of
acquisition costs related to a non-consummated transaction.
Income Tax Benefit. Our effective tax rates of 39.3% and 43.7% for the
quarters ended September 28, 2002 and September 29, 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 $9.6
million for the quarter ended September 28, 2002 compared to a net income of
$5.1 million in third quarter of 2001.
EBITDA. For the reasons set forth above, we had an EBITDA of $27.0
million, or 14.8% of net sales, for the quarter ended September 28, 2002
compared to $24.0 million, or 14.9% of net sales, for the third quarter of 2001.
Our Adjusted EBITDA, as defined below, increased 18.5% to $29.2 million from
$24.6 million in 2001 as set forth below:
Quarter Ended
---------------------------------
Sept. 28, Sept. 29,
2002 2001
--------- ----------
EBITDA(a) $27,021 $23,996
Non-cash variable stock compensation 2,076 543
Interest income 65 67
------- -------
Adjusted EBITDA(a) $29,162 $24,606
======= =======
As a percentage of net sales, our Adjusted EBITDA improved 0.7
percentage points to 16.0% in 2002 from 15.3% in 2001.
(a) EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, ESOP expense, management
fees, changes in the fair market value of derivative
instruments, and acquisition costs related to a non-consummated
transaction. Adjusted EBITDA, as defined by our Senior Credit
Facility, is calculated as EBITDA plus interest income and
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,
17
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
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.
NINE MONTHS ENDED SEPTEMBER 28, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
29, 2001
Net Sales. Net sales for the nine months ended September 28, 2002
increased $47.1 million, or 10.1%, to $514.3 million from $467.2 million for the
first nine months of 2001. The increase was primarily due to (i) a 12.4%, or
$65.0 million, increase in bedding average unit selling price due principally to
a shift in sales mix to higher priced products; (ii) new customers added over
the last year; and (iii) a reclassification for the nine months ended September
29, 2001 of $50.5 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 at the beginning of fiscal year 2002. The sales reduction for the nine
months of 2002 resulting from the adoption of EITF 01-9 was only $26.4 million
due to the Company's adoption of a more stringent proof of advertising policy
late in 2001 compared to $50.5 million for the first nine months of 2001. Net
sales, exclusive of EITF 01-9 reclassifications, for the nine months ended
September 28, 2002 increased $23.0 million, or 4.4%. The increase in net sales
for the first nine months of 2002 was offset in part by a decrease in bedding
unit sales volume of 12.4% due to (i) the general economic slowdown; and (ii)
the loss of principally high volume/low margin business as a result of
bankruptcy and subsequent liquidation of several major customers. The aggregate
net sales decline for the first nine months ended September 28, 2002 for
customers which filed for bankruptcy and ceased business in 2001 totaled $17.8
million.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the nine months ended September 28, 2002 decreased 8.0 percentage
points to 52.9% from 60.9% in the first nine months of 2001. The nine months
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 first nine
months of 2002 versus the first nine 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 nine months of 2002
was 10.4% lower than first nine months of 2001. Exclusive of the above mentioned
reclassified expenses resulting from the adoption of EITF 01-9, our gross margin
increased 4.7 percentage points to 49.7% for the nine months ended September 28,
2002 from 45.0% for the first nine months of 2001.
18
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the nine months ended
September 28, 2002 increased 5.4 percentage points to 34.8% from 29.4% in the
first nine months of 2001. The increase from the first nine 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 amount of such costs reclassified in
the first nine months of 2001 than in the first nine months of 2002. For the
nine months ended September 28, 2002 and September 29, 2001, the total of such
costs which were classified as a reduction of revenue were $26.4 million and
$50.5 million, respectively. Selling, general and administrative expenses,
inclusive of the expenses characterized as a reduction of revenue as mentioned
above, as a percentage of net sales, for the nine months ended September 28,
2002 increased 1.7 percentage point to 38.0% in 2002 from 36.3% 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 expenditures 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 care plan.
Non-cash variable stock compensation. Non-cash variable stock
compensation expense for the nine months ended September 28, 2002 increased $6.1
million to $11.6 million from $5.5 million for the first nine months of 2001.
The increase was attributable to an increase in the number of vested stock
options outstanding at September 28, 2002 versus September 29, 2001 and a 30.9%
increase in the underlying value of Holdings' common stock during the first nine
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 $5.3 million to $1.0 million for the nine months ended September 28,
2002 from $6.3 million in the first nine 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 $2.1 million for the
first nine months of 2001.
Interest Expense, Net. Interest expense, net, decreased $4.8 million,
or 19.8%, to approximately $19.6 million for the nine months ended September 28,
2002 from $24.4 million in the first nine months of 2001. The decrease in
interest expense resulted from 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 $1.5 million to $1.3
million for the nine months ended September 28, 2002 compared to $2.8 million in
the first nine months of 2001. The decrease was primarily attributable to (i)
the 2001 write-off of $0.8 million in acquisition
19
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
costs related to a non-consummated transaction; (ii) a $0.1 million non-cash
gain on expiration of derivative instruments in the first nine months of 2002
compared to a $0.4 million non-cash loss on the value of derivative instruments
in the first nine months of 2001; and (iii) a reduction in management advisory
fees in 2002.
Income Tax Benefit. Our effective tax rates of 39.2% and 42.0% for the
nine months ended September 28, 2002 and September 29, 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 $18.0
million for the nine months ended September 28, 2002 compared to a net income of
$2.5 million in first nine months of 2001.
EBITDA. For the reasons set forth above, we had an EBITDA of $64.2
million, or 12.5% of net sales, for the nine months ended September 28, 2002
compared to $51.0 million, or 10.9% of net sales, for the first nine months of
2001. Our Adjusted EBITDA, as defined below, increased 33.7% to $75.9 million
from $56.8 million in 2001 as set forth below:
Nine Months Ended
-------------------------
Sept. 28, Sept 29,
2002 2001
---- ----
EBITDA(a) $64,188 $50,957
Non-cash variable stock compensation 11,561 5,521
Interest income 151 301
------- -------
Adjusted EBITDA(a) $75,900 $56,779
======= =======
As a percentage of net sales, our Adjusted EBITDA improved 2.6
percentage points to 14.8% in 2002 from 12.2% in 2001. Our trailing twelve
months Adjusted EBITDA through September 28, 2002 was $97.5 million, or 14.7% of
net sales, which is an increase of 31.0% over the trailing twelve months
Adjusted EBITDA of $74.4 million, or 12.0% of net sales, through September 29,
2001.
(a) EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, ESOP expense,
management fees, changes in the fair market value of
derivative instruments, and acquisition costs related to a
non-consummated transaction. Adjusted EBITDA, as defined by
our Senior Credit Facility, is calculated as EBITDA plus
interest income and 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
20
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
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 nine months of 2002, our total debt declined by $41.7
million, compared to a total debt decrease of $11.1 million in the first nine
months of 2001.
Our operating activities provided cash of $52.1 million in the first nine months
of 2002 compared to $20.3 million provided in the first nine months of 2001. The
following items principally account for this increase: (i) net income of $18.0
million for the first nine months of 2002 versus $2.5 million net income in the
first nine months of 2001; (ii) an increase in non-cash variable stock
compensation expense of $6.0 million for the first nine months of 2002 versus
the comparable period of 2001; (iii) an increase in net assets of $5.3 million
for the first nine months of 2002 versus $16.4 million for the first nine months
of 2001; and (iv) deferred income tax expense of $10.6 million for the first
nine months of 2002 versus a $1.4 million deferred income tax expense for the
first nine 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 $3.6 million for the nine months ended
September 28, 2002. We expect to spend an aggregate of approximately $7.3
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 first nine months of 2002, we voluntarily
prepaid $31.6 million of outstanding term debt allocated as follows: Term A -
$6.7 million; Term B - $13.3 million; and Term C - $11.6 million.
21
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
As of September 28, 2002, we had borrowings of $1.7 million and availability to
borrow $55.4 million under our Revolving Credit Facility. For the trailing
twelve months ended September 28, 2002, our Maximum Leverage Ratio, as defined
by our Senior Credit Facility, was 2.60. We were in compliance with the
financial covenants contained in all of our credit facilities as of September
28, 2002.
Effective October 21, 2002, the Company amended its Senior Credit Facility:
- to permit the Company to repurchase (in the open market) up
to $20 million of outstanding New Notes;
- to permit the Company to repurchase Holdings' Junior
Subordinated PIK Notes as permitted by the indenture for the
New Notes;
- to modify the definition of Consolidated Excess Free Cash Flow
and deduct $9.3 million from the fiscal year 2002 excess free
cash flow mandatory payment;
- to permit restricted payments (as defined in the Senior Credit
Facility) of $6 million to deceased, terminated or retired
management shareholders in fiscal year 2002;
- to allow for a $7.5 million investment in an international
captive insurance company;
- to eliminate the requirement that the Company must fix the
interest rate on at least 50% of the principal amount of
outstanding term loans;
- to increase the annual asset sale basket from $3 million to
$10 million;
- to adjust the definition of Management Fees and increase the
overall cap to $3 million from $2.25 million;
- to provide an option for a 12 month LIBOR interest rate period
in the Revolver and the Tranche A term loan; and
- to provide for more restrictive financial covenants.
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 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.
22
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS
The results for the quarter and nine months ended September 28, 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 $4.2 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 (beginning of fiscal year 2002). Upon adoption of SFAS 142,
the Company completed its impairment testing and did not recognize an impairment
charge. For the quarter and nine months ended September 29, 2001, amortization
of goodwill and intangibles of $2.1 million and $6.3 million, respectively,
would have been $0.7 million for the quarter and $2.1 million for the nine
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. Certain
costs, such as co-operative advertising, promotional money, and amortization of
supply agreements, were historically recorded in selling, general and
administrative expenses but are now classified as a reduction of net sales under
the provisions of EITF 01-9. The adoption of EITF 01-9 resulted in a reduction
in both net sales and selling, general and administrative expenses of $11.0
million and $26.4 million for the quarter and nine months ended September 28,
2002 and $16.7 million and $50.5 million for the quarter and nine months ended
September 29, 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 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
23
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
liability resulting from the passage of time through charges to interest
expense. Adoption of this pronouncement did not have a material impact on the
consolidated financial statements.
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 material 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 material 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. The Company does not expect the adoption of SFAS 146 to
have a material impact on the Company's financial position or results of
operations.
24
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
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 and second quarters 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.
25
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 September
28, 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 64% of floating rate debt outstanding as of September
28, 2002.
Item 4. Disclosure Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Chief Financial Officer have conducted an evaluation of
the Company's disclosure controls and procedures as of a date within 90 days of
filing this quarterly report. Based on their evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the applicable Securities and
Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS AND PROCEDURES. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the most recent
evaluation of these controls by the Company's Chief Executive Officer and Chief
Financial Officer, including any corrective actions with regard to significant
deficiencies and material weaknesses.
26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.39 Labor Agreement between the Company and The United
Steel Workers of America, Local No. 13-02, for all
employees at the Shawnee, Kansas plant of the Company
excluding executives, sales employees, office
employees, supervisors, timekeepers, and mechanics,
for the period from April 22, 2002 to April 19, 2004.
99.1 Chief Executive Officer and Chief Financial Officer
Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
27
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: November 5, 2002
28
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, the Chief Executive Officer, of Simmons Company (the "registrant"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the periodic
reports are being prepared;
(b) evaluated the effectiveness of the registrant's
internal disclosures controls and procedures as of a
date within 90 days prior to this quarterly report
(the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Dated this 5th day of November.
/s/ Charles R. Eitel
-----------------------------------------
Charles R. Eitel, Chief Executive Officer
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, the Chief Financial Officer, of Simmons Company (the "registrant"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(d) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which the periodic
reports are being prepared;
(e) evaluated the effectiveness of the registrant's
internal disclosures controls and procedures as of a
date within 90 days prior to this quarterly report
(the "Evaluation Date"); and
(f) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Dated this 5th day of November.
/s/ William S. Creekmuir
---------------------------------
Chief Financial Officer