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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 28, 2002
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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
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SIMMONS COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 06-1007444
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Concourse Parkway, Suite 800
Atlanta, Georgia 30328-6188
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code (770) 512-7700
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 27, 2003 was $ 0.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
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The number of shares of the registrant's common stock outstanding as of March
27, 2003 is 31,964,452.
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DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
ITEM 1. BUSINESS
GENERAL
Founded in 1870, Simmons Company (the "Company" or "Simmons") is a leading
manufacturer and distributor of premium branded bedding products in the United
States of America and the world leader in Pocketed Coil(R) innerspring
technology. We manufacture anD license a broad range of mattresses and related
sleep products under well-recognized brand names including Simmons(R),
Beautyrest(R), BackCare(R), Deep Sleep(R) and Olympic(R) Queen. In 2002, we
added to our product line-up with the introduction of BackCare KidsTM
mattresses, LivingRightTM adjustable foundations, and a broader assortment of
products to serve the luxury category. Sales of conventional bedding, which
includes fully assembled mattresses and foundations, accounted for substantially
all of our 2002 net sales.
We manufacture and supply conventional bedding to over 10,000 retail
outlets, representing over 3,100 customers, throughout the nation and in Puerto
Rico. Our customers include furniture stores, specialty sleep shops, department
stores, rental stores and membership clubs. We support our customers with
significant local and national brand advertising and promotional spending, as
well as extensive customer support services. We operate 18 strategically located
manufacturing facilities across the United States of America and in Puerto Rico
through our wholly-owned subsidiaries, The Simmons Manufacturing Co., LLC and
Simmons Caribbean Bedding, Inc. Unlike most of our competitors, which operate as
associations of independent manufacturing licensees, we are one of two national
industry participants that operates each of its own manufacturing facilities,
allowing us greater quality control and standardization of best manufacturing
practices.
We also distribute branded products on a contract sales basis directly to
institutional users of bedding products, such as the hospitality industry and
certain agencies of the United States Government, through the Company's
wholly-owned subsidiary, Simmons Contract Sales, LLC. Additionally, we license
our trademarks, patents, and other intellectual property to various domestic and
foreign manufacturers principally through the Company's wholly-owned subsidiary,
Dreamwell, Ltd.
The Company also operates 17 retail outlet stores located throughout the
United States of America through the Company's wholly-owned subsidiary, World of
Sleep Outlets, LLC; 59 retail mattress stores operating as Mattress Gallery
located in Southern California through the Company's wholly-owned subsidiary,
Gallery Corp. (of which 26 stores were added in December 2002 by assuming the
leases and acquiring the inventory from Mattress Discounters Corporation, which
was in bankruptcy, for approximately $1.7 million); and beginning March 1, 2003,
49 retail mattress stores operating as Mattress Gallery and Sleep Country USA
located in Oregon and Washington through the Company's wholly-owned subsidiary,
SC Holdings, Inc.
RECENT HISTORY OF THE COMPANY
Recapitalization
On July 16, 1998, Simmons Holdings, Inc., the parent company of Simmons
("Holdings"), entered into a recapitalization agreement with the Company and REM
Acquisition, Inc., a transitory Delaware merger corporation ("REM"), sponsored
by Fenway Partners, Inc. ("Fenway"). Pursuant to the agreement, on October 29,
1998, REM merged with and into Holdings (the "Recapitalization") with Holdings
being the surviving corporation. The Recapitalization resulted in certain
stockholders of Holdings, who are affiliates of or investors arranged by
Investcorp S.A. ("Investcorp"), receiving an aggregate amount of cash of
approximately $193.4 million, and certain stockholders of Holdings who are or
were members of management of the Company receiving an aggregate amount of cash
of approximately $14.0 million. Investcorp retained shares of common stock of
Holdings with a then estimated fair value of $9.0 million and management
retained shares of stock and options to purchase stock of Holdings with a then
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estimated fair value of $16.5 million. As part of the Recapitalization, REM
purchased all of the shares of Series A Preferred Stock of the Company (the
"Series A Preferred Stock") owned by the Simmons Company Employee Stock
Ownership Plan (together with a trust forming a part thereof, the "ESOP") that
had been allocated to its participants for an aggregate purchase price of $15.4
million, and the ESOP exchanged its remaining unallocated shares of Series A
Preferred Stock for shares of common stock of Holdings. The Series A Preferred
Stock purchased by REM was cancelled. The ESOP retained shares of common stock
of Holdings with a then estimated fair value of $23.4 million.
Financing for the Recapitalization, the related transactions, and the fees
and expenses incurred therewith was provided by (i) the Company's borrowings
under a new $270.0 million senior credit facility (the "Senior Credit Facility")
which refinanced the majority of the Company's existing senior and subordinated
obligations, (ii) the Company's borrowings of $75.0 million under Senior
Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the Company's
borrowings of $30.0 million under the Junior Subordinated Notes (the "Junior
Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings' borrowings of
$10.0 million under Junior Subordinated PIK Notes (the "Junior Subordinated PIK
Notes") issued to an affiliate of Fenway, and (v) $177.0 million of capital
provided by affiliates of Fenway, affiliates of Investcorp, management and
certain other investors of Holdings.
As a result of the Recapitalization and related transactions, Simmons
Holdings, LLC, an entity controlled by funds affiliated with Fenway, acquired
75.1% of the outstanding voting shares of Holdings, and management, the ESOP and
Investcorp retained approximately 5.9%, 13.7% and 5.3%, respectively, of the
outstanding shares of Holdings. The Company accounted for the Recapitalization
as a leveraged recapitalization, whereby the historical bases of the assets and
liabilities of the Company were maintained.
On March 16, 1999, we completed a refinancing (the "March 1999
Refinancing"), which consisted of the sale of $150.0 million of 10.25% Senior
Subordinated Notes due 2009 (the "Notes") pursuant to a private offering. We
used the net proceeds from this offering to:
- repay the indebtedness and related accrued interest under the Senior
Bridge Loans and the Junior Simmons Notes issued by us;
- repay the amounts outstanding and related accrued interest under our
revolving credit facility; and
- prepay a portion of the amounts outstanding and related accrued
interest under our term loan facility.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated Notes
due 2009 (the "New Notes") in exchange for all Notes, pursuant to an exchange
offer whereby holders of the Notes received New Notes which have been registered
under the Securities Act of 1933, as amended, but are otherwise identical to the
Notes.
RECENT ACQUISITIONS
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On February 28, 2003, the Company acquired SC Holdings, Inc., a leading
mattress retailer in the Pacific Northwest which operates 49 stores under the
Sleep Country USA and Mattress Gallery names, from an affiliate of Fenway for
approximately $18.4 million, plus transaction costs and additional contingent
consideration based upon future performance.
INDUSTRY OVERVIEW
The domestic wholesale bedding industry generated sales of over $4.8
billion in 2002 according to industry sales data compiled by the International
Sleep Products Association ("ISPA"). Although fragmented with approximately 700
manufacturers, the industry is mature and stable. The stability of the bedding
market is supported by research which indicates that over 80% of bedding sales
result from replacement purchases. We believe that key demographic trends are
driving growth in the demand for larger-sized, premium bedding products
including:
- the rapidly growing 45-64 year old population category, a group with
higher levels of disposable income and which historically has been
more likely to purchase premium bedding; this population category is
also one which may consider the purchase of a second home, requiring
additional bedding purchases;
- the increasing consumer awareness of the health-related benefits of
proper rest; and
- the increasing number and size of bedrooms in homes.
Most conventional bedding is sold to furniture stores and specialty sleep
shops. The remaining channels of distribution include department stores,
national mass merchants, rental stores, membership clubs and contract customers.
COMPETITION
While there are approximately 700 bedding manufacturers in the United
States, four companies, Simmons, Sealy Corporation ("Sealy"), Serta, Inc.
("Serta"), and The Spring Air Company account for more than sixty percent of the
industry's wholesale revenues. We believe we principally compete against these
three primary competitors on the basis of brand recognition, product selection
and quality, and the quality of customer support programs, including
cooperative advertising, sales force training and marketing assistance. We
believe we compare favorably to our primary competitors in each of these areas.
In addition, only Simmons and Sealy have national, company-operated
manufacturing and distribution capabilities.
The rest of the United States' conventional bedding market consists of
approximately seven smaller national manufacturers and nearly 700 independent
local and regional manufacturers. These local and regional manufacturers
generally focus on the sale of lower price point products. While we primarily
manufacture differentiated bedding products targeted for mid to upper-end price
points, we also offer a full line of bedding products to our retailer base in
order for these retailers to maintain their competitive positioning.
PRODUCTS
We provide our retail customers with a full range of mattress products that
are targeted to cover a breadth of marketplace price points ($199 to $5,000
queen set price) and offer consumers better sleep quality benefits related to
common causes of poor sleep. Our focus on the sleep quality benefits of our
products differs from the majority of the industry in our employment of
differentiated product
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constructions designed to address specific consumer sleep needs and marketing
programs that promote these better sleep benefits, instead of the traditional
comfort and price feature selling.
Our mattress products are built from foam or one of two spring unit
construction techniques: Pocketed Coil(R) (Marshall Coil) springs or open coil
constructions. The Beautyrest(R) line of products utilizes our patented Pocketed
Coil(R) spring construction, whOSE rows are joined at the center third of the
coils instead of the top. This patented way of attaching rows of coils allows
for each coil to depress independently of the adjacent coils, resulting in
better conformability to the sleeping body and the reduction of motion
transferred across the bed from one partner to the other. Competitors' attempts
to copy this product benefit generally affix their coils at the top and bottom,
a technique not capable of offering the unique Beautyrest(R) Do Not Disturb(R)
benefit.
Our open coil products differ from traditional open coil mattresses in the
design of our coil. Our BackCare(R) product offerS a unique gradient-zoned
support, featuring five distinct comfort and support zones that mirror the
natural s-shape of the spine, providing additional firmness in the lower back
and thigh for better support. We also use other open coil units in our Deep
Sleep(R) line targeted at the under $500 queen price category. The coil units
used in these products are also unique to our products.
In 2000, we introduced the first full line of mattresses that consumers
never need to flip. This patented design offers enhanced sleep benefits and
product durability, along with the consumer convenience of never having to flip
their mattress. Every mattress Simmons manufactures features this innovative
never-needs-to-be-flipped design.
Beautyrest(R), our flagship premium product, has been our primary brand
since we introduced it in 1925 and is expected to continue generating the
majority of our sales. The Beautyrest(R) product was redesigned in 2002 with
improved partner motion separation benefits, greater aesthetic appeal and the
convenience of never needing to be flipped. Beautyrest(R) is sold primarily
through furniture stores, mattress specialty stores and department stores. All
Beautyrest(R) retail floor samples display a "Window Sticker" label that allows
consumers to choose the benefit package most appealing to them and to compare
the Beautyrest(R) Do Not Disturb(R) benefit to competitive constructions and
other Beautyrest(R) models.
Beautyrest(R) World Class(TM) Exceptionale(TM), Latitudes(TM),
DreamWell(TM) and Joseph Abboud(R) products are the luxury priCE POINt
extensions of the Beautyrest(R) line. Unlike other mattress brands, which
generally build their luxury line by adding foam, fiber and non-sleep-related
accessories to their mainstream product, the Beautyrest(R) luxury products
primarily feature our exclusive Pocketed Coil(R)-on-Pocketed Coil(R)
construction. This unique construction offers a different comfort level from the
mainstream price point Beautyrest(R) models and the combined benefits of comfort
and reduced motion transfer.
BackCare(R), our second flagship brand, was introduced in 1995 and
redesigned in late 2002 with advanced "gradient support" benefits and with
Simmons' patented never-needs-to-be-flipped design. BackCare(R) gradient
support, with varying levels of firmness for different zones of the sleeping
body, features a zoned coil unit, titanium re-enforced lumbar support and new
zoned foams that work together to offer support that mirrors the natural s-shape
of the human spine. BackCare(R) Advanced(TM) offers the BackCare(R) gradient
support in a series of unique constructions featuring foam core constructions in
conjunction with contour memory foam and contour natural foam. It also features
an allergy care fiber which is an environmentally-secure way of reducing indoor
allergens in the mattress that can cause allergic reactions, including asthma.
BackCare(R) Advanced(TM) is also available in a Karen Neuberger(R) collection of
covers for selected retailers to leverage the popularity of this well known
women's pajama designer.
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BackCare Kids(TM) was introduced in 2002 specifically for the unique sleep
needs of children. BackCare Kids(TM) offers three benefits not available in
competitive children's mattresses: Moisture Ban(TM) liquid repellant, an allergy
care fiber to help eliminatE allergens in the bed that can cause allergic
reactions, and a RiteHeight(TM) option for bunk beds, trundle beds and day beds
that are designed for a lower height mattress.
Deep Sleep(R) was introduced in 2001 and redesigned in 2002. The Deep
Sleep(R) product line is targeted at the traditional under $500 queen price
points. This product line offers comfort, durability and value, utilizing a
unique product construction in comparison to competitive open coil units,
offering benefits not available from traditional open coil mattresses.
Olympic(R) Queen, the first new size in mattresses distributed on a
national basis since Simmons began distributing king and queen sizes on a
national basis in 1958, was introduced in 2001. The Olympic(R) Queen offers
consumers 10% more sleeping surface than a traditional queen, without requiring
the replacement of the traditional queen frame with a wider frame. This patent
pending new size, which is available in Beautyrest(R), BackCare(R) and Deep
Sleep(R), is targeted at queen size mattress owners who would prefer a wider
mattress, but are unwilling to purchase a larger bed because of their existing
queen bed frame or the size of their bedroom. We offer specially designed
Egyptian cotton Olympic(R) Queen sheets for sale by our retailers or through our
internet website www.simmons.com.
LivingRight(TM) adjustable foundations were introduced in late 2002 as part
of the BackCare(R) and BackCare(R) Advanced(TM) product lines. This product line
began rolling out at retail in the first quarter of 2003. LivingRight(TM)
broadens the traditionally older consumer profile of adjustable beds to the
broader market of all adults, reflecting the trend towards using the bed as more
than just a place to sleep (reading in bed, working on the computer, watching
television, gathering with the family, etc.). The unique LivingRight(TM) design
incorporates the benefits of adjustability in a foundation that looks more like
a standard foundation than traditional adjustable beds.
CUSTOMERS
Our strong brand names and reputation for high quality products, innovation
and service to our customers, together with the highly attractive retail margins
associated with bedding products, have enabled us to establish a strong customer
base throughout the United States and across all major distribution channels,
including furniture stores, specialty sleep shops, department stores, rental
stores and warehouse showrooms. We manufacture and supply conventional bedding
to over 10,000 retail outlets, representing over 3,100 customers.
We also distribute branded products on a contract sales basis directly to
institutional users of bedding products such as the hospitality industry and
certain agencies of the United States Government. Major commercial accounts
include Starwood Hotels & Resorts Worldwide, Inc. ("Starwood Hotels"), La Quinta
Inns, Inc., Best Western International, Inc., and The Walt Disney Company. In
1999, Starwood Hotels selected Beautyrest(R)as the bed for their "Heavenly Bed"
program, a luxury hotel room program targeted at their preferred customer club
members.
Our five largest customers accounted for approximately 17% of 2002 product
shipments. No one customer represented more than 10% of product shipments in
2002.
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SALES, MARKETING AND ADVERTISING
Our products are sold by approximately 180 local field sales
representatives, backed by sales management at each of our 18 manufacturing
facilities, as well as national account representatives that give direction and
support for sales to national accounts. This selling infrastructure provides
retailers with coordinated national marketing campaigns, as well as local
support tailored to the competitive environments of each individual market.
Additionally, the Company utilizes approximately 20 independent sales
representatives, principally in the area of contract sales.
Our sales support focuses on two areas:
- cooperative promotional advertising and other retail support programs
designed to complement individual retailer's marketing programs; and
- national consumer communications designed to establish and build brand
awareness among consumers.
We develop advertising and retail sales incentive programs specifically for
individual retailers. Point-of-sale materials, including mattresses and
foundation displays that we design and supply, highlight the differentiating
features and benefits of our products. In addition, we offer training for retail
sales personnel through an internally developed sales representative training
program. We believe that our sales training and consumer education programs are
the most effective in the industry. We have designed these programs, delivered
on-site at our retailers' facilities or at our research and education center,
Simmons Institute of Technology and Education ("SITE"), to teach retail floor
salespeople product knowledge and sales skills. We seek to improve our
retailers' unit sales, and increase their sales of bedding in the higher price
category. We also establish individual incentive programs for our customers and
their sales personnel. Our sales force is trained extensively in advertising,
merchandising and salesmanship, all of which increases the value of the
marketing support they provide to retailers. We believe that our focus on better
sleep and on the training of our sales representatives and our customers' retail
salespeople differentiates us from most of our large competitors.
SUPPLIERS
We purchase substantially all of our conventional bedding raw materials
centrally in order to maximize economies of scale and volume discounts. The
major raw materials that we purchase are wire, spring components, lumber, foam,
insulator pads, innersprings, and fabrics and other roll goods consisting of
foam, fiber, and non-wovens. We obtain a large percentage of our required raw
materials from a small number of suppliers. In 2002, we bought approximately 78%
of our raw material needs from 10 suppliers. We believe that supplier
concentration is common in the bedding industry.
We have long-term supply agreements with Leggett & Platt, Incorporated
("Leggett & Platt"), and Foamex L.P. Leggett & Platt supplies the majority of
several components, including spring components, insulator pads, wire, fiber,
quilt backing and flange material, to the bedding industry. In 2002, we bought
approximately 33% of our raw materials from Leggett & Platt. We expect that in
2003 we will buy a comparable portion of our raw materials from Leggett & Platt.
To ensure a long-term and adequate supply of various components, we have entered
into agreements with Leggett & Platt, generally expiring in the year 2010, for
the supply of grid tops and innersprings. Among other things, these agreements
generally require us to purchase a majority of our requirements of several
components from Leggett & Platt.
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With the exception of Leggett & Platt, we believe that we could replace our
other suppliers, if or when the need arises, within 90 days as we have already
identified and use alternative sources.
SEASONALITY/OTHER
For the past several years, there has been little seasonality to our
business.
Most of our sales are by short term purchase orders. Because the level of
our production is generally adjusted to meet customer order demand, we have a
negligible backlog of orders. Most finished goods inventories of bedding
products are physically stored at our manufacturing locations until shipped
(usually within days of manufacture).
MANUFACTURING AND FACILITIES
The Company manufactures most conventional bedding to order and utilizes
"just-in-time" inventory techniques in its manufacturing process to more
efficiently serve its customers' needs and to minimize their inventory carrying
costs. Most bedding orders are scheduled, produced and shipped within four days
of receipt. This rapid delivery capability allows us to minimize our inventory
of finished products and better satisfy customer demand for prompt shipments.
We operate 18 bedding manufacturing facilities in 16 states and Puerto
Rico. We invest substantially in new product development, enhancement of
existing products and improved operating processes. We believe new product
development and product enhancements are crucial to maintaining our strong
industry position. We maintain close contact with bedding industry developments
through sleep research conducted by industry groups and by our own marketing and
engineering departments, as well as through participation in the Better Sleep
Council, an industry association that promotes awareness of sleep issues, and
ISPA. Our marketing and manufacturing departments work closely with the
engineering staff to develop and test new products for marketability and
durability.
We also seek to reduce costs and improve productivity by continually
developing more efficient manufacturing and distribution processes at SITE, a
state-of-the-art 38,000 square foot research and education center in Atlanta,
Georgia. As of February 28, 2003, we had 17 engineers and technicians employed
full-time at SITE. These employees ensure that we maintain high quality products
by conducting product and materials testing, designing manufacturing facilities
and equipment and improving process engineering and development. We believe that
our engineering staff gives us a competitive advantage over most of our
competitors who do not have significant in-house engineering resources.
WARRANTIES AND PRODUCT RETURNS
Our conventional bedding products generally offer 10-year limited
warranties against manufacturing defects. We believe that our warranty terms are
generally consistent with those of our primary national competitors. The
historical costs to us of honoring warranty claims have been within management's
expectations. We have also experienced non-warranty returns for reasons
generally related to order entry errors and shipping damage. We resell our
non-warranty returned products primarily through as-is furniture dealers or our
17 World of Sleep Outlets stores.
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PATENTS AND TRADEMARKS
We own many trademarks, including Simmons(R), Beautyrest(R), BackCare(R),
Deep Sleep(R), and Pocketed Coil(R), most of which ARE registered in the United
States and in many foreign countries. We protect our manufacturing equipment and
processes as trade secrets and through patents. We possess several patents on
the equipment used to manufacture our Pocketed Coil(R) innersprings. We do not
consider our overall success to be dependent upon any particular intellectual
property rights. We cannot assure that the degree of protection offered by the
various patents will be sufficient, that patents will be issued in respect of
pending patent applications, or that we will be able to protect our
technological advantage upon the expiration of our patents. If we were unable to
maintain the proprietary nature of our intellectual property, our financial
condition or results of operations could be materially adversely affected.
LICENSING
During the late 1980's and early 1990's, we disposed of most of our foreign
operations and secondary domestic lines of business. As a result, we now license
internationally the Simmons(R) name and many of our trademarks, processes and
patents generally on an exclusive long-term basis to third-party manufacturers
which produce and distribute conventional bedding products within their
designated territories. These licensing agreements allow the Company to reduce
exposure to political and economic risk abroad by minimizing investments in
those markets. We have eighteen foreign licensees and eight foreign
sub-licensees with operations in Argentina, Australia, Brazil, Canada, Chile,
Colombia, Dominican Republic, Ecuador, El Salvador, England, France, Hong Kong,
Israel, Italy, Japan, Korea, Mexico, Morocco, New Zealand, Oman, Panama,
Singapore, South Africa, Sweden, Taiwan, and Venezuela. These
foreign licensees and sub-licensees have rights to sell Simmons-branded products
in approximately 90 countries.
Additionally, we have fifteen domestic third-party licensees. Some of these
licensees manufacture and distribute juvenile bedding, healthcare-related
bedding and furniture, and non-bedding upholstered furniture, primarily on
long-term or automatically renewable terms. Additionally, we have licensed the
Simmons(R) name and other trademarks, generally for limited terms, to
manufacturers of airbeds, waterbeds, feather and down comforters, sheets and
synthetic comforter sets, pillows, bed pads, blankets, bed frames, futons,
office chairs, specialty sleep items, massage recliners, pet beds, and other
products.
In 2002, 2001 and 2000 our licensing agreements as a whole generated
royalties of approximately $7.9 million, $8.6 million and $8.0 million,
respectively, which are accounted for as a reduction of selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
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EMPLOYEES
As of February 28, 2003, we had approximately 2,900 full-time employees.
Approximately 1,200 of these were represented by labor unions. Employees at nine
of our 18 manufacturing facilities are represented by various labor unions with
separate collective bargaining agreements. Collective bargaining agreements
typically are negotiated for two to four-year terms. During 2001 and 2002, new
collective bargaining contracts were negotiated for the majority of our
manufacturing facilities represented by labor unions. The new contracts will not
have a material impact to our future results from operations.
The locations where our employees are covered by collective bargaining
agreements and the contract expiration dates are as follows:
FACILITY LABOR UNION EXPIRATION DATE
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Atlanta United Steel Workers of America October 2005
Columbus United Steel Workers of America October 2004
Columbus International Association of Machinists February 2004
Dallas United Steel Workers of America October 2004
Honolulu International Longshoremen and January 2005
Warehousemen's Union
Jacksonville United Steel Workers of America October 2004
Kansas City United Steel Workers of America April 2004
Los Angeles United Steel Workers of America October 2005
Los Angeles International Brotherhood of Teamsters October 2006
Piscataway United Steel Workers of America October 2005
Piscataway International Association of Machinists November 2004
San Leandro United Furniture Workers April 2004
We consider overall relations with our workforce to be satisfactory. We
have had no labor-related work stoppages in over 20 years. However, if a work
stoppage were to occur at one of our manufacturing facilities, we believe it
would not have a material adverse impact to our operating results as we believe
we would be able to shift production to other manufacturing facilities. Since
1980, we have opened nine new plants, none of which are unionized.
Approximately 2,400 of our current and former employees are participants in
the ESOP.
REGULATORY MATTERS
As a manufacturer of bedding and related products, we use and dispose of a
number of substances, such as glue, lubricating oil, solvents, and other
petroleum products, that may subject us to regulation under numerous federal and
state statutes governing the environment. Among other statutes, we are subject
to the Federal Water Pollution Control Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Clean Air Act and related state statutes and regulations. We have made
and will continue to make capital and other expenditures to comply with
environmental requirements. As is the case with manufacturers in general, if a
release of hazardous substances occurs on or from our properties or any
associated offsite disposal location, or if contamination from prior activities
is discovered at any of our properties, we may be held liable, the amount of
such liability could be material and our financial condition or results of
operations could be materially adversely affected. We are currently evaluating
our potential liability with respect to the cleanup of environmental
contamination at and in the vicinity of our leased manufacturing facility in San
Leandro, California and our former facility in Linden/Elizabeth, New Jersey.
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We have recorded a reserve to reflect our potential liability for
environmental matters. Because of the uncertainties associated with
environmental remediation, we cannot assure the reader that the costs incurred
with respect to the potential liabilities will not exceed the recorded reserves.
Our conventional bedding and other product lines are subject to various
federal and state laws and regulations relating to flammability, sanitation and
other standards. We believe that we are in material compliance with all such
laws and regulations.
In August 2001, the California legislature passed a bill requiring that all
mattresses and foundations manufactured for sale in California be open flame
resistant. The legislature requires the California Bureau of Home Furnishings
and Thermal Insulation (the "Bureau") to adopt regulations no later than January
1, 2004 requiring that mattresses and foundations meet a resistance to open
flame test.
The Bureau has submitted proposed regulations, which have not been
finalized. If the proposed regulations are adopted as currently written, the
bedding industry will be prohibited from selling any mattresses and/or
foundations in California after January 1, 2004 that do not comply with the
proposed regulations. The proposed regulations, as currently drafted, may
adversely affect our manufacturing processes and material costs. Although we are
developing product solutions that are intended to enable us to meet the proposed
regulations, we can give no assurances that these solutions are sufficient until
after the proposed regulations are finalized.
FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform Act
of 1995. When used in this Annual Report on Form 10-K, the words "believes,"
"anticipates," "expects," "intends," "projects" and similar expressions are used
to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future financial and operating results, including expected benefits from our
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, expansion of the market value of retail
operations, 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 2002. The Company undertakes no obligation to update or revise any
forward-looking statements, either to reflect new developments, or for any other
reason.
11
ITEM 2. PROPERTIES
Our corporate offices are located in approximately 49,000 square feet of
leased office space at One Concourse Parkway, Atlanta, Georgia 30328. The
following table sets forth selected information regarding manufacturing and
other facilities we operated as of February 28, 2003:
Year of
Date Lease Square
Location Occupied Expiration Footage
-------- -------- ---------- -------
Manufacturing Facilities:
Mableton, Georgia (Atlanta) 1991 2007 148,300
Charlotte, North Carolina 1993 2010 144,280
Grove City, Ohio (Columbus) 1987 2004 190,000
Coppell, Texas (Dallas) 1998 2008 140,981
Aurora, Colorado (Denver) 1998 2008 129,000
Fredericksburg, Virginia 1994 2009 128,500
Honolulu, Hawaii 1992 2008 63,280
Jacksonville, Florida 1973 2003 205,729
Janesville, Wisconsin 1982 Owned 288,700
Shawnee Mission, Kansas (Kansas City) 1997 Owned 130,000
Compton, California (Los Angeles) 1974 2005 223,382
Tolleson, Arizona (Phoenix) 1997 2007 103,408
Piscataway, New Jersey 1988 2003 264,908
Salt Lake City, Utah 1998 2008 77,500
San Leandro, California 1992 2007 250,600
Auburn, Washington (Seattle) 1992 2003 133,610
Agawam, Massachusetts (Springfield) 1993 2006 125,000
Trujillo Alto, Puerto Rico 1998 Owned 50,000
---------
Subtotal 2,797,178
Other Facilities in Atlanta, Georgia:
Corporate Headquarters 2000 2011 49,045
SITE 1995 2005 42,534
Gwinnett Storage 2002 2005 6,660
---------
Total Square Footage 2,895,417
=========
Management believes that our facilities, taken as a whole, have adequate
productive capacity and sufficient manufacturing equipment to conduct business
at levels exceeding current demand.
In addition, we operate 17 retail outlet stores with approximately 171,000
square feet in the aggregate through our World of Sleep Outlets, LLC subsidiary;
59 retail mattress stores with approximately 242,000 square feet in the
aggregate and an office/warehouse with approximately 44,000 square feet through
our Gallery Corp. subsidiary; and beginning March 1, 2003, 49 retail mattress
stores with approximately 262,000 square feet in the aggregate and
office/warehouses with approximately 86,000 square feet in the aggregate through
our SC Holdings, Inc. subsidiary.
12
ITEM 3. LEGAL PROCEEDINGS
On or about December 11, 2001, FDL, Inc. ("FDL") filed a complaint, which
has been amended twice since the original filing, against the Company in the
United States District Court for the Southern District of Indiana. FDL alleges
that we licensed trademark rights to FDL that we licensed to another licensee
under a separate agreement, and based on that allegation, purports to assert
claims for fraud, breach of contract, false representation, and for declarations
that the license agreement between FDL and the Company is terminated and/or
rescinded and that FDL is entitled to use the trademarks at issue in connection
with certain products. We denied the material allegations of the amended
complaint and asserted counterclaims against FDL, alleging that FDL has breached
its contract with us by failing to pay overdue royalties under the license
agreement, refusing to permit us to conduct audits and inspections of FDL's
books and records, and selling products bearing our trademarks outside the
geographic territory permitted in the license agreement between FDL and the
Company. FDL also has asserted claims against United Sleep Products Denver, Inc.
("United Sleep"), a licensee of ours, alleging that United Sleep tortiously
interfered with FDL's business relationship with us; infringed and diluted our
trademarks; engaged in unfair competition; and violated the provisions of the
Lanham Act. We have entered into an agreement with United Sleep, under which we
have assumed the defense of United Sleep in the action and agreed to indemnify
it with respect to the claims FDL presently has asserted against it. The case
presently is set for trial on November 3, 2003. The Company intends to
vigorously defend this lawsuit.
From time to time, we have been involved in various legal proceedings. We
believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of common
equity of the Company. As of December 28, 2002, there is one holder of record of
the Company's common shares.
No dividends have been paid on any class of common equity of the Company
during the last three fiscal years. The ability of the Company to pay dividends
on its common stock is restricted by the terms of the Senior Credit Facility and
the Indenture governing the New Notes.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(dollars in thousands)
Set forth below is our selected historical consolidated financial data. We
derived our historical Statement of Operations and Balance Sheet Data for 2002,
2001, 2000, 1999, and 1998 from our consolidated financial statements. The
information presented below should be read in conjunction with Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements and accompanying notes
and other financial information appearing in Item 8.
The information below should be considered when reading the data that
follows:
- EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, ESOP expense, management fees,
changes in the fair 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
non-cash variable stock compensation and interest income for 2002 and
2001, and non-cash variable stock compensation, interest income and
certain other items as listed on page 16 for 2000, 1999 and 1998. We
believe 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 future
filings 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.
- Working capital represents total current assets, excluding cash and
equivalents, less total current liabilities, excluding current
maturities of long-term debt.
14
Year ended Year ended Year ended Year ended Year ended
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $ 670,390 $ 612,995 $ 658,154 $ 550,062 $ 541,239
Cost of products sold ................. 356,444 365,420 404,263 348,920 347,543
--------- --------- --------- --------- ---------
Gross profit .......................... 313,946 247,575 253,891 201,142 193,696
Operating expenses:
Selling, general and
administrative expenses ....... 232,265 185,092 215,924 158,861 143,978
Non-cash variable stock compensation 15,561 14,847 574 -- --
ESOP expense ....................... -- 2,816 7,117 7,169 6,453
Management compensation -
transaction related ........... -- -- -- -- 14,223
Amortization of intangibles ........ 1,030 16,309 8,367 7,628 7,629
--------- --------- --------- --------- ---------
248,856 219,064 231,982 173,658 172,283
--------- --------- --------- --------- ---------
Operating income ...................... 65,090 28,511 21,909 27,484 21,413
Interest expense, net (1) ............. 25,532 33,245 34,957 36,186 45,450
Other expense, net .................... 2,055 3,038 1,778 1,627 2,406
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..... $ 37,503 $ (7,772) $ (14,826) $ (10,329) $ (26,443)
========= ========= ========= ========= =========
Net income (loss) ..................... $ 24,375 $ (1,132) $ (10,943) $ (9,129) $ (19,019)
========= ========= ========= ========= =========
OTHER DATA:
Adjusted EBITDA (2) ................... $ 99,282 $ 78,337 $ 61,649 $ 66,740 $ 62,264
Capital expenditures .................. 7,441 5,099 13,290 9,659 15,553
Depreciation and amortization ......... 18,437 31,766 21,673 17,959 16,593
BALANCE SHEET DATA (END OF YEAR):
Working capital ....................... $ 25,284 $ 37,892 $ 55,457 $ 53,897 $ 46,567
Total assets .......................... 385,312 385,666 416,861 406,100 400,061
Total debt, including current
maturities ...................... 242,375 295,914 325,274 333,983 313,469
Total common stockholder's deficit .... (55,189) (58,318) (36,402) (23,332) (12,301)
(1) Interest expens $ 23,169 $ 30,339 $ 33,505 $ 31,686 $ 22,776
Amortization of deferred debt
issuance costs ............. 2,557 3,303 1,801 4,701 22,858
Interest income ............... (194) (397) (349) (201) (184)
--------- --------- --------- --------- ---------
Interest expense, net ......... $ 25,532 $ 33,245 $ 34,957 $ 36,186 $ 45,450
========= ========= ========= ========= =========
15
(2) Items added back to Net income (loss) to arrive at Adjusted EBITDA are
as follows:
Year ended Year ended Year ended Year ended Year ended
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
Net income (loss) ................... $ 24,375 $ (1,132) $(10,943) $ (9,129) $(19,019)
Depreciation and amortization ....... 18,437 31,766 21,673 17,959 16,593
Income tax expense (benefit) ........ 13,128 (6,640) (3,883) (1,200) (7,424)
Interest expense .................... 25,532 33,245 34,957 36,186 45,450
ESOP expense ........................ -- 2,816 7,117 7,169 6,453
Other expense, net .................. 2,055 3,038 1,778 1,627 2,406
-------- -------- -------- -------- --------
EBITDA ........................... 83,527 63,093 50,699 52,612 44,459
Management compensation -
severance related ................ -- -- 3,777 6,600 --
Management compensation -
transaction related .............. -- -- -- -- 14,223
Interest income ..................... 194 397 349 201 184
Serta settlement and legal fees ..... -- -- 6,250 -- --
Non-cash variable stock option
compensation ..................... 15,561 14,847 574 -- --
Manufacturing process
improvements expense ........ -- -- -- -- 2,208
Management strategic initiatives .... -- -- -- 444 418
Receivable write-off ................ -- -- -- 6,883 --
Discontinued product line ........... -- -- -- -- 772
-------- -------- -------- -------- --------
Adjusted EBITDA ................. $ 99,282 $ 78,337 $ 61,649 $ 66,740 $ 62,264
======== ======== ======== ======== ========
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read along with the "Selected Consolidated
Financial and Other Data" and our consolidated financial statements and the
accompanying notes included elsewhere herein.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, the
Company's management must make decisions which impact the reported amounts and
the related disclosures. Such decisions include the selection of the appropriate
accounting principles to be applied and the assumptions on which to base
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to allowance for doubtful accounts, impairment of long
lived assets, impairment of goodwill, warranties, cooperative advertising and
rebate programs, non-cash variable stock compensation, income taxes, and
litigation and contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company's management
believes the critical accounting policies described below are the most important
to the fair presentation of the Company's financial condition and results. The
following policies require management's more significant judgments and estimates
in the preparation of the Company's consolidated financial statements.
Allowance for doubtful accounts. Our management must make estimates of the
uncollectibility of our accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Actual losses for uncollectible accounts have generally been
consistent with management's estimates. However, deteriorating financial
conditions of certain key customers or a significant continued slow down in the
economy could have a material negative impact on the Company's ability to
collect on accounts, in which case additional allowances may be required. Our
accounts receivable balance was $73.2 million and $73.8 million, net of
allowance for doubtful accounts of $3.1 million and $1.8 million, respectively,
at December 28, 2002 and December 29, 2001, respectively. Further information is
provided in Schedule II, "Valuation and Qualifying Accounts."
Impairment of long-lived assets. The Company regularly assesses all of its
long-lived assets, including intangibles, for impairment whenever events or
circumstances indicate its carrying value may not be recoverable. Management
assesses whether there has been an impairment by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the asset. The factors considered by management in this assessment include
operating results, trends and prospects, as well as the effects of obsolescence,
demand, competition and other economic factors. If an impairment is deemed to
exist, management records an impairment charge equal to the excess of the
carrying value over the fair value of the impaired assets.
Impairment of goodwill. We test goodwill and other indefinite-lived
intangible assets for impairment on an annual basis by comparing the fair value
of the Company's reporting units to their carrying values. Fair value is
determined by the assessment of future discounted cash flows. Additionally,
goodwill is tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of an
entity below its carrying value. These events or circumstances would include a
significant change in the business climate, legal factors,
17
operating performance indicators, competition, sale or disposition of a
significant portion of the business, or other factors.
As part of the adoption of SFAS 142, the Company performed initial
valuations during the first quarter of 2002 to determine if any impairment of
goodwill and indefinite-lived intangibles existed and determined that no
impairment of goodwill and indefinite-lived intangible assets existed. In
accordance with SFAS 142, goodwill was tested again at December 28, 2002 for
impairment by comparing the fair value of the Company's reporting units to their
carrying values. Management determined that no impairment of goodwill existed at
December 28, 2002.
Warranty accrual. Our management must make estimates of potential future
product returns related to current period product revenue. Management analyzes
historical returns when evaluating the adequacy of the warranty accrual.
Significant management judgments and estimates must be made and used in
connection with establishing the warranty accrual in any accounting period. The
Company's warranty policy provides a 10-year non-prorated warranty service
period on all first quality products currently manufactured, except for certain
products for the hospitality industry which have varying non-prorated warranty
periods ranging from five to 10 years. The Company's policy is to accrue the
estimated cost of warranty coverage at the time the sale is recorded. At
December 28, 2002 and December 29, 2001, the Company had a warranty accrual of
$3.4 million and $3.1 million, respectively.
Cooperative Advertising and Rebate Programs. The Company enters into
agreements with its customers to provide funds for advertising and promotion of
the Company's products. The Company also enters into volume and other rebate
programs with certain customers whereby funds may be rebated to the customer.
When sales are made to these customers, the Company records accrued liabilities
pursuant to these agreements. Management regularly assesses these liabilities
based on forecasted and actual sales and claims and management's knowledge of
customer purchasing habits to determine whether all of the cooperative
advertising earned will be used by the customer, whether the cooperative
advertising costs meet the requirement for classification as selling, general
and administrative expense versus a reduction of net sales, and whether the
customer will meet the requirements to receive rebated funds. Costs of these
programs totaled $86.4 million, $75.9 million and $77.0 million in 2002, 2001
and 2000, respectively.
Non-cash variable stock compensation expense. The Company records non-cash
variable stock compensation expense, related to director and employee Regular
stock options, utilizing the intrinsic value method as prescribed by Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and related interpretations. Management must estimate the employee service
period over which the compensation was awarded. The service period is estimated
to be generally four to five years. Additionally, because the vesting of the
plan options is dependent upon achieving an annual Adjusted EBITDA target or as
otherwise established by the Compensation Committee of the Board of Directors,
management must estimate the ultimate number of shares that will vest. The
Company records additional adjustments to non-cash variable stock compensation
expense for changes in the intrinsic value of vested regular stock options in a
manner similar to a stock appreciation right because the option holder can
compel the Company to settle the award by transferring cash or other assets
rather than our common stock. The Company utilizes a third-party valuation firm
to determine the intrinsic value of our common stock, including option shares,
on a quarterly basis. This firm must also make estimates in determining the
intrinsic value. The Company recorded non-cash variable stock compensation
expense of approximately $15.6 million, $14.8 million and $0.6 million related
to Regular stock options during 2002, 2001 and 2000, respectively. At December
28, 2002 and December 29, 2001, the Company had a liability of $29.2 million and
$15.1 million, respectively, for non-cash variable stock compensation expense.
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the
18
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
The Company has net operating loss carryforwards of approximately $19.4
million for federal income tax purposes which are limited under various sections
of the Internal Revenue Code. Such net operating loss carryforwards expire on
various dates through 2020. Our management must make estimates regarding the
future realization of these net operating losses. Realization of the net
operating loss carryforwards is dependent upon future profitable operations and
reversals of existing temporary differences. Although realization is not
assured, the Company believes it is more likely than not that the net recorded
benefits will be realized through the reduction of future taxable income.
Litigation and contingent liabilities. From time to time, the Company and
its operations are parties to or targets of lawsuits, claims, investigations and
proceedings, including product liability, personal injury, patent and
intellectual property, commercial, contract, environmental, antitrust, health
and safety, and employment matters, which are handled and defended in the
ordinary course of business. The Company accrues a liability for such matters
when it is probable that a liability has been incurred and the amount can be
reasonably estimated. The Company believes the amounts reserved are adequate for
such pending matters; however, results of operations could be affected by
significant litigation adverse to the Company.
RESULTS OF OPERATIONS
The following table sets forth some components of our Consolidated
Statement of Operations data expressed as a percentage of net sales:
Fiscal Year
---------------------------------------
2002 2001 2000
---------- ---------- ----------
(52 weeks) (52 weeks) (53 weeks)
Net sales 100.0% 100.0% 100.0%
Cost of products sold 53.2% 59.6% 61.4%
----- ----- -----
Gross profit 46.8% 40.4% 38.6%
Selling, general and administrative expenses 34.6% 30.2% 32.8%
Non-cash variable stock compensation expense 2.3% 2.4% 0.1%
ESOP expense -- 0.4% 1.1%
Amortization of intangibles 0.1% 2.7% 1.3%
----- ----- -----
Operating income 9.7% 4.7% 3.3%
Interest expense, net 3.8% 5.4% 5.3%
Other expense, net 0.3% 0.5% 0.3%
----- ----- -----
Income (loss) before income taxes 5.6% (1.2)% (2.3)%
Income tax expense (benefit) 2.0% (1.0)% (0.6)%
----- ----- -----
Net income (loss) 3.6% (0.2)% (1.7)%
===== ===== =====
FISCAL YEAR 2002 AS COMPARED TO FISCAL YEAR 2001
Net Sales. Net sales for the year ended December 28, 2002 increased $57.4
million, or 9.4%, to $670.4 million in 2002 from $613.0 million in 2001. The
increase was primarily due to (i) a 10.7%, or approximately $68.5 million in the
aggregate, increase in bedding average unit selling price resulting from a shift
in sales mix toward higher priced products; (ii) new customers added over the
last year; and (iii) the
19
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, which resulted in the reclassification of certain payments to customers,
such as co-operative advertising expenditures, promotional monies expenditures,
volume rebates and amortization of supply agreements, from selling, general and
administrative expenses and cost of products sold to a reduction of revenue. The
amounts reclassified from selling, general and administrative expenses and cost
of products sold totaled $49.7 million and $0.7 million, respectively, in 2002
versus $76.3 million and $0.8 million, respectively, in 2001. The increase in
2002 net sales was partially offset by a 5.7% decrease in bedding unit sales
volume largely due to the loss of high volume, low margin business resulting
from customer bankruptcies in the August 2000 to July 2001 period and the
general economic slowdown. The aggregate sales decline in 2002 for customers
which filed for bankruptcy and ceased business in 2001 totaled approximately $18
million.
The Company's adoption of a more stringent proof of advertising policy late
in 2001 resulted in less co-operative advertising expenditures being classified
as a reduction of revenue in fiscal year 2002. Sales, exclusive of EITF 01-9
reclassifications, of $720.8 million in 2002 increased $30.7 million, or 4.5%,
from $690.1 million in 2001. This methodology for calculating sales is
comparable to that used by the International Sleep Products Association ("ISPA")
for calculating market share.
Cost of Products Sold. As a percentage of net sales, cost of products sold
for the year ended December 28, 2002 decreased 6.4 percentage points to 53.2%
from 59.6% in 2001. Our 2002 gross margin improvement to 46.8% reflects (i) the
above mentioned lower EITF 01-9 sales reduction in 2002 as compared to 2001 and
the increase in average unit selling price; (ii) lower material costs due in
part to our "Zero Waste" cost reduction initiative which began in 2001 and
continued in 2002; and (iii) lower labor costs due to management of factory
headcount and labor hours. The average factory worker headcount for 2002 was
6.8% less than 2001. Our gross margin, exclusive of EITF 01-9 reclassifications,
increased 3.6 percentage points in 2002 to 50.5% from 46.9% in 2001.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses for the year ended December 28,
2002 increased 4.4 percentage points to 34.6% from 30.2% in 2001. This increase
is principally attributable to the above mentioned adoption of EITF 01-9
resulting in $49.7 million and $76.3 million in 2002 and 2001, respectively, of
costs historically characterized as selling, general and administrative expenses
being characterized as a reduction of revenue. Selling, general and
administrative expenses, inclusive of the expenditures characterized as a
reduction of revenue due to EITF 01-9, as a percentage of net sales, in 2002
increased 1.2 percentage points to 39.2% from 38.0% in 2001. This increase was
primarily attributable to an increase in co-operative advertising expenditures
due to the shift in our sales mix toward products that have higher subsidies and
selling expenses.
Non-Cash Variable Stock Compensation Expense. Non-cash variable stock
compensation expense increased $0.7 million for the year ended December 28, 2002
to $15.6 million from $14.8 million in 2001. The 2002 expense resulted from a
40.1% increase in the underlying value of Holdings' common stock during 2002 and
an increase in the number of vested stock options outstanding at December 28,
2002 versus December 29, 2001.
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 incurred an expense associated with the ESOP plan.
Amortization of Intangibles. Amortization of intangibles of $1.0 million
for the year ended December 28, 2002 decreased $15.3 million from $16.3 million
for 2001. This decrease was principally due to (i) a non-cash impairment charge
in the fourth quarter of 2001 of $7.9 million to write down to
20
market value the goodwill for the Company's wholly-owned subsidiary Gallery
Corp.; (ii) the adoption of SFAS No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets, at the beginning of our 2002 fiscal year; and (iii) a
decrease in amortization of patents due to the expiration of certain patents. As
a result of the adoption of SFAS 142, we discontinued the amortization of
goodwill and performed a transitional test of goodwill impairment, which
resulted in no impairment charge. Had this pronouncement been adopted at the
beginning of 2001, amortization of intangibles, exclusive of impairment charges,
would have been reduced by $5.6 million to $2.8 million in 2001.
Interest Expense, Net. Interest expense, net decreased $7.7 million, or
23.2%, to $25.5 million for the year ended December 28, 2002 from $33.2 million,
after restatement for adoption of SFAS 145 (see Note 2 in the Company's
Consolidated Financial Statements), for 2001 due primarily to (i) decreased
average outstanding borrowings; (ii) lower Prime and LIBOR base rates in 2002;
and (iii) lower interest rate margins on our Senior Credit Facility obligations.
Our interest paid in 2002 was $23.2 million, a 23.6% decrease from $30.5 million
paid in 2001.
Other Expense, Net. Other expense, net decreased approximately $1.0 million
in 2002. In 2001, we wrote off acquisition costs of $0.8 million related to a
non-consummated transaction.
Income Tax Expense. Our effective income tax rate of 35.0% for the year
ended December 28, 2002 differs from the federal statutory rate primarily due to
general business credits. Our effective income tax rate of 85.4%, after
restatement for adoption of SFAS 145 (see Note 2 in the Company's Consolidated
Financial Statements), for the year ended December 29, 2001 differs from the
federal statutory rate primarily due to the reversal of a valuation allowance
and the amortization of goodwill not being tax deductible. The valuation
allowance was reversed in 2001 due to the likelihood of realizing the future tax
benefit of certain tax loss carryforwards.
Net Income (Loss). For the reasons set forth above, we had net income of
$24.4 million for the year ended December 28, 2002 compared to a net loss of
$1.1 million for the year ended December 29, 2001.
EBITDA. For the reasons set forth above, we had EBITDA of $83.5 million, or
12.5% of net sales, for 2002 compared to $63.1 million, or 10.3% of net sales,
for 2001. Our Adjusted EBITDA, as defined below, increased 26.7% to $99.3
million in 2002 from $78.3 million in 2001. As a percentage of net sales, our
Adjusted EBITDA improved 2.0 percentage points to 14.8% in 2002 from 12.8% in
2001. A calculation of our Adjusted EBITDA for 2002 and 2001 is set forth below:
Years ended
-------------------
Dec. 28, Dec. 29,
2002 2001
------- -------
Net income (loss) $24,375 $(1,132)
Depreciation and amortization 18,437 31,766
Income tax expense (benefit) 13,128 (6,640)
Interest expense 25,532 33,245
ESOP expense -- 2,816
Other expense, net 2,055 3,038
------- -------
EBITDA(a) 83,527 63,093
Non-cash variable stock compensation 15,561 14,847
Interest income 194 397
------- -------
Adjusted EBITDA(a) $99,282 $78,337
======= =======
21
(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 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.
FISCAL YEAR 2001 (52 WEEKS) AS COMPARED TO FISCAL YEAR 2000 (53 WEEKS)
Net Sales. Net sales, as restated for EITF 01-9, for the year ended
December 29, 2001 decreased 6.9%, or $45.2 million, to $613.0 million in 2001
from $658.2 million in 2000. The fiscal year ended December 30, 2000 included an
additional week. Adjusting for the extra week, net sales decreased 5.1% versus
the comparable period in 2000. The decrease was primarily due to an 11.5%, or
approximately $84.2 million, decrease in bedding unit sales volume offset in
part by a 5.5%, or approximately $39.8 million, increase in bedding average unit
selling price. The unit sales volume decrease in 2001 resulted primarily from an
overall economic slowdown, which resulted in a reduction of sales beginning in
the second quarter of 2001, and the loss of business as a result of the
bankruptcy and subsequent liquidation of several major customers during the last
eighteen months prior to December 29, 2001, including The Heilig-Meyers Company
("Heilig-Meyers") (filed Chapter 11 in August 2000), Montgomery Ward, LLC (filed
Chapter 11 in December 2000), and Homelife Corporation ("Homelife") (filed
Chapter 11 in July 2001). In 2000, these three customers in the aggregate
accounted for 10.6% of our product shipments. The aggregate sales decline with
these three customers for fiscal year 2001 versus 2000 totaled $66.4 million.
The bedding average unit selling price increase was due principally to a price
increase of approximately 5% for our Beautyrest(R) product line in April 2001
and a shift in sales mix to higher priced products.
Cost of Products Sold. As a percentage of net sales, cost of products sold,
as restated for EITF 01-9, for the year ended December 29, 2001 decreased 1.8
percentage points to 59.6% from 61.4% in 2000. Our gross margin improvement for
2001 versus 2000 of 1.8 percentage points to 40.4% resulted principally from (i)
the increase in our bedding average unit selling price; (ii) the introduction of
our 2001 BackCare(R) product line; (iii) lower material costs as a percentage of
sales following introduction of our "Zero Waste" cost reduction initiative at
the beginning of 2001; and (iv) lower labor costs as a percentage of net sales
due to improved management of headcount and labor hours. At year end 2001, our
factory worker headcount was 12.0% lower than at the beginning of the year.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses, as restated for EITF 01-9, for the
year ended December 29, 2001 decreased 2.6 percentage points to 30.2% from 32.8%
in 2000. This decrease was primarily attributable to the following:
22
- non-recurring expenses in 2000 of $6.25 million (1.0% of 2000 net
sales), in the aggregate, to settle the Serta litigation and legal
fees associated with the litigation;
- non-recurring expenses in 2000 totaling approximately $3.5 million
(0.5% of 2000 net sales) to write-off transaction fees and to adjust
the receivable of a former customer, which the Company was
contemplating acquiring, to net realizable value following
management's decision that a distribution strategy of further
investment into retail operations through acquisition of certain
customers was not in the bests interest of the Company at that time;
- non-recurring expenses in 2000 totaling approximately $4.3 million
(0.7% of 2000 net sales) to write-off the receivable of a customer,
which at one time represented our potential direct entry into retail
operations, and to provide for lease termination fees relating to
certain lease obligations of the customer which were guaranteed by the
Company;
- measures implemented in July and August of 2001 that provided salary
and fringe benefit decreases, net of severances paid, of approximately
$1.7 million in 2001;
- a decrease in management severance expense of $1.7 million due to the
non-recurring severance costs incurred in 2000 related to the
reorganization of senior management of the Company;
- a $1.5 million (0.2% of net sales) gain in 2001 related to the partial
settlement of an obligation under our retiree health care plan; and
- a reduction of bad debt expense of $0.5 million. In 2000, bad debt
expense was negatively impacted by charges of $3.3 million (0.5% of
2000 net sales) in the aggregate to reserve for accounts receivable
due from Heilig-Meyers and Montgomery Ward.
Non-Cash Variable Stock Compensation Expense. Non-cash variable stock
compensation expense increased $14.3 million for the year ended December 29,
2001 to $14.8 million from $0.6 million in 2000 due to a 79.0% increase in the
underlying value of Holdings' common stock during 2001.
ESOP Expense. ESOP expense declined $4.3 million to approximately $2.8
million for the year ended December 29, 2001 from $7.1 million in 2000. This
decrease was due to a reduction in the number shares allocable for 2001, offset
in part by a 79.0% increase in the underlying value of Holdings' common stock
during 2001.
Amortization of Intangibles. Amortization of intangibles for the year ended
December 29, 2001 increased $7.9 million to $16.3 million from $8.4 million for
2000. This increase was due to a non-cash impairment charge in the fourth
quarter of 2001 of $7.9 million to write-down to market value the goodwill of
the Company's wholly-owned subsidiary Gallery Corp.
Interest Expense, Net. Interest expense, net decreased $1.7 million, or
4.9%, to approximately $33.2 million, after restatement for adoption of SFAS 145
(see Note 2 in the Company's Consolidated Financial Statements), for the year
ended December 29, 2001 from $35.0 million for 2000 due primarily to (i) lower
Prime and LIBOR base rates on our Senior Credit Facility obligations; (ii)
decreased average outstanding borrowings; and (iii) one less week of interest on
senior indebtedness during the year (fiscal 2000 was a 53-week year), partially
offset by an increase in our interest rate margin in January 2001 following
amendment to our Senior Credit Facility and interest rate protection agreements
on a portion of our floating rate debt which have the effect of reducing the
benefit of declining interest rates.
Other Expense, Net. Other expense, net increased approximately $1.2 million
to $3.0 million for the year ended December 29, 2001 compared to $1.8 million
for the year ended December 30, 2000. This
23
increase is principally due to the write-off of $0.8 million in acquisition
costs related to a transaction that was not consummated and higher management
advisory fees.
Income Tax Benefit. Our effective income tax rate of 85.4%, after
restatement for adoption of SFAS 145 (see Note 2 in the Company's Consolidated
Financial Statements), for the year ended December 29, 2001 differed from the
federal statutory rate primarily due to the reversal of a valuation allowance
and the amortization of goodwill not being tax deductible. The valuation
allowance was reversed due to the likelihood of realizing the future tax benefit
of certain tax loss carryforwards. Our effective income tax rate of 26.2% for
the year ended December 30, 2000 differed from the federal statutory rate
primarily due to the non-tax deductible amortization of goodwill.
Net Loss. For the reasons set forth above, we incurred a net loss of $1.1
million for the year ended December 29, 2001 compared to a net loss of $10.9
million for the year ended December 30, 2000, a decrease in our net loss of $9.8
million.
EBITDA. For the reasons set forth above, we had an EBITDA of $63.1 million,
or 10.3% of net sales, for 2001 compared to $50.7 million, or 7.7% of net sales,
for 2000. Our Adjusted EBITDA, as defined below, increased 27.1% to $78.3
million in 2001 from $61.6 million in 2000. As a percentage of net sales, our
Adjusted EBITDA improved 3.5 percentage points to 12.8% in 2001 from 9.3% in
2000. A calculation of our Adjusted EBITDA is set forth below:
Years ended
-------------------
Dec. 29, Dec. 30,
2001 2000
------- --------
Net loss $(1,132) $(10,943)
Depreciation and amortization 31,766 21,673
Income tax benefit (6,640) (3,883)
Interest expense 33,245 34,957
ESOP expense 2,816 7,117
Other expense, net 3,038 1,778
------- --------
EBITDA(a) 63,093 50,699
Non-cash variable stock compensation 14,847 574
Serta settlement and related legal fees -- 6,250
Management severance -- 3,777
Interest income 397 349
------- --------
Adjusted EBITDA(a) $78,337 $ 61,649
======= ========
(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 non-cash variable stock compensation and interest income
for 2001, and non-cash variable stock compensation expense, interest
income and certain other items as listed on page 16 for 2000.
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 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
24
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 source of cash to fund liquidity needs are (i) cash provided
by operating activities and (ii) borrowings available under our Senior Credit
Facility. Our primary use of funds consists of payments of principal and
interest for our debt, capital expenditures, distributions to Holdings,
acquisitions and funding for working capital increases. In 2002, our total debt
declined by $53.5 million, compared to a total debt decrease of $29.4 million in
2001.
Our operating activities provided cash of $74.0 million in 2002 compared to
$38.8 million in 2001. The following items principally account for the cash
provided from operations in 2002 and 2001: (i) operating income of $65.1 million
in 2002 versus $28.5 million in 2001; (ii) a decrease in working capital of
$12.6 million in 2002 versus a decrease of $17.6 million in 2001; and (iii)
minimal cash tax payments in 2002 and 2001 due to the utilization of federal and
state net operating loss carryforwards. We expect our remaining federal net
operating loss carryforwards of $19.4 million as of December 28, 2002 to be
fully utilized in 2003 resulting in the payment of federal income taxes
beginning in 2003. We expect that our obligation to pay federal income taxes
beginning in 2003 will reduce the Company's ability to accelerate debt payments.
Our capital expenditures totaled $7.4 million for the 2002 fiscal year and
consisted primarily of normal recurring capital expenditures. We expect to spend
an aggregate of approximately $10.0 million for capital expenditures in 2003. We
believe that annual capital expenditure limitations in our Senior Credit
Facility and the Indenture will not significantly inhibit us from meeting our
ongoing capital needs.
During the first quarter of 2002, we reacquired rights to certain
trademarks from a licensee for $3.0 million, including transaction costs.
Our 10.25% Series B Senior Subordinated Notes ("New Notes") bear interest
at the rate of 10.25% per annum, which is payable semiannually on March 15 and
September 15, and are guaranteed by all of our domestic subsidiaries. As of
December 28, 2002, the aggregate principal amount outstanding of the New Notes
was $150.0 million.
Our Senior Credit Facility, as amended, provides for loans of up to $136.0
million, consisting of a Term Loan Facility of $76.0 million and a Revolving
Loan Facility of $60.0 million. Our indebtedness under the Senior Credit
Facility bears interest at a floating rate, is guaranteed by Holdings and all of
our active domestic subsidiaries, and is collateralized by substantially all of
our assets.
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;
25
- 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) for the repurchase of Holdings' stock from deceased,
terminated or retired management shareholders of approximately $3.3
million and $5.2 million in fiscal years 2002 and 2003, respectively;
- 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 permitted annual asset sales from $3 million to $10
million;
- to adjust the definition of Management Fees and increase the overall
cap on such fees 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.
At December 28, 2002, 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 December 28,
2002 for the Tranche A term, Tranche B term and Tranche C term loans were 3.83%,
4.78%, and 5.00%, respectively.
We are exposed to market risk from changes in interest rates. In order to
address this risk, we have developed and implemented a policy to utilize
six-month LIBOR contracts to minimize the impact of near term LIBOR base rate
increases. On November 27, 2002, we elected to set our interest rate at the
six-month LIBOR rate for approximately $40.0 million of our Term Loan Facility,
which fixed the LIBOR base rate at 1.50% through May 22, 2003 for approximately
48% of floating rate debt outstanding at December 28, 2002.
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, we voluntarily prepaid $41.4 million of outstanding
term debt in 2002 out of cash flows from operations allocated as follows: Term A
- - $11.5 million; Term B - $18.3 million; and Term C - $11.6 million. No
mandatory prepayments or scheduled repayments are required in 2003 under the
terms of our Senior Credit Facility. Future principal debt payments are expected
to be paid out of cash flows from operations, borrowings on our current
Revolving Credit Facility, and future refinancing of our debt. As of December
28, 2002, we had availability to borrow $56.2 million under our Revolving Credit
Facility, after giving effect to $3.8 million that was reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit.
Our Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge coverage, cash interest coverage and
leverage ratios. The Senior Credit Facility also contains covenants which, among
other things, limit capital expenditures, the incurrence of additional
26
indebtedness, investments, dividends, transactions with affiliates, asset sales,
mergers and consolidations, prepayments of other indebtedness, liens and
encumbrances and other matters customarily restricted in such agreements. As of
December 28, 2002, we were in compliance with all our financial covenants.
The Company's contractual obligations and other commercial commitments and
the periods in which payments are due as of December 28, 2002 are summarized
below:
Next After
Contractual Obligations: Total Year 2-3 Years 4-5 Years 5 Years
- ------------------------ -------- -------- --------- --------- --------
Long-term debt(1) ............. $242,240 $ 413 $ 57,850 $ 19,832 $164,145
Capital lease obligations ..... 135 91 44 -- --
Noncancellable operating leases 74,543 22,796 26,751 17,121 7,875
Distributions to Holdings(2) 5,762 3,420 2,312 30 --
-------- -------- -------- -------- --------
Total contractual ........ $322,680 $ 26,720 $ 86,957 $ 36,983 $172,020
======== ======== ======== ======== ========
Other commercial COMMITMENTS:
Standby letters of credit $ 3,750 $ 3,750 $ -- $ -- $ --
======== ======== ======== ======== ========
(1) Accelerated payments could be required under the Consolidated Excess
Cash Flow provisions of the Senior Credit Facility. The Revolving
Credit Facility expires on October 29, 2004. The Company expects that
it will have the ability to renew the existing facility or have the
ability to find new financing with comparable terms prior to
expiration. If the Company is unable to renew its existing arrangement
or obtain new financing, this could have an adverse affect on the
Company's ability to fund operations.
(2) Holdings has certain notes payable to former stockholders for stock
redemptions. The Company will be required to distribute certain
amounts to Holdings to pay such obligations.
The Company's customers include furniture stores, specialty sleep shops,
department stores, rental stores, contract customers and membership clubs. In
the future, these retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which occurrences could
decrease the number of stores that carry the Company's products. These retailers
are also subject to changes in consumer spending and the overall state of the
economy. Bankruptcies of our customers may have and have had a material adverse
impact on sales and financial condition. Any of these factors could have a
material adverse effect on our business, financial condition or results of
operations.
The Company's ability to make scheduled payments of principal, or to pay
the interest on our indebtedness, or to fund planned capital expenditures will
depend on the Company's future performance, which, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. Based upon the current level of
operations and certain anticipated improvements, the Company believes that cash
flow from operations and available cash, together with available borrowings
under the Senior Credit Facility, will be adequate to meet our future liquidity
needs for the next several years. There can be no assurance that our business
will generate sufficient cash flow from operations, that anticipated revenue
growth and operating improvements will be realized, or that future borrowings
will be available under the Senior Credit Facility in an amount
27
sufficient to enable us to service our indebtedness, including the New Notes, or
to fund our liquidity needs.
SEASONALITY
For the past several years, there has been little seasonality to our
business.
ACCOUNTING PRONOUNCEMENTS
The financial results for the year ended December 28, 2002, include the
effect of adopting Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations ("SFAS 141"), and SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which resulted in a $5.6 million 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 indefinite-lived intangibles are now evaluated
against this new criteria. SFAS 142 requires the use of a nonamortization
approach to account for purchased goodwill and indefinite-lived 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 carrying 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 in
2002. For the years ended December 29, 2001 and December 30, 2000, pre-tax
amortization of goodwill and intangibles of $8.4 million in each year, exclusive
of the Gallery goodwill impairment charge of $7.9 million recognized in 2001,
would have been $2.8 million had SFAS 142 been adopted effective with the
beginning of fiscal 2000.
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"), which supersedes 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 year 2002)
on a prospective basis. Adoption of this pronouncement did not have a material
impact on the consolidated financial statements.
28
Effective December 30, 2001 (the first day of fiscal year 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 a reduction of sales. The Company previously 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 decreased net sales, selling, general and administrative expenses and
cost of products sold by $50.4 million, $49.7 million and $0.7 million,
respectively, for the year ended December 28, 2002 and $77.1 million, $76.3
million and $0.8 million, respectively, for the year ended December 29, 2001.
The adoption of EITF 01-9 also had the effect of decreasing net sales, selling,
general and administrative expenses and cost of products sold by $62.6 million,
$61.4 million and $1.2 million, respectively, for the year ended December 30,
2000. As reclassifications, these changes did not affect the Company's financial
position or results of operations.
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 May 15, 2002, transactions entered
into after May 15, 2002, 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. Due to the adoption of SFAS 145, $0.5
million of extraordinary expense, net of tax, related to accelerated debt
payments reported in 2001, has been reclassified to interest expense ($0.9
million) with the related tax benefit ($0.4 million) being reclassed to income
tax benefit in the 2001 Consolidated Statement of Operations.
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
EITF 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.
On November 25, 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"), an interpretation of
SFAS Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies ("SFAS
5"), relating to the guarantor's accounting for, and disclosure of, the issuance
of certain types of guarantees. FIN 45 requires that upon issuance of a
guarantee, the entity (i.e., the guarantor) must recognize a liability for the
29
fair value of the obligation it assumes under that guarantee. The FASB believes
that, in current practice, many entities might not be recognizing that
liability, believing that US GAAP does not require recognition, particularly
when the entity does not receive separately identifiable consideration (i.e., a
premium) for issuing the guarantee. Many guarantees are embedded in purchase or
sales agreements, service contracts, joint venture agreements, or other
commercial agreements and the guarantor in many such arrangements does not
receive a separately identifiable upfront payment for issuing the guarantee. FIN
45 is intended to improve the comparability of financial reporting by requiring
identical accounting for guarantees issued with a separately identified premium
and guarantees issued without a separately identified premium. FIN 45's
provisions for initial recognition and measurement should be applied on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year end. The guarantor's previous
accounting for guarantees that were issued before December 31, 2002 may not be
revised or restated to reflect the effect of the recognition and measurement
provisions of FIN 45. The Company does not expect the adoption of FIN 45 to have
a material impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Stock-Based Compensation -
Transition and Disclosure ("SFAS 148"), an amendment to SFAS No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"). The transition guidance and annual
disclosure provisions are effective for the Company's 2002 financial statements
and the interim disclosure provisions are effective for interim periods
beginning with the Company's first quarter 2003. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company records estimated compensation expense
over the service period based upon the intrinsic value of the options as they
are earned by the employees and records additional adjustments to non-cash
variable stock compensation expense for changes in the intrinsic value of vested
options in a manner similar to a stock appreciation right. Therefore, adoption
of this pronouncement did not have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), principally to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 is effective for the
Company's first quarter 2003 with transitional disclosure required with these
financial statements. The Company does not expect the adoption of FIN 46 to have
a material impact on the Company's financial position or results of operations.
30
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
See Item 1 "Business -- Forward-Looking Statements" for additional information.
We are exposed to market risk from changes in interest rates. In the first
quarter of 2002, the Company's interest rate swap and collars expired and were
not renewed. Interest rate protection agreements prior to October 2002 increased
our interest expense by $0.4 million in both 2002 and 2001, but reduced our
interest expense by $0.3 million in 2000. The Company recognized a $0.1 million
gain on expiration of the interest rate protection agreements in the first
quarter of 2002.
In order to address market risk, we have implemented a policy to maintain
the percentage of fixed and variable debt within certain parameters through the
use of six-month LIBOR contracts to minimize the impact of near term LIBOR base
rate increases. On November 27, 2002, we elected to set our interest rate at the
six-month LIBOR rate for approximately $40.0 million of our Term Loan Facility,
which fixed the LIBOR base rate at 1.50% through May 22, 2003 for approximately
48% of floating rate debt outstanding as of December 28, 2002.
All other factors remaining unchanged, a hypothetical 10% increase or
decrease in interest rates for one year on our variable rate financial
instruments would not have a material impact on earnings during the current or
next fiscal year.
31
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Simmons Company
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 15(a)(1) present fairly, in all material
respects, the financial position of Simmons Company (the "Company") at December
28, 2002 and December 29, 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 28, 2002, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. The financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangibles to
comply with Statement of Financial Accounting Standards ("SFAS") No. 142 and
adopted SFAS No. 145 which required the Company to reclassify losses related to
the early extinguishment of debt.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 3, 2003
32
Simmons Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Year ended Year ended Year ended
December 28, December 29, December 30,
2002 2001 2000
----------- ----------- -----------
(52 weeks) (52 weeks) (53 weeks)
Net sales ....................................... $ 670,390 $ 612,995 $ 658,154
Cost of products sold ........................... 356,444 365,420 404,263
--------- --------- ---------
Gross margin ........................... 313,946 247,575 253,891
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 232,265 185,092 215,924
Non-cash variable stock compensation expense 15,561 14,847 574
ESOP expense ............................... -- 2,816 7,117
Amortization of intangibles ................ 1,030 16,309 8,367
--------- --------- ---------
248,856 219,064 231,982
--------- --------- ---------
Operating income ....................... 65,090 28,511 21,909
Interest expense, net ...................... 25,532 33,245 34,957
Other expense, net ......................... 2,055 3,038 1,778
--------- --------- ---------
Income (loss) before income taxes ..... 37,503 (7,772) (14,826)
Income tax expense (benefit) .................... 13,128 (6,640) (3,883)
--------- --------- ---------
Net income (loss) .................... 24,375 (1,132) (10,943)
Other comprehensive income (loss):
Foreign currency translation adjustment .... (19) (61) (20)
--------- --------- ---------
Comprehensive income (loss) ........... $ 24,356 $ (1,193) $ (10,963)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
33
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
December 28, December 29,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 5,755 $ 1,209
Accounts receivable, less allowances for doubtful
receivables, discounts and returns of $5,251 and
$4,695, respectively ................................. 71,067 70,896
Inventories ............................................... 23,322 24,400
Deferred income taxes ..................................... 3,265 5,296
Other current assets ...................................... 20,912 13,371
--------- ---------
Total current assets ................................. 124,321 115,172
========= =========
Property, plant and equipment, net ............................. 39,660 45,276
Goodwill, net .................................................. 172,643 172,643
Intangible assets, net ......................................... 6,711 3,800
Deferred income taxes .......................................... 24,505 34,706
Other assets ................................................... 17,472 14,069
--------- ---------
$ 385,312 $ 385,666
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt ...................... $ 504 $ 12,147
Accounts payable .......................................... 39,137 29,306
Accrued liabilities ....................................... 54,145 46,765
--------- ---------
Total current liabilities ............................ 93,786 88,218
--------- ---------
Non-current liabilities:
Long-term debt ............................................ 241,871 283,767
Accrued stock compensation ................................ 26,778 12,324
Other ..................................................... 16,848 15,596
--------- ---------
Total liabilities .................................... 379,283 399,905
--------- ---------
Commitments and contingencies (notes 12 and 17)
Redemption obligation -- ESOP .................................. 61,218 44,079
Stockholder's deficit:
Common stock, $.01 par value; 50,000,000 shares authorized,
31,964,452 shares issued and outstanding ............. 320 320
Accumulated deficit ....................................... (55,365) (58,513)
Accumulated other comprehensive loss ...................... (144) (125)
--------- ---------
Total stockholder's deficit .......................... (55,189) (58,318)
--------- ---------
$ 385,312 $ 385,666
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
34
Simmons Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Deficit
(in thousands, except share amounts)
Accumulated
Additional Other Total
Common Common Paid-In Accumulated Comprehensive Stockholder's
Shares Stock Capital Deficit Loss Deficit
---------- ------ ---------- ----------- ------------- -------------
December 25, 1999 ................ 31,964,452 $ 320 $ -- $(23,608) $ (44) $(23,332)
Net loss ...................... -- -- -- (10,943) -- (10,943)
Other comprehensive income:
Change in foreign currency
translation ......... -- -- -- -- (20) (20)
---------- ----- -------- -------- ------- --------
Comprehensive loss ............ (10,943) (20) (10,963)
Excess of ESOP expense at fair
market value over cost ... -- -- 2,010 -- -- 2,010
Increase in redemption
obligation -- ESOP based on
fair market value ........ -- -- (1,029) (384) -- (1,413)
Distributions to Holdings ..... -- -- (981) (1,723) -- (2,704)
---------- ----- -------- -------- ------- --------
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)
---------- ----- -------- -------- ------- --------
December 29, 2001 ................ 31,964,452 320 -- (58,513) (125) (58,318)
Net income .................... -- -- -- 24,375 -- 24,375
Other comprehensive loss:
Change in foreign currency
translation ......... -- -- -- -- (19) (19)
---------- ----- -------- -------- ------- --------
Comprehensive income (loss) ... 24,375 (19) 24,356
Increase in redemption
obligation -- ESOP based on
fair market value ........ -- -- -- (17,139) -- (17,139)
Distributions to Holdings ..... -- -- -- (4,088) -- (4,088)
---------- ----- -------- -------- ------- --------
December 28, 2002 ................ 31,964,452 $ 320 $ -- $(55,365) $ (144) $(55,189)
=========== ===== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended Year ended Year ended
December 28, December 29, December 30,
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 24,375 $ (1,132) $(10,943)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 18,437 25,479 22,090
Non-cash variable stock compensation expense 15,561 14,847 574
Goodwill impairment charge -- 7,882 --
ESOP expense -- 2,816 7,117
Provision for doubtful accounts 3,082 6,006 12,616
Provision (benefit) for deferred income taxes 12,232 (8,559) (4,319)
Non-cash interest expense 2,557 3,637 1,801
Gain on settlement of postretirement benefits -- (2,137) --
Other, net (413) (754) (478)
Net changes in operating assets and liabilities:
Accounts receivable (3,253) 8,526 (20,822)
Inventories 1,078 445 (4,674)
Other current assets (12,107) (4,729) (7,028)
Accounts payable 9,831 (6,926) 19,848
Accrued liabilities 7,592 (4,285) 4,510
Settlement of retiree health care obligation -- (2,250) --
Other, net (4,947) (96) 332
-------- -------- --------
Cash provided by operating activities 74,025 38,770 20,624
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (7,441) (5,099) (13,160)
Purchase of intangible assets (2,963) (2,499) --
Development of intellectual property (969) -- --
Proceeds from disposals of property, plant and equipment 216 395 --
-------- -------- --------
Net cash used in investing activities (11,157) (7,203) (13,160)
-------- -------- --------
Cash flows from financing activities:
Distributions to Holdings (4,088) (3,284) (2,704)
Payments of Senior Credit Facility, net (53,061) (28,796) (8,165)
Payments of other long-term borrowings (575) (564) (544)
Proceeds of sale/leaseback transaction -- -- 2,909
Payments of financing costs (570) (714) (412)
-------- -------- --------
Net cash used in financing activities (58,294) (33,358) (8,916)
-------- -------- --------
Net effect of exchange rate changes on cash (28) (61) (20)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 4,546 (1,852) (1,472)
Cash and cash equivalents, beginning of period 1,209 3,061 4,533
-------- -------- --------
Cash and cash equivalents, end of period $ 5,755 $ 1,209 $ 3,061
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 23,642 $ 27,022 $ 34,996
======== ======== -=======
Cash paid for income taxes $ 426 $ 1,647 $ 147
======== ======== ========
Acquisition of business in exchange for receivables $ -- $ -- $ 15,449
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share amounts)
1. THE COMPANY
Simmons Company ("Simmons" or "the Company") is one of the largest bedding
manufacturers in the United States of America. The Company manufactures
mattresses, foundations, bedding frames and sleep accessories through its
wholly-owned subsidiaries, The Simmons Manufacturing Co., LLC and Simmons
Caribbean Bedding, Inc. Simmons and its subsidiaries sell through all major
distribution channels, including furniture stores, specialty sleep shops,
department stores, rental stores and warehouse showrooms. The Company and its
subsidiaries manufacture and supply conventional bedding to over 10,000 retail
outlets, representing over 3,100 customers.
Simmons distributes branded products on a contract sales basis directly to
institutional users of bedding products, such as the hospitality industry and
certain agencies of the United States Government, through the Company's
wholly-owned subsidiary, Simmons Contract Sales, LLC. The Company licenses its
trademarks, patents and other intellectual property to various domestic and
foreign manufacturers principally through its wholly-owned subsidiary,
Dreamwell, Ltd.
Additionally, the Company operates 17 retail outlet stores located
throughout the United States of America through the Company's wholly-owned
subsidiary, World of Sleep Outlets, LLC; 59 retail mattress stores operating as
Mattress Gallery located in Southern California through the Company's
wholly-owned subsidiary, Gallery Corp. (of which 26 stores were added in
December 2002 by assuming the leases and acquiring the inventory from Mattress
Discounters Corporation, which was in bankruptcy, for approximately $1.7
million); and beginning March 1, 2003, 49 retail mattress stores operating as
Mattress Gallery and Sleep Country USA located in Oregon and Washington through
the Company's wholly-owned subsidiary, SC Holdings, Inc.
The Recapitalization
On July 16, 1998, the Company's parent, Simmons Holdings, Inc. ("Holdings")
entered into a recapitalization agreement with the Company and REM Acquisition,
Inc., a transitory Delaware merger corporation ("REM"), sponsored by Fenway
Partners, Inc. ("Fenway"). Pursuant to the agreement, on October 29, 1998 REM
merged with and into Holdings (the "Recapitalization"), with Holdings being the
surviving corporation. As a result of the Recapitalization, Simmons Holdings,
LLC, an entity controlled by funds affiliated with Fenway, acquired 75.1% of the
outstanding voting shares of Holdings, and management, the ESOP and Investcorp
retained approximately 5.9%, 13.7% and 5.3%, respectively, of the outstanding
shares of Holdings. The Company has accounted for the Recapitalization as a
leveraged recapitalization, whereby the historical bases of the assets and
liabilities of the Company have been maintained.
2. PRINCIPAL ACCOUNTING POLICIES
Critical Accounting Policies
From the Company's principal accounting policies, the following have been
identified as critical accounting policies:
- estimating valuation allowances and accrued liabilities, specifically
the allowance for doubtful accounts and the warranty accrual;
- impairment of long-lived assets;
- impairment of goodwill;
37
- cooperative advertising and rebate programs;
- non-cash variable stock compensation expense;
- income taxes; and
- litigation and contingent liabilities.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates and Reclassifications
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Such financial statements include estimates and assumptions that affect
the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities, and the amounts of revenues and expenses. Actual results could
differ from those estimates. During 2001, the Company began to classify certain
revenues from its retail operations in the revenue category on the Consolidated
Statement of Operations. In 2000, such revenues were classified as a reduction
of selling, general and administrative expense. Such amounts were insignificant
in 2000 and do not affect operating income in any period.
Certain amounts in the 2001 and 2000 financial statements and related
footnotes have been reclassified to conform with the current presentation.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 2002 and 2001 comprised 52 weeks and fiscal
year 2000 comprised 53 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
net realizable value. The cost of inventories includes raw materials, direct
labor and manufacturing overhead costs. The Company provides inventory reserves
for excess, obsolete or slow-moving inventory based on changes in customer
demand, technology developments or other economic factors.
Supply Agreements
The Company from time to time enters into long-term supply agreements with
its customers. Any initial cash outlay by the Company is capitalized and
amortized as a reduction to revenue over the life of the contract and is ratably
recoverable upon contract termination. Such capitalized amounts are included in
other current assets and other assets in the Company's consolidated balance
sheets. Amortization expense related to these contracts was $4.6 million, $4.2
million, and $4.7 million in 2002, 2001 and 2000, respectively.
38
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation expense is
determined principally using the straight-line method over the estimated useful
lives for financial reporting and accelerated methods for income tax purposes.
Expenditures that substantially increase asset values or extend useful lives are
capitalized. Expenditures for maintenance and repairs are expensed as incurred.
When property items are retired or otherwise disposed of, amounts applicable to
such items are removed from the related asset and accumulated depreciation
accounts and any resulting gain or loss is credited or charged to income. Useful
lives are generally as follows:
Buildings and improvements 15 - 26 years
Leasehold improvements 2 - 10 years
Machinery and equipment 5 - 10 years
Computers and software 3 - 7 years
Amortization of Intangibles
Intangible assets consist primarily of patents, trademarks, and capitalized
costs related to licenses. Goodwill represents the excess of consideration paid
over the fair value of net assets acquired in purchase business combinations. In
2000 and 2001, goodwill and trademarks were amortized using the straight-line
method over periods of benefit that did not exceed forty years. With the
adoption of SFAS 142 as of December 30, 2001 (the first day of fiscal year
2002), no amortization was taken on these assets in 2002. The cost of obtaining
or defending patents is amortized using the straight-line method over the
estimated economic lives of the respective patents, which are generally 17
years. The capitalized costs related to licenses are amortized using the
straight-line method over the life of the respective license, which is generally
two to four years.
The Company tests goodwill and other indefinite-lived intangible assets for
impairment on an annual basis by comparing the fair value of the Company's
reporting units to their carrying values. Fair value is determined by the
assessment of future discounted cash flows. Additionally, goodwill is tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of an entity below its carrying
value. These events or circumstances would include a significant change in the
business climate, legal factors, operating performance indicators, competition,
sale or disposition of a significant portion of the business or other factors.
Other indefinite-lived intangible assets are tested between annual tests if
events or changes in circumstances indicate that the asset might be impaired.
Impairment of Long-Lived Assets
The Company regularly reviews all of its long-lived assets, including
intangibles with finite lives, for impairment whenever events or circumstances
indicate their carrying value may not be recoverable. Management reviews whether
there has been an impairment by comparing anticipated undiscounted future cash
flows from operating activities with the carrying value of the asset. The
factors considered by management in this assessment include operating results,
trends and prospects, as well as the effects of obsolescence, demand,
competition and other economic factors. If an impairment is deemed to exist,
management would record an impairment charge equal to the excess of the carrying
value over the fair value of the impaired assets.
As discussed in note 6 to the consolidated financial statements, the
Company recognized an impairment charge of $7.9 million in 2001. There were no
goodwill additions or impairments for the year ended December 28, 2002.
39
Debt Issuance Costs
The Company capitalizes costs associated with the issuance of debt and
amortizes the cost as additional interest expense over the lives of the debt
using the effective interest rate method. Amortization expense of $2.6 million,
$3.3 million, and $1.8 million for 2002, 2001, and 2000, respectively, is
included as a non-cash component of interest expense in the accompanying
Consolidated Statements of Operations. Due to the adoption of SFAS 145, $0.5
million of extraordinary expense, net of tax, related to accelerated debt
payments in 2001 has been reclassified to interest expense ($0.9 million) with
the related tax benefit ($0.4 million) reclassed to income tax benefit in the
accompanying 2001 Consolidated Statement of Operations.
Revenue Recognition
The Company recognizes revenue, net of estimated returns, when title and
risk of ownership passes, which is generally upon delivery of shipments. Sales
are presented net of cash discounts, rebates, returns and certain consideration
provided to customers such as co-operative advertising costs, promotional monies
and amortization of supply agreements. The Company uses historical trend
information regarding returns to reduce sales for estimated future returns. The
Company provides an allowance for bad debts for estimated uncollectible accounts
receivable, which is included in selling, general and administrative expenses in
the accompanying Consolidated Statements of Operations.
Product Delivery Costs
Product delivery costs are billed to the Company's customers and are
included as a component of net sales. The Company incurred $31.8 million, $31.6
million, and $30.4 million in shipping and handling costs associated with the
delivery of finished mattress products to its customers in 2002, 2001 and 2000,
respectively. These costs are included in selling, general and administrative
expenses in the accompanying Consolidated Statements of Operations.
Employee Stock Ownership Plan
Prior to 2002, the Company recognized ESOP expense as an amount equal to
the fair market value of the shares committed to be released to participants'
accounts. As of December 29, 2001, all the plan shares had been committed to be
released to participants' accounts. The unearned compensation balance was
previously amortized using the shares allocated method (i.e., at cost). The
difference in the fair market value and the cost of the shares, if any, was
recorded as an adjustment to additional paid-in capital.
Because of the Company's or Holdings' obligation to repurchase shares from
the ESOP under certain circumstances for their then current fair value, the
Company has classified the redemption value of such shares in the accompanying
consolidated balance sheets as redemption obligation -- ESOP as of December 28,
2002 and December 29, 2001, respectively. In 2002, this obligation increased
$17.1 million as a result of the increase in the underlying fair value of
Holdings common stock.
Stock Option Plans
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principle Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB No. 25), issued in March 2000, to account
for its employee stock option plans. Under this method, compensation expense is
recorded over the service period based
40
upon the intrinsic value of the options as they are earned by the employees.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS 123,
the Company has adopted the disclosure-only provisions and continues to apply
the intrinsic value-based method of accounting as described above. The
accounting for awards of stock-based compensation where an employee can compel
the entity to settle the award by transferring cash or other assets to employees
rather than by issuing equity instruments is substantially the same under SFAS
123 and APB 25. Accordingly, SFAS 123 pro-forma disclosures are not presented.
Foreign Currency
Subsidiaries located outside the United States of America generally use the
local currency as the functional currency. Assets and liabilities are translated
at exchange rates in effect at the balance sheet date and income and expense
accounts at average exchange rates during the year. Resulting translation
adjustments are recorded directly to accumulated other comprehensive income
(loss), a separate component of stockholder's deficit.
Product Development Costs
Costs associated with the development of new products and changes to
existing products are charged to expense as incurred. These costs amounted to
approximately $2.4 million, $1.8 million and $1.7 million for 2002, 2001 and
2000, respectively.
Rebates
The Company provides volume rebates to certain customers for the
achievement of various purchase volume levels. The Company recognizes a
liability for the rebate at the point of revenue recognition for the underlying
revenue transactions that result in progress by the customer towards earning the
rebate. Measurement of the liability is based on the estimated number of
customers that will ultimately earn and claim the rebates or refunds under the
offer. Rebates were $10.4 million, $10.6 million and $6.3 million in 2002, 2001
and 2000, respectively, and are included as a reduction of sales in the
accompanying Consolidated Statements of Operations.
Advertising Costs
The Company records the cost of advertising, including co-op advertising,
as an expense or a reduction of net sales when incurred or no later than when
the advertisement appears or the event is run. Advertising costs were $86.8
million, $74.0 million and $83.7 million for 2002, 2001 and 2000, respectively,
and in accordance with EITF 01-9, are included as either a reduction of net
sales or a component of selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
41
Warranties
The Company's warranty policy provides a 10-year non-prorated warranty
service period on all first quality products, except for certain products for
the hospitality industry which have varying non-prorated warranty periods
generally ranging from five to ten years. The Company's policy is to accrue the
estimated cost of warranty coverage at the time the sale is recorded. Accrued
warranties totaled $3.4 million and $3.2 million, respectively, as of December
28, 2002 and December 29, 2001. The following table presents a reconciliation of
the Company's warranty liability at December 28, 2002:
Dollar Amount of
Liability
----------------
Debit/(Credit)
Balance at December 29, 2001 $ 3,162
Accrual for warranties during 2002 3,256
Settlements made during 2002 (2,984)
-------
Balance at December 28, 2002 $ 3,434
=======
Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized when it is probable that a liability exists and the amount or
range of amounts can be reasonably estimated. Remediation costs that relate to
an existing condition caused by past operations are accrued when it is probable
that the costs will be incurred and can be reasonably estimated.
Derivative Instruments
Effective January 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). This statement, as
amended, standardizes the accounting for derivative instruments, including
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the balance sheet and measure
them at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether a derivative is designated as part of a hedging relationship and, if it
is, depending on the type of the hedging relationship. The cumulative effect
upon prior years of adopting SFAS 133 was not material.
Significant Concentrations of Risk
Cash and cash equivalents are maintained with several major financial
institutions in the United States of America and Puerto Rico. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally,
these deposits may be redeemed upon demand. Additionally, the Company monitors
the financial condition of such institutions and considers the risk of loss
remote.
The Company manufactures and markets sleep products, including mattresses
and box springs to retail establishments primarily in the United States of
America. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not, in most cases, require collateral.
Shipments to the Company's five largest customers aggregated approximately 17%,
17% and 21% of total shipments for each of 2002, 2001 and 2000, respectively,
and no single customer accounted for over 10% of the Company's net sales.
42
Purchases of raw materials from one vendor represented approximately 21%,
20% and 20% of cost of products sold for 2002, 2001 and 2000, respectively.
Additionally, the Company purchases substantially all of its foam from one
supplier. Such purchases represented approximately 12%, 14% and 13% of cost of
products sold for 2002, 2001 and 2000, respectively. The Company also primarily
utilizes two third-party logistics providers which, in the aggregate, accounted
for 66%, 63% and 60% of outbound shipments in 2002, 2001 and 2000,
respectively.
Accounting Pronouncements
The financial results for the year ended December 28, 2002, include the
effect of adopting Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations ("SFAS 141"), and SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which resulted in a $5.6 million 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 indefinite-lived intangibles are now evaluated
against this new criteria. SFAS 142 requires the use of a nonamortization
approach to account for purchased goodwill and indefinite-lived 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 carrying 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 in
2002. For the years ended December 29, 2001 and December 30, 2000, pre-tax
amortization of goodwill and intangibles of $8.4 million in each year, exclusive
of the Gallery goodwill impairment charge of $7.9 million recognized in 2001,
would have been $2.8 million had SFAS 142 been adopted effective with the
beginning of fiscal 2000.
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"), which supersedes 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 year 2002)
on a prospective basis. Adoption of this pronouncement did not have a material
impact on the consolidated financial statements.
43
Effective December 30, 2001 (the first day of fiscal year 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 a reduction of sales. The Company previously 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 decreased net sales, selling, general and administrative expenses and
cost of products sold by $50.4 million, $49.7 million and $0.7 million,
respectively, for the year ended December 28, 2002 and $77.1 million, $76.3
million and $0.8 million, respectively, for the year ended December 29, 2001.
The adoption of EITF 01-9 also had the effect of decreasing net sales, selling,
general and administrative expenses and cost of products sold by $62.6 million,
$61.4 million and $1.2 million, respectively, for the year ended December 30,
2000. As reclassifications, these changes did not affect the Company's financial
position or results of operations.
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 May 15, 2002, transactions entered
into after May 15, 2002, 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. Due to the adoption of SFAS 145, $0.5
million of extraordinary expense, net of tax, related to accelerated debt
payments reported in 2001, has been reclassified to interest expense ($0.9
million) with the related tax benefit ($0.4 million) being reclassed to income
tax benefit in the 2001 Consolidated Statement of Operations.
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
EITF 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.
On November 25, 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"), an interpretation of
SFAS Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies ("SFAS
5"), relating to
44
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. FIN 45 requires that upon issuance of a guarantee, the entity
(i.e., the guarantor) must recognize a liability for the fair value of the
obligation it assumes under that guarantee. The FASB believes that, in current
practice, many entities might not be recognizing that liability, believing that
US GAAP does not require recognition, particularly when the entity does not
receive separately identifiable consideration (i.e., a premium) for issuing the
guarantee. Many guarantees are embedded in purchase or sales agreements, service
contracts, joint venture agreements, or other commercial agreements and the
guarantor in many such arrangements does not receive a separately identifiable
upfront payment for issuing the guarantee. FIN 45 is intended to improve the
comparability of financial reporting by requiring identical accounting for
guarantees issued with a separately identified premium and guarantees issued
without a separately identified premium. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year end. The guarantor's previous accounting for guarantees
that were issued before December 31, 2002 may not be revised or restated to
reflect the effect of the recognition and measurement provisions of FIN 45. The
Company does not expect the adoption of FIN 45 to have a material impact on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Stock-Based Compensation -
Transition and Disclosure ("SFAS 148"), an amendment to SFAS No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"). The transition guidance and annual
disclosure provisions are effective for the Company's 2002 financial statements
and the interim disclosure provisions are effective for interim periods
beginning with the Company's first quarter 2003. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company records estimated compensation expense
over the service period based upon the intrinsic value of the options as they
are earned by the employees and records additional adjustments to non-cash
variable stock compensation expense for changes in the intrinsic value of vested
options in a manner similar to a stock appreciation right. Therefore, adoption
of this pronouncement did not have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), principally to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights ("variable interest entities" or "VIEs") and how to
determine when and which business enterprise should consolidate the VIE (the
"primary beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 is effective for the
Company's first quarter 2003 with transitional disclosure required with these
financial statements. The Company does not expect the adoption of FIN 46 to have
a material impact on the Company's financial position or results of operations.
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company is structured so that many employees of the Company have a
beneficial ownership of the stock of Holdings or, prior to the Recapitalization,
of the Company through their participation in the ESOP. Through 2002, the
Company made annual contributions to the ESOP in an amount up to 25% of eligible
participant compensation, subject to certain limitations and conditions. The
ESOP used all
45
such contributions to repay the ESOP loan. As a result, there was no cash cost
associated with the contributions to the ESOP. Following 2002, no further
Company contributions will be made to the ESOP.
ESOP assets are held in trust by State Street Bank and Trust Company, the
ESOP trustee. Prior to repayment of the ESOP loan in full in 2002, the ESOP
shares were held in a suspense account and were released to the ESOP
participants' accounts based on debt service. In 2000, 1,071,944 shares were
released to participants' accounts for the 1999 ESOP allocation. In 2001,
988,124 shares were released to participants' accounts for the 2000 ESOP
allocation. In 2002, 298,006 shares were released to participants' accounts for
the 2001 ESOP allocation. At December 28, 2002, all shares of Holdings common
stock in the ESOP were allocated, resulting in no further allocation of shares
to participants.
Over half of the Company's full-time employees are participants in the
ESOP. The participants and beneficiaries of the ESOP are not subject to income
tax with respect to contributions made on their behalf until they receive
distributions from the ESOP.
Under the provisions of the ESOP, the Company or Holdings is obligated to
repurchase participant shares distributed under the terms of the ESOP, as long
as the shares are not publicly traded or if the shares are subject to trading
limitations. Holdings regularly repurchases shares from the ESOP to provide
liquidity for cash distributions. Holdings repurchased approximately 29,345
shares and 25,972 shares from the ESOP in 2002 and 2001, respectively, at an
average price of $15.2038 and $8.2457 per share, respectively. The ESOP held
3,414,300 and 3,443,645 shares as of December 28, 2002 and December 29, 2001,
respectively.
4. INVENTORIES
Inventories consisted of the following as of December 28, 2002 and December
29, 2001:
2002 2001
------- -------
Raw materials $ 11,198 $ 13,263
Work-in-progress 1,240 1,029
Finished goods 10,884 10,108
-------- --------
$ 23,322 $ 24,400
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December 28,
2002 and December 29, 2001:
2002 2001
------- -------
Land, buildings and improvements $11,298 $11,165
Leasehold improvements 10,926 9,549
Machinery and equipment 72,350 68,106
Construction in progress 955 820
------- -------
95,529 89,640
Less accumulated depreciation (55,869) (44,364)
------- -------
$39,660 $45,276
======= =======
Depreciation expense was $12.8 million for both 2002 and 2001, and $11.2
million for 2000.
46
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On December 30, 2001 (the first day of fiscal year 2002), the Company
adopted SFAS 142 and ceased to amortize goodwill and costs associated with
indefinite life trademarks. As required by SFAS 142, the Company reassessed the
expected useful lives of existing intangible assets. This reassessment resulted
in no changes to the expected useful lives of the Company's patents and
licenses.
Summarized below are the major classes of intangible assets that will
continue to be amortized under SFAS 142, as well as the carrying values of those
intangible assets, which will no longer be amortized:
December 28, 2002 December 29, 2001
----------------------- ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Amortized intangible assets
Patents $17,647 $(17,049) $17,454 $(16,045)
Licenses 398 (8) -- --
------- -------- ------- --------
Total $18,045 $(17,057) $17,454 $(16,045)
======= ======== ======= ========
Unamortized intangible assets
Trademarks $ 5,723 $ 2,391
------- -------
Total $ 5,723 $ 2,391
======= =======
The following table presents the Company's 2000 and 2001 results on a basis
comparable to the 2002 results, adjusted to exclude amortization expense
(including any related tax effects) related to goodwill:
2002 2001 2000
------- ------- --------
Reported net income (loss) $24,375 $(1,132) $(10,943)
Add back: goodwill amortization -- 5,636 5,571
------- ------- --------
Adjusted net income (loss) $24,375 $ 4,504 $ (5,372)
======= ======= ========
In connection with the acquisition of substantially all of the retail store
locations and other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp.
("CBMC") by Gallery Corp. ("Gallery") in 2000, the Company recorded $16.1
million of goodwill. This represented the excess of the purchase price over the
fair value of assets acquired and was being amortized on a straight line basis
over a twenty year period. Due to various Gallery operating factors, in the
fourth quarter of 2001 the Company reviewed the carrying value of Gallery's
goodwill in accordance with the Company's accounting policies and recorded an
impairment charge of $7.9 million to write down the Gallery goodwill to its
estimated market value. The impairment charge is included in amortization of
goodwill in the accompanying 2001 Consolidated Statement of Operations. There
were no goodwill additions or impairments for the year ended December 28, 2002.
As part of the adoption of SFAS 142, the Company performed initial
valuations during the first quarter 2002 to determine if any impairment of
goodwill and indefinite-lived intangibles existed and determined that no
impairment of goodwill and indefinite-lived intangible assets existed. In
accordance with SFAS 142, goodwill was tested at December 28, 2002 for
impairment by comparing the fair value of
47
the Company's reporting units to their carrying values. Fair values were
determined by the assessment of future discounted cash flows. This impairment
test will be performed each year on the last day of the Company's fiscal year
unless circumstances or events necessitate an evaluation at an interim date.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 28, 2002 and
December 29, 2001:
2002 2001
------- -------
Accrued wages and benefits $18,130 $13,410
Accrued advertising and incentives 18,480 16,783
Accrued interest 5,084 5,785
Other accrued expenses 12,451 10,787
------- -------
$54,145 $46,765
======= =======
8. LONG-TERM DEBT
Long-term debt consisted of the following at December 28, 2002 and December
29, 2001:
2002 2001
-------- --------
Senior Credit Facility:
Tranche A Term Loan $ 14,500 $ 30,061
Tranche B Term Loan 42,505 65,762
Tranche C Term Loan 19,006 33,249
-------- --------
Total Senior Credit Facility 76,011 129,072
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 3.33%, due 2016 4,200 4,400
Banco Santander loan, 3.42%, due 2013 2,329 2,524
10.25% Series B Senior Subordinated Notes due 2009 150,000 150,000
Other, including capital lease obligations 135 218
-------- --------
242,375 295,914
Less current portion (504) (12,147)
-------- --------
$241,871 $283,767
======== ========
The 10.25% Series B Senior Subordinated Notes ("New Notes") bear interest
at the rate of 10.25% per annum, which is 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 and its subsidiaries
to comply with certain restrictive covenants, including a restriction on
dividends and limitations on the incurrence of indebtedness, certain payments
and distributions, and sales of the Company's assets and stock.
The New Notes are fully and unconditionally guaranteed on an unsecured,
senior subordinated basis by all of the Company's active domestic subsidiaries.
Exclusive of allocation of the debt and related interest of the Company, the
total sales, total assets, cash flow from operations, net income from
48
continuing operations before income taxes, and stockholder's equity of the three
active non-guarantor international subsidiaries was $13.6 million, $10.9
million, $1.7 million, $1.0 million, and $6.5 million, respectively, as of and
for the year ended December 28, 2002.
The Senior Credit Facility, as amended, provides for loans of up to $136.0
million, consisting of a Term Loan Facility of $76.0 million and a Revolving
Loan Facility of $60.0 million. The Company's indebtedness under the Senior
Credit Facility bears interest at a floating rate, is guaranteed by Holdings and
all of the Company's active domestic subsidiaries, and is collateralized by
substantially all of the Company's assets.
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) for the repurchase of Holdings stock from deceased,
terminated or retired management shareholders of approximately $3.3
million and $5.2 million in fiscal years 2002 and 2003, respectively;
- 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 permitted asset sales from $3 million to $10 million;
- to adjust the definition of Management Fees and increase the overall
cap on such fees 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.
Borrowings under the Senior Credit Facility bear interest at December 28,
2002 at the Company's 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 December 28,
2002 for the Tranche A term, Tranche B term and Tranche C term loans were 3.83%,
4.78% and 5.00%, respectively.
The use of interest rate risk management instruments, such as collars and
swaps, was required under the terms of the Senior Credit Facility prior to the
October 2002 amendment. Interest rate protection agreements increased the
Company's interest expense by $0.4 million in both 2002 and 2001, and reduced
the Company's interest expense by $0.3 million in 2000. The Company recognized a
$0.1 million gain on expiration of the interest rate protection agreements in
the first quarter of 2002.
49
The Company is exposed to market risk from changes in interest rates. In
order to address this risk, the Company has developed and implemented a policy
to utilize six-month LIBOR contracts to minimize the impact of near term LIBOR
base rate increases. On November 27, 2002, the Company elected to set its
interest rate at the six-month LIBOR rate for approximately $40.0 million of the
Term Loan Facility, which fixed the LIBOR base rate at 1.50% through May 22,
2003 for approximately 48% of floating rate debt outstanding as of December 28,
2002.
As of December 28, 2002, the Company had availability to borrow $56.2
million under the Revolving Credit Facility after giving effect to $3.8 million
that was reserved for the Company's reimbursement obligations with respect to
outstanding letters of credit. The remaining availability under the Revolving
Credit Facility may be utilized to meet the Company's current working capital
requirements, including issuance of stand-by and trade letters of credit. The
Company also may utilize the remaining availability under the Revolving Credit
Facility to fund distributions to Holdings, acquisitions and capital
expenditures.
The Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge coverage, 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
December 28, 2002, the Company was in compliance with all of its financial
covenants.
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 then 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, the Company voluntarily prepaid $41.4
million of outstanding term debt in 2002 out of cash flows from operations
allocated as follows: Term A -- $11.5 million; Term B -- $18.3 million; and Term
C -- $11.6 million. No mandatory prepayments or scheduled repayments are
required in 2003 under the terms of the Senior Credit Facility.
Future maturities of long-term debt as of December 28, 2002 are as follows:
2003 $ 504
2004 14,961
2005 42,933
2006 19,419
2007 413
Thereafter 164,145
--------
$242,375
========
The Revolving Credit Facility expires on October 29, 2004. The Company
expects that it will have the ability to renew the existing facility or have the
ability to find new financing with comparable terms prior to expiration. If the
Company is unable to renew its existing arrangement or obtain new financing,
this could have an adverse affect on the Company's ability to fund operations.
The fair value of the Company's long-term debt is estimated based on the
current rates offered for debt of similar terms and maturities except for the
10.25% Series B Senior Subordinated Notes due 2009 which is at quoted market
values. The fair value of the Company's 10.25% Series B Senior Subordinated
50
Notes due 2009 was $160.5 million as of December 28, 2002. All other long-term
debt approximates fair value as of December 28, 2002.
9. DERIVATIVE INSTRUMENTS
The Company has periodically used certain interest rate swaps and collars
to manage its interest rate risk. In 2002, the Company ceased the use of
interest rate protection agreements and amended their Senior Credit Facility to
eliminate the requirement that the Company must fix the interest rate on at
least 50% of the principal amount of outstanding term loans. The swaps and
collars did not qualify for hedge accounting, therefore, the Company recorded a
$0.1 million gain in 2002 on expiration of the swaps and collars. This gain is
included in other expense, net in the accompanying 2002 Consolidated Statement
of Operations. The cumulative effect upon prior years of adopting SFAS 133 was
not material.
10. LICENSING
During the late 1980's and early 1990's, the Company disposed of most of
its foreign operations and secondary domestic lines of business. As a result,
the Company now licenses internationally the Simmons(R) name and many of its
trademarks, processes and patents generally on an exclusive long-term basis to
third-party manufacturers which produce and distribute conventional bedding
products within their designated territories. These licensing agreements allow
the Company to reduce exposure to political and economic risks abroad by
minimizing investments in those markets. The Company has eighteen foreign
licensees and eight foreign sub-licensees with operations in Argentina,
Australia, Brazil, Canada, Chile, Colombia, Dominican Republic, Ecuador, El
Salvador, England, France, Hong Kong, Israel, Italy, Japan, Korea, Mexico,
Morocco, New Zealand, Oman, Panama, Singapore, South Africa, Sweden, Taiwan, and
Venezuela. These foreign licensees and sub-licensees have rights to sell
Simmons-branded products in approximately 90 countries.
Additionally, the Company has fifteen domestic third-party licensees. Some
of these licensees manufacture and distribute juvenile bedding,
healthcare-related bedding and furniture, and non-bedding upholstered furniture,
primarily on long-term or automatically renewable terms. Additionally, the
Company has licensed the Simmons(R) name and other trademarks, generally for
limited terms, to manufacturers of airbeds, waterbeds, feather and down
comforters, sheets and synthetic comforter sets, pillows, bed pads, blankets,
bed frames, futons, office chairs, specialty sleep items, massage recliners and
pet beds.
In 2002, 2001 and 2000 the Company's licensing agreements as a whole
generated royalties of approximately $7.9 million, $8.6 million and $8.0
million, respectively, which are accounted for as a reduction of selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations.
11. OTHER EXPENSE, NET
Other expense, net is comprised of the following:
2002 2001 2000
------ ------ ------
Management advisory fee paid to a $2,165 $2,160 $1,778
related party
Other non-operating (revenue) expenses (110) 878 --
------ ------ ------
$2,055 $3,038 $1,778
====== ====== ======
51
12. LEASES AND OTHER COMMITMENTS
The Company leases certain facilities and equipment under operating leases.
The Company's commitments under capital leases are not material to
necessitate separate disclosure. Rent expense was $21.6 million, $21.2 million,
and $15.7 million for 2002, 2001 and 2000, respectively.
The following is a schedule of the future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 28, 2002:
2003 $22,796
2004 14,162
2005 12,589
2006 10,063
2007 7,058
Thereafter 7,875
-------
$74,543
=======
The Company has the option to renew certain plant operating leases, with
the longest renewal period extending through 2021. Most of the operating leases
provide for increased rent through increases in general price levels.
The Company has various purchase commitments with certain suppliers in
which the Company is committed to purchase approximately $74 million of raw
materials from these vendors in 2003. If the Company does not reach the
committed level of purchases, various additional payments could be required to
be paid to these suppliers.
13. STOCK OPTION PLANS
In 1996, the board of directors established a management stock incentive
plan (the "1996 Plan"), which provided for the granting of non-qualified options
for Class C common stock of Holdings to members of management and certain key
employees. The options outstanding under the 1996 Plan were granted at prices
which were equal to or above the market value of the Class C stock on the date
of grant. As a result of the Recapitalization, the vesting of the issued and
outstanding stock options under the 1996 plan was accelerated.
In 1996, the Company also entered into an agreement with Holdings whereby
if Holdings grants any options to purchase shares of common or Class C Stock of
Holdings to a director, employee or consultant of the Company, the Company will
grant to Holdings corresponding options, exercisable only upon exercise of the
Holdings options, to purchase the same number of shares of common stock of the
Company at the same per share exercise price and subject to substantially the
same terms and conditions as the Holdings options. All references to stock
options pertain to the Holdings options which have been attributed to the
Company for disclosure purposes.
During 1999, the board of directors of Holdings established the 1999 Stock
Option Plan ("1999 Plan"), which now provides for the granting of up to
4,902,878 options for shares of Holdings common stock to directors (including
those who are not employees), all executive officers of the Company and its
subsidiaries, and other employees, consultants and advisors. Under the terms of
the 1999 Plan, options may be either incentive or non-qualified. Generally, the
options outstanding under the 1999 Plan are granted at prices which equate to or
are above the market value of the common stock of Holdings on the date of grant,
expire after ten years, and vest ratably over a four or five year period based
upon the achievement of an annual Adjusted EBITDA target, as defined in the 1999
Plan, or as otherwise established by the Compensation Committee of the Board of
Directors. The 1999 Plan permits the Compensation Committee to grant other stock
options on terms and conditions established by the Committee. The incentive plan
provides for issuance of regular options ("Regular Options") and superincentive
options ("Superincentive Options"). Regular Options are subject to certain time
and performance vesting restrictions and Superincentive Options vest only in
connection with the
52
consummation of a change of control or initial public offering of Holdings and
the attainment by shareholders affiliated with Fenway of certain internal rate
of return objectives.
In 2002, the board of directors of Holdings established the 2002 Stock
Option Plan ("2002 Plan"), which now provides for the granting of up to
1,053,122 options for shares of Holdings common stock to directors (including
those who are not employees), all executive officers of the Company and its
subsidiaries, and other employees, consultants and advisors. Under the terms of
the 2002 Plan, options may be either incentive or non-qualified. Generally, the
options outstanding under the 2002 Plan are granted at prices which are equal to
or are above the market value of the common stock of Holdings on the date of
grant, expire after ten years, and vest based upon conditions specified by the
board of directors of Holdings. This plan provides for issuance of Regular
Options and Superincentive Options. Regular Options are subject to certain time
and performance vesting restrictions and Superincentive Options vest only in
connection with the consummation of a change of control or initial public
offering of Holdings and the attainment by shareholders affiliated with Fenway
of certain internal rate of return objectives.
Under APB 25, because the vesting of the plan options is dependent upon
achieving an annual Adjusted EBITDA target or as otherwise established by the
Compensation Committee of the Board of Directors, the ultimate number of vested
shares, and therefore the measurement date, is not currently determinable.
Accordingly, pursuant to APB 25, the Company records estimated compensation
expense over the service period based upon the intrinsic value of the options as
they are earned by the employees.
Additionally, the 2002, 1999 and 1996 Plans provide that the option holders
may, under certain circumstances, require Holdings to repurchase the shares
underlying vested options. Therefore, pursuant to APB 25 and its
interpretations, the Company records additional adjustments to non-cash variable
stock compensation expense for changes in the intrinsic value of vested Regular
Options under the 1996, 1999 and 2002 Plans in a manner similar to a stock
appreciation right. The accounting for awards of stock-based compensation where
an employee can compel the entity to settle the award by transferring cash or
other assets to employees rather than by issuing equity instruments is
substantially the same under SFAS 123 and APB 25. Accordingly, SFAS 123
pro-forma disclosures are not presented.
The Company recorded non-cash variable stock compensation expense of
approximately $15.6 million, $14.8 million and $0.6 million related to Regular
Options during 2002, 2001 and 2000, respectively.
53
Stock option activity (all non-qualified) during 2002, 2001 and 2000
follows:
Weighted
Average
Number Exercise
of Shares Price
----------- --------
Shares outstanding at December 25, 1999 4,377,492 $ 5.27
Granted 4,820,000 $ 6.73
Forfeited (2,061,000) $ 6.73
Cancelled (1,232,196) $ 2.79
----------
Shares outstanding at December 30, 2000 5,904,296 $ 6.50
Granted 503,878 $ 7.67
Forfeited (740,861) $ 6.73
Cancelled (148,371) $ 6.16
---------- ------
Shares outstanding at December 29, 2001 5,518,942 $ 6.58
Granted 410,750 $13.45
Forfeited (862,064) $ 6.78
Cancelled (219,404) $ 4.39
---------- ------
Shares outstanding at December 28, 2002 4,848,224 $ 7.23
========== ======
Shares exercisable at December 28, 2002 2,187,862 $ 6.60
========== ======
The following table summarizes information concerning currently outstanding
and exercisable options:
Outstanding Options Exercisable Options
- -------------------------------------------------------------------------- -----------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices Dec. 28, 2002 Contractual Life Exercise Price Dec. 28, 2002 Exercise Price
- --------------- --------------- ---------------- ---------------- -------------- ----------------
$ 2.65 - $ 3.57 195,474 3.1 $ 2.74 195,474 $ 2.74
$ 5.15 - $ 7.15 4,122,000 7.3 $ 6.76 1,904,075 $ 6.75
$ 8.95 - $12.80 335,000 9.2 $10.96 61,875 $10.31
$14.15 - $16.75 195,750 10.0 $15.06 26,438 $15.18
--------- ---------
4,848,224 7.0 $ 7.23 2,187,862 $ 6.60
========= =========
54
14. INCOME TAXES
The components of the provision for income taxes are as follows:
2002 2001 2000
------- ------- -------
Current tax provision:
Federal $ -- $ -- $ --
State 250 -- --
Foreign 475 496 422
------- ------- -------
725 496 422
------- ------- -------
Deferred tax provision:
Federal 11,104 (6,764) (3,625)
State 1,258 (372) (680)
Foreign 41 -- --
------- ------- -------
12,403 (7,136) (4,305)
------- ------- -------
Income tax expense (benefit) $13,128 $(6,640) $(3,883)
======= ======= =======
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 2002, 2001 and 2000 provision for income taxes is
as follows:
2002 2001 2000
-------- ------- -------
Income taxes at federal statutory rate $ 13,128 $ (2,720) $ (5,040)
State income taxes, net of federal benefit 1,480 (174) (442)
General business tax credits (1,500) -- --
Reversal of valuation allowance -- (3,999) --
Goodwill amortization -- 1,691 1,643
State net operating loss benefit -- (655) --
Foreign tax credits (137) (529) --
Other, net 157 (254) (44)
-------- -------- --------
$ 13,128 $ (6,640) $ (3,883)
======== ======== ========
Components of the net deferred income tax asset as of December 28, 2002 and
December 29, 2001 are as follows:
2002 2001
-------- --------
Current deferred income taxes:
Accounts receivable and inventory reserves $ 1,300 $ 2,081
Accrued liabilities, not currently deductible 5,228 6,571
Prepaids and other assets, not currently taxable (3,263) (3,356)
-------- --------
Current deferred income tax asset 3,265 5,296
Noncurrent deferred income taxes:
Property bases differences 1,492 (3,207)
Patents bases differences -- (248)
Stock option compensation 10,314 4,913
Net operating loss carryforwards 8,482 30,184
Income tax credit carryforwards 2,204 --
Other noncurrent accrued liabilities, not
currently deductible 2,013 3,064
-------- --------
Non-current deferred income tax asset 24,505 34,706
-------- --------
Net deferred income tax asset $ 27,770 $ 40,002
======== ========
55
Realization of the net deferred tax asset is dependent upon the future
profitable operations and future reversals of existing temporary differences.
Although realization is not assured, the Company believes it is more likely than
not that the net recorded benefits will be realized through the reduction of
future taxable income.
As of December 28, 2002, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $19.4 million. The net
operating loss carryforwards expire on various dates through 2020. As of
December 28, 2002, the Company had approximately $1.5 million of general
business credits and $0.7 million of foreign tax credits available to offset
future payments of federal income taxes. These credits will expire in varying
amounts between 2003 and 2022.
Cumulative undistributed earnings to be permanently reinvested by the
Company's international subsidiaries totaled approximately $6.0 million at
December 28, 2002. Because the Company plans to have its international
subsidiaries permanently reinvest these earnings, no U.S. deferred income tax
has been recorded.
15. RETIREMENT PLANS
Simmons 401(k) Plan
The Company has a defined contribution 401(k) plan for substantially all
employees other than employees subject to collective bargaining agreements.
Employees with 12 weeks of employment who have reached age 18 are permitted to
participate in the plan. Generally, employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation. Eligible participants
may make contributions to the defined contribution plan; however, prior to 2001,
no employer contributions were allowed. In 2001, the Company amended the plan to
provide for the making of employer non-elective contributions, currently 3% of
an employee's compensation (subject to current tax limitations) once an employee
completes one year of service, and to allow participants to make salary deferral
contributions up to 17% of compensation on a pre-tax basis, subject to various
tax limitations. All employer non-elective contributions are immediately vested
and not subject to forfeiture.
In 2002 the Company further amended the plan to provide for an additional
employer matching contribution of 50 cents on each employee dollar contributed
up to 6% of the employee's pay (subject to current tax limitations). The
additional matching contribution is provided to participants who complete 1,000
hours of service and are employed on the last day of each plan year. The
additional matching contribution will vest 20% per year over five years.
In 2002 and 2001, the Company made contributions to the plan of $3.0
million and $1.9 million, respectively, in the aggregate.
Other Plans
Certain union employees participate in multi-employer pension plans
sponsored by their respective unions. Amounts charged to pension cost,
representing the Company's required contributions to these plans for 2002, 2001
and 2000 were $2.0 million, $2.1 million and $1.8 million, respectively.
The Company had accrued $2.5 million at both December 28, 2002 and December
29, 2001 for a supplemental executive retirement plan for a former executive.
Such amounts are included in other non-current liabilities in the accompanying
consolidated balance sheets.
56
Retiree Health Coverage
The Company currently provides certain health care and life insurance
benefits to eligible retired employees. Eligibility is defined as retirement
from active employment, having reached age 55 with 15 years of service, and
previous coverage as a salaried or nonunion employee. Additionally, spouses are
eligible to receive benefits, provided the spouse was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. There is no current retiree health coverage for participants age
65 and over. The Company also provided life insurance to all retirees who
retired before 1979. These plans are unfunded.
The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active service period
of the employee. Such amounts are included in other non-current liabilities in
the accompanying consolidated balance sheets.
In 2000, the Company limited eligibility for retiree health care benefits
to employees who had become or did become eligible (by reaching age 55 with 15
years of service) by December 31, 2001. The effect of this change was a decrease
in the benefit obligation of approximately $1.1 million. In 2001, the Company
made benefit payments of approximately $2.5 million to settle a portion of this
obligation. As a result of the settlement, the Company recorded a gain of
approximately $2.1 million during 2001 related to the reduction of the
accumulated post-retirement benefit obligation. Approximately $0.5 million and
$1.6 million of this gain is reflected in cost of products sold and selling,
general and administrative expenses, respectively, in the accompanying 2001
Consolidated Statement of Operations.
57
The following table presents a reconciliation of the plan's status at
December 28, 2002 and December 29, 2001:
December 28, December 29,
2002 2001
------------ -----------
Change in benefit obligation:
Benefit obligation, beginning of year $ 727 $ 1,857
Interest cost 39 81
Actuarial loss (gain) 43 1,337
Benefits paid (268) (298)
Settlements -- (2,250)
------- -------
Benefit obligation, end of year $ 541 $ 727
======= =======
Change in plan assets:
Fair value of assets, beginning of year $ -- $ --
Employer contributions 268 2,548
Settlement -- (2,250)
Benefits paid (268) (298)
------- -------
Fair value of assets, end of year $ -- $ --
======= =======
Reconciliation of accrued benefit cost:
Funded status $ (541) $ (727)
Unrecognized prior service cost (696) (928)
Unrecognized net gain (321) (461)
------- -------
Accrued benefit cost, end of year $(1,558) $(2,116)
======= =======
December 28, December 29, December 30,
2002 2001 2000
----------- ----------- -----------
Weighted-average assumptions:
Discount rate 5.70% 6.50% 7.25%
Components of net periodic benefit cost:
Service cost $ -- $ -- $ 160
Interest cost 23 81 201
Amortization of:
Prior service cost (232) (232) (30)
Gain (89) (450) (212)
------- ------- -------
Net periodic benefit cost (298) (601) 119
Settlements gain -- (1,536) --
Curtailment gain -- -- (153)
------- ------- -------
Postretirement benefit income $ (298) $(2,137) $ (34)
======= ======= =======
A 9.5% annual rate of increase in the cost of health care benefits was
assumed for 2002, decreasing by 0.5% per year to an ultimate rate of 5.0%. A
1.0% change in assumed health care cost trend rates would have an immaterial
effect on the benefit obligation or the postretirement benefit income.
58
16. LEGAL SETTLEMENT AND CONTINGENCIES
On or about December 11, 2001, FDL, Inc. ("FDL") filed a complaint, which
has been amended twice since the original filing, against the Company in the
United States District Court for the Southern District of Indiana. FDL alleges
that the Company licensed trademark rights to FDL that the Company licensed to
another licensee under a separate agreement, and based on that allegation,
purports to assert claims for fraud, breach of contract, false representation,
and for declarations that the license agreement between FDL and the Company is
terminated and/or rescinded and that FDL is entitled to use the trademarks at
issue in connection with certain products. The Company denied the material
allegations of the amended complaint and asserted counterclaims against FDL,
alleging that FDL has breached its contract with the Company by failing to pay
overdue royalties under the license agreement, refusing to permit the Company to
conduct audits and inspections of FDL's books and records, and selling products
bearing the Company's trademarks outside the geographic territory permitted in
the license agreement between FDL and the Company. FDL also has asserted claims
against United Sleep Products Denver, Inc. ("United Sleep"), a licensee of the
Company, alleging that United Sleep tortiously interfered with FDL's business
relationship with the Company; infringed and diluted the Company's trademarks;
engaged in unfair competition; and violated the provisions of the Lanham Act.
The Company has entered into an agreement with United Sleep, under which the
Company has assumed the defense of United Sleep in the action and agreed to
indemnify it with respect to the claims FDL presently has asserted against it.
The case presently is set for trial on November 3, 2003. The Company intends to
vigorously defend this lawsuit.
From time to time, the Company has been involved in various legal
proceedings. The Company believes that all other litigation is routine in nature
and incidental to the conduct of the Company's business, and that none of this
other litigation, if determined adversely to the Company, would have a material
adverse effect on the Company's financial condition or results of its
operations.
At December 28, 2002, Holdings had $19.4 million of outstanding Junior
Subordinated PIK Notes payable to an affiliate of Fenway, which bear interest at
17.5% per annum and are due on October 29, 2011. Holdings is unable to repay the
debt without receiving dividends from the Company. The Company's indenture for
the New Notes and Senior Credit Facility restrict the payment of dividends by
the Company to Holdings for repayment of the Junior Subordinated PIK Notes.
17. RELATED PARTY TRANSACTIONS
During 2002, 2001 and 2000, the Company had sales of finished mattress
products pursuant to supply contracts to SC Holdings, Inc., an entity acquired
by the Company on February 28, 2003 from an affiliate of Fenway as further
discussed in Note 18 to the consolidated financial statements. Sales to SC
Holdings, Inc. totaled approximately $12.0 million in 2002 and $13.1 million for
both 2001 and 2000. At December 28, 2002, accounts receivable in the
accompanying consolidated balance sheet included approximately $2.7 million due
from SC Holdings, Inc. Two directors of the Company were directors of SC
Holdings, Inc. The Company believes 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 in 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. The Fenway Advisory Agreement was amended on
October 21, 2002 to change the calculation of the annual management fee. In
exchange for advisory services, the Company has beginning October 21, 2002
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
59
any out-of-pocket expenses, incurred by Fenway in connection with providing
services to the Company. Prior to October 21, 2002, the annual management fee to
Fenway was calculated as 0.25% of net sales for the prior year. Included in
other expense in the accompanying Consolidated Statements of Operations is $2.2
million for both 2002 and 2001, and $1.8 million for 2000 related to the
management fee.
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 (i)
franchise taxes and other fees required to maintain Holdings' corporate
existence; (ii) operating costs incurred by Holdings attributable to its
ownership of the Company's capital stock not to exceed $0.9 million per year;
(iii) 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; (iv) 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 as permitted under the Senior
Credit Facility, as amended; and (v) registration expenses incurred by Holdings
incident to a registration of any capital stock of Holdings under the Securities
Act. The Company anticipates additional distributions to Holdings related to
notes payable to former shareholders of $3.4 million, $1.2 million and $1.1
million in 2003, 2004 and 2005, respectively.
18. SUBSEQUENT EVENT
On February 28, 2003, the Company acquired all the common stock of SC
Holdings, Inc. from an affiliate of Fenway for approximately $18.4 million plus
transaction costs and additional contingent consideration based upon future
performance. SC Holdings, Inc. is a leading mattress retailer in the Pacific
Northwest, which operates 49 stores under the Sleep Country USA and Mattress
Gallery names. SC Holdings, Inc. will be included in the Company's consolidated
results of operations and financial position beginning in the first quarter of
2003.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of March 1, 2003 and
position of each of our directors and executive officers.
Name Age Position
- ---- --- --------
Charles R. Eitel 53 Chairman of the Board of Directors and
Chief Executive Officer
Robert W. Hellyer 43 President and Director
William S. Creekmuir 47 Executive Vice President, Chief Financial
Officer, Assistant Treasurer, Assistant
Secretary and Director
Mark A. Parrish 37 Executive Vice President and Chief
Operations Officer
Rhonda Rousch 48 Executive Vice President -- Human
Resources and Assistant Secretary
Kevin Damewood 46 Senior Vice President -- Sales
Donald J. Hofmann 50 Senior Vice President -- Marketing
Allen N. Podratsky 47 Senior Vice President -- Product
Development and Supply Chain Management
Kristen K. McGuffey 37 Senior Vice President -- General Counsel
and Secretary
Peter Lamm 51 Director
Richard C. Dresdale 46 Vice President, Assistant Treasurer,
Assistant Secretary and Director
Mark R. Genender 38 Vice President, Assistant Treasurer,
Assistant Secretary and Director
Dale F. Morrison 54 Director
Charles R. Eitel joined Simmons in January 2000 as Chairman of the Board of
Directors and Chief Executive Officer of the Company and Holdings. Prior to
joining Simmons, Mr. Eitel served as President and Chief Operating Officer of
Interface, Inc., a leading global manufacturer and marketer of floorcoverings,
interior fabrics and architectural raised floors. Prior to serving as Chief
Operating Officer, he held the positions of Executive Vice President of
Interface, President and Chief Executive Officer of the Floorcoverings Group,
and President of Interface Flooring Systems, Inc. Mr. Eitel is a director of
Duke Realty Corporation, an industrial real estate company (REIT) based in
Indianapolis, Indiana and American Fidelity Assurance Company in Oklahoma City,
Oklahoma.
Robert W. Hellyer joined Simmons in 1995 and has served as President and
director of the Company and Holdings since January 2001. Prior to assuming his
current position, Mr. Hellyer served as Executive Vice President -- Sales and
Marketing, Executive Vice President -- Sales, General Manager -- Janesville and
Vice President of Sales -- Janesville. Prior to joining Simmons, Mr. Hellyer
held various sales positions with Stearns & Foster. Mr. Hellyer is a member of
the Board of Trustees of the International Sleep Products Association.
61
William S. Creekmuir joined Simmons in April 2000 and serves as Executive
Vice President, Chief Financial Officer, Assistant Treasurer, Assistant
Secretary and director of the Company and Executive Vice President, Chief
Financial Officer, Assistant Treasurer, Assistant Secretary and director of
Holdings. Prior to joining Simmons, Mr. Creekmuir served as Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of LADD Furniture,
Inc. Mr. Creekmuir is a member of the Business Advisory Council to the Walker
College of Business at Appalachian State University. Mr. Creekmuir is also a
Certified Public Accountant.
Mark A. Parrish joined Simmons in June 2001 as Executive Vice President and
Chief Operations Officer of the Company and Holdings. Prior to joining Simmons,
from May 2000 to July 2001, Mr. Parrish was the Chief Operating Officer and
director of MW Manufacturers, Inc., a company affiliated with Fenway. From March
1999 to April 2000, Mr. Parrish held various senior management positions with
Interface, Inc. Prior to 1999, Mr. Parrish was employed by Harley-Davidson, Inc.
Rhonda Rousch joined Simmons in November 2001 and has served as Executive
Vice President -- Human Resources and Assistant Secretary since October 2002.
Prior to assuming her current position, Ms. Rousch served as Senior Vice
President -- Human Resources and Assistant Secretary. Prior to joining Simmons,
from September 2000 to November 2001, Ms. Rousch was Vice President of Human
Resources for MW Manufacturers, Inc., a company affiliated with Fenway. Prior to
September 2000, Ms. Rousch was the Director of Organizational Readiness for
Harley-Davidson, Inc.
Kevin Damewood joined Simmons in January 2000 and has served as Senior Vice
President -- Sales since July 2001. Prior to assuming his current position, Mr.
Damewood served as Vice President -- National Accounts. Mr. Damewood also worked
for Simmons from July 1996 to April 1999 as Vice President -- Sales for the
Company's Seattle and Salt Lake City plants. Between April 1999 and December
2000, Mr. Damewood was employed with Premier Bedding Group as Vice President of
National Sales.
Donald J. Hofmann joined Simmons in 1995 and has served as Senior Vice
President -- Marketing since February 2000. Mr. Hofmann served as Vice President
- -- Marketing and Vice President -- Advertising prior to assuming his current
position. Prior to joining Simmons, Mr. Hofmann held various marketing and
advertising positions, including President of Earle Palmer Brown Advertising and
Executive Vice President of Marketing at Tupperware, Inc. Mr. Hofmann is a
director of the Better Sleep Council, an organization affiliated with the
International Sleep Products Association.
Allen N. Podratsky joined Simmons in May 2000 as Senior Vice President -
Product Development and Supply Chain Management. Prior to joining Simmons, from
February 1999 to May 2000, Mr. Podratsky was Vice President of World-Wide Supply
Chain Management for Xerox Engineering Systems, a division of Xerox Corporation.
From 1992 to May 2000, Mr. Podratsky held various positions at Mattel, Inc.
(Fisher-Price, Inc.) including Director Product Development and Director
Commodity Management -- Plastics. Mr. Podratsky is a director of the Sleep
Products Safety Council, an organization affiliated with the International Sleep
Products Association.
62
Kristen K. McGuffey joined Simmons in November 2001 and has served as
Senior Vice President -- General Counsel and Secretary since August 2002. Prior
to assuming her current position, Ms. McGuffey served as Vice President --
General Counsel and Assistant Secretary. Prior to joining Simmons, from March
2000 to October 2001, Ms. McGuffey was employed by Viewlocity, Inc., with the
most recent position of Executive Vice President and General Counsel. From March
1997 to February 2000, Ms. McGuffey was a partner of and, prior to that, an
associate at Morris, Manning & Martin LLP. Prior to March 1997, Ms. McGuffey was
an associate at Paul, Hastings, Janofsky & Walker, LLP.
Peter Lamm became a director of Simmons and Holdings in 1998 in connection
with the Recapitalization. Mr. Lamm is Chairman and Chief Executive Officer and
a founding partner of Fenway, a New York-based direct investment firm for
institutional investors with a primary objective of acquiring leading
middle-market companies. Mr. Lamm currently serves as a director of several
companies, including Aurora Foods Inc., Iron Age Corporation, Harry Winston,
Inc. and Blue Capital Management.
Richard C. Dresdale became a director of Simmons and Holdings in 1998 in
connection with the Recapitalization. Mr. Dresdale is also Vice President,
Assistant Treasurer and Assistant Secretary of the Company and Holdings. Mr.
Dresdale is President and a founding partner of Fenway. Mr. Dresdale currently
serves as a director of several companies, including Aurora Foods Inc. and Blue
Capital Management.
Mark R. Genender became a director of Simmons and Holdings in 1999. Mr.
Genender is also Vice President, Assistant Treasurer and Assistant Secretary of
the Company and Holdings. Mr. Genender is a Managing Director of Fenway where he
has worked since 1996. Prior to Fenway, Mr. Genender worked for Nabisco, Inc.
and PepsiCo, Inc. Mr. Genender currently serves as a director of several
companies, including DCI Holdings, Inc., M2 Automotive and Harry Winston, Inc.
Dale F. Morrison became a director of Simmons and Holdings in 2002. Mr.
Morrison is Chief Executive Officer of Fenway Partners Resources, Inc. From 2000
to 2001, Mr. Morrison was Chief Executive Officer of Ci4net, a technology equity
holding company. From 1995 to 2000, Mr. Morrison was associated with Campbell
Soup Company and served as President, Chief Executive Officer and a director
from 1997 to 2000. Mr. Morrison currently serves as a director of several
companies, including Aurora Foods Inc. and Iron Age Corporation.
Each of our directors will hold office until the next annual meeting of our
shareholders or until his successor has been elected and qualified. Our
executive officers are elected by and serve at the discretion of our Board of
Directors. There are no family relationships between any of our directors or
executive officers. As of December 28, 2002, the members of the Audit Committee
of the Board of Directors are Messrs. Dresdale and Genender and the members of
the Compensation Committee of the Board of Directors are Messrs. Eitel, Lamm and
Dresdale. Mr. Dresdale is the Treasurer and a Director and Mr. Lamm is a
Director of Valley Recreation Products Inc., which filed a voluntary petition
for relief under Chapter 7 of the United States Bankruptcy Code on July 25,
2002.
63
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in the previous
three years by our Chief Executive Officer and each of our other four most
highly compensated executive officers during the past year (the "Named Executive
Officers"). The compensation arrangements for each of these officers that are
currently in effect are described under the caption "Employment Arrangements"
below. The bonuses set forth below include amounts earned in the year shown but
paid in the subsequent year.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Annual Compensation Awards
------------------------------------------- ------------
Other All Other
Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)(7)
- --------------------------- ---- -------- -------- ------------ ------------ ------------
Charles R. Eitel 2002 $562,083 $613,039 $ 18,800(1) -- $48,952
Chairman, Chief Executive 2001 528,847 275,249 105,093(1) -- 27,137
Officer 2000 496,474 484,447 13,858(1) 1,350,000(2) 2,259
Robert W. Hellyer 2002 311,000 258,915 11,500(3) -- 33,613
President 2001 293,750 111,754 66,502(3) 40,276
2000 217,500 229,500 8,000(3) 480,000 21,698
William S. Creekmuir 2002 300,000 249,758 148,353(4) -- 32,339
Executive Vice President & 2001 298,750 103,715 81,910(4) 12,293
Chief Financial Officer 2000 213,750 207,912 35,088(4) 500,000 384
Mark A. Parrish 2002 259,166 215,763 11,500(5) 25,000 66,778
Executive Vice President & 2001 120,833 88,109 6,875(5) 275,000 60,430
Chief Operations Officer
Rhonda Rousch 2002 184,583 89,178 12,515(6) 50,000 8,168
Executive Vice President -- 2001 22,500 10,000 1,125(6) 50,000 --
Human Resources
(1) Such amounts principally include a car allowance of $12,000 in 2002, 2001
and 2000; and club initiation and membership fees of $6,800, $93,093 and
$1,858 in 2002, 2001 and 2000, respectively. These items were taxable to
Mr. Eitel. The personal income tax impact of a 2001 club initiation and
membership fee was assumed by the Company which resulted in additional
compensation of $40,009.
(2) As of October 29, 2002, all such options are held by The Charles R. Eitel
Revocable Trust, of which Mr. Eitel is the trustee.
(3) Such amounts principally include a car allowance of $9,000 in both 2002 and
2001, and $6,000 in 2000; and moving expenses of $55,502 in 2001. These
items were taxable to Mr. Hellyer. The personal income tax impact of the
2001 moving expenses was assumed by the Company which resulted in
additional compensation of $10,315.
(4) Such amounts principally include a car allowance of $9,000 in both 2002 and
2001, and $6,750 in 2000; commute and temporary housing expenses of
$16,852, $70,910 and $26,338 in 2002, 2001 and 2000, respectively; and
moving expenses of $120,000 in 2002. These items were taxable to Mr.
Creekmuir. The personal income tax impact of certain commute and temporary
housing expenses
64
and moving expenses was assumed by the Company which resulted in
additional compensation of $38,674 and $34,562 in 2002 and 2001,
respectively.
(5) Such amounts include a car allowance of $9,000 and $4,875 in 2002 and 2001,
respectively.
(6) Such amounts include a car allowance of $9,000 and $1,125 in 2002 and 2001,
respectively.
(7) All other compensation amounts include:
(a) contributions to our ESOP in 2002, 2001 and 2000, respectively, in the
amounts of $16,170, $0 and $0 for Mr. Eitel; $17,147, $21,911 and
$21,237 for Mr. Hellyer; and $14,229, $0 and $0 for Mr. Creekmuir,
respectively;
(b) contributions to our 401(k) plan in 2002 and 2001, respectively, in
the amounts of $11,058 and $14,500 for Mr. Eitel; $10,875 and $14,812
for Mr. Hellyer; $9,750 and $6,750 for Mr. Creekmuir; $4,550 and $0
for Mr. Parrish; and $3,469 and $0 for Ms. Rousch, respectively;
(c) premiums for term life insurance and long-term disability insurance in
2002, 2001 and 2000, respectively, in the amounts of $21,724, $12,636
and $2,259 for Mr. Eitel; $5,591, $3,552 and $461 for Mr. Hellyer;
$8,340, $5,543 and $384 for Mr. Creekmuir; $1,798, $0 and $0 for Mr.
Parrish; and $4,699, $0 and $0 for Ms. Rousch, respectively. These
premiums were taxable to Messrs. Eitel, Hellyer, Creekmuir, and
Parrish and Ms. Rousch. The personal income tax impact of these items
were assumed by the Company which resulted in additional compensation
in 2002 and 2001, respectively, in the amounts of $9,994 and $5,756
for Mr. Eitel; $2,543 and $2,452 for Mr. Hellyer; $3,845 and $2,548
for Mr. Creekmuir; $828 and $0 for Mr. Parrish; and $2,164 and $0 for
Ms. Rousch; and
(d) forgiveness of loan in the amount of $111,804 in both 2002 and 2001
for Mr. Parrish. This item was taxable to Mr. Parrish. The personal
income tax impact of this item was assumed by the Company which
resulted in additional compensation of $51,374.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------------
Percent of
Total Potential Realizable Value
Number of Options / of
Securities SARs Granted Exercise Assumed Annual Rates of
Underlying to Employees or Stock Price Appreciation
Option/ SARs in Fiscal Base Price Expiration For Option Terms
Name Granted (#) Year ($/Sh) Date 5%($) 10%($)
- ---- ------------ ------------ ---------- ---------- ------- --------------
Charles R. Eitel -- -- -- -- -- --
Robert W. Hellyer -- -- -- -- -- --
William S. Creekmuir -- -- -- -- -- --
Mark A. Parrish 25,000 6.1% $ 7.15 2012 $126,973 $ 509,995
Rhonda Rousch 50,000 12.2% $12.80 2012 $454,617 $1,825,995
65
The table below sets forth information concerning the value of unexercised
stock options at the end of 2002 for the Named Executive Officers. No options
were exercised by the Named Executive Officers in 2002. There was no public
trading market for our common stock as of December 28, 2002. Therefore, the
values in the table below have been calculated on the basis of the per share
amount as determined by an independent third-party appraisal less the applicable
exercise price.
FISCAL YEAR END OPTION VALUES
Number of Shares Value of Unexercised
Underlying Unexercised In-The-Money
Options at Options at
Fiscal Year End (#) Fiscal Year End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
Charles R. Eitel (1)
Regular 500,000 500,000 5,599,250 5,599,250
Superincentive -- 350,000 -- 3,919,475
Robert W. Hellyer
Regular 169,791 145,709 2,014,185 1,631,722
Superincentive -- 212,500 -- 2,379,681
William S. Creekmuir
Regular 125,000 125,000 1,399,813 1,399,813
Superincentive -- 250,000 -- 2,799,626
Mark A. Parrish
Regular 50,000 150,000 539,000 1,617,000
Superincentive -- 100,000 -- 1,078,000
Rhonda Rousch
Regular 6,250 43,750 56,125 296,625
Superincentive -- 50,000 -- 352,750
Effective April 1, 2003, the following Regular Options become exercisable
as follows -- Mr. Eitel, 250,000 shares; Mr. Hellyer, 74,584 shares; Mr.
Creekmuir, 62,500 shares; Mr. Parrish, 50,000 shares; and Ms. Rousch, 12,500
shares.
(1) As of October 29, 2002, all such options are held by The Charles R.
Eitel Revocable Trust, of which Mr. Eitel is the trustee.
RETIREMENT PLANS
We maintain several single employer retirement plans including a single
employer defined benefit plan and two single employer defined contribution
plans, the ESOP and a 401(k) Plan, which are intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986. We also participate in a
number of multi-employer pension plans, from which we have no present intention
to withdraw. In the aggregate, these plans cover substantially all permanent
employees.
Simmons 401(k) Plan. The Simmons 401(k) Plan, as amended, contains a cash
or deferred arrangement under Section 401(k) of the Internal Revenue Code.
Employees with 12 weeks of employment who have reached age 18 are permitted to
participate in the plan. Generally, employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation.
Presently, approximately 2,000 employees participate in this plan.
Participants direct the investment of their account balances. Effective January
1, 2001, eligible employees may defer the receipt of up to 17% (previously 6%)
of compensation on a pre-tax basis, subject to various tax limitations. The
66
plan provides for the making of employer non-elective contributions, currently
3% of an employee's compensation (subject to current tax limitations), once an
employee completes one year of service. Participants are fully vested in their
salary deferral and non-elective employer contributions at all times.
In 2002 we further amended the plan to provide for an additional employer
matching contribution of 50 cents on each employee dollar contributed up to 6%
of the employee's pay (subject to current tax limitations). The matching
contribution will be provided to participants who complete 1,000 hours of
service and are employed on the last day of each plan year. The matching
contribution will vest 20% annually over five years. The Company made
contributions to the 401(k) plan during 2002 and 2001 in the aggregate of $3.0
million and $1.9 million, respectively.
ESOP. The ESOP is a defined contribution pension benefit plan that is
designed to qualify as an employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Internal Revenue Code. Stock of Holdings and other
assets of the ESOP are held in a trust for which State Street Bank and Trust
Company serves as trustee. The ESOP provides benefits to each participating
employee based on the value of the stock and other assets allocated to the
participant's account over the period of such participant's participation in the
plan. The ESOP covers otherwise eligible employees of Simmons who are 18 or
older and who have completed at least one year of service for Simmons.
Generally, employees covered by collective bargaining agreements are not
permitted to participate, unless the collective bargaining agreement expressly
provides for participation. As of December 28, 2002, approximately 2,400 of our
current and former employees were participants in the ESOP. Effective December
29, 2001, no further employees can become eligible to participate in the ESOP.
Through 2002, we made annual cash contributions to the ESOP in an amount up
to 25% of eligible participant compensation, subject to limitations and
conditions. The ESOP used this cash to repay a previously outstanding loan to
us. As a result, there was no cash cost to us associated with the contributions
to the ESOP. As the loan was repaid, a portion of the shares of Holdings held by
the ESOP was allocated to participant accounts and non-cash compensation expense
equal to the fair market value of the allocated shares was charged to non-cash
ESOP expense. All shares of Holdings held by the ESOP have been allocated to
plan participants.
With limited exceptions, including an exception required by law permitting
retirement-age individuals with at least 10 years of plan participation to
liquidate over a six-year period those shares allocated to their accounts,
shares allocated to a participant's account under the ESOP cannot be sold or
otherwise transferred by the participant. The ESOP provides for distributions to
be made to participants following termination of employment. With respect to
participants whose termination of employment occurs after becoming eligible for
retirement at age 65, early retirement at age 55 with at least 10 years of
service, or on account of permanent disability or death, 50% of the distribution
generally is made during the plan year in which the distribution request is made
and the balance of the distribution generally is made during the plan year
following the plan year in which the distribution request is made. In all other
cases, distribution generally is made or commences to be made after the
expiration of a five plan year period following the plan year in which
termination occurs. Distributions are made in cash, based on the fair market
value, as determined pursuant to an annual appraisal, of the shares allocated to
the participant's account. A participant entitled to a distribution is entitled
under law to have the shares allocated to his or her account distributed in
kind. A participant electing to have a distribution of shares has a limited
right to require us to purchase such shares at fair market value over
approximately a two-year period.
Defined Benefit Plan. We also sponsor a single employer defined benefit
pension plan for eligible employees called the Retirement Plan for Simmons
U.S.A. Employees. This plan currently benefits only employees covered by
specific collective bargaining agreements, and has less than 100
67
participants. The monthly benefit for these participants upon normal retirement
is generally determined as the sum of:
(1) 0.75% of monthly earnings as of January 1, 1963 multiplied by
specified credited service as of May 1, 1963;
(2) 1.0% of the first $400 of monthly earnings plus 1.75% of monthly
earnings in excess of $400 for the time period from May 1, 1963
through April 30, 1967; and
(3) 1.25% of the first $550 of monthly earnings plus 1.75% of monthly
earnings in excess of $550 for each year and completed month of
credited service, beginning May 1, 1967.
There is a reduction for benefits accrued under the Retirement Plan for
Simmons Employees, a predecessor plan that was terminated in 1987. A somewhat
different formula applies to employees who are represented by IAM Local 315 in
New Jersey and UFWA Local 262 in California. None of the named executive
officers benefit under the plan.
Retiree Health Coverage. The Company currently provides certain health care
and life insurance benefits to eligible retired employees. Eligibility is
defined as retirement from active employment, having reached age 55 with 15
years of service, and previous coverage as a salaried or nonunion employee.
Additionally, spouses are eligible to receive benefits, provided the spouse was
covered prior to retirement. The medical plan pays a stated percentage of most
medical expenses reduced for any deductible and payments made by government
programs and other group coverage. There is no current retiree health coverage
for participants age 65 and over. The Company also provided life insurance to
all retirees who retired before 1979. These plans are unfunded.
The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active service period
of the employee. Such amounts are included in other non-current liabilities in
the accompanying consolidated balance sheets.
In 2000, we limited eligibility for retiree health care benefits to
employees who had become or did become eligible (by reaching age 55 with 15
years of service) by December 31, 2001. The effect of this change was a decrease
in the benefit obligation of approximately $1.1 million. In 2001, we made
benefit payments of approximately $2.5 million to settle a portion of this
obligation. As a result of the settlement, we recorded a gain of approximately
$2.1 million during 2001 related to the reduction of the accumulated
post-retirement benefit obligation. Approximately $0.5 million and $1.6 million
of this gain is reflected in cost of products sold and selling, general and
administrative expenses, respectively, in the accompanying 2001 Consolidated
Statement of Operations. The remaining accrued obligation of approximately $1.6
million at December 28, 2002 consists of approximately $0.7 million of
unrecognized prior service costs and approximately $0.3 million of unrecognized
net gains, both of which will be amortized through 2006, and approximately $0.5
million in remaining obligations to retirees.
MANAGEMENT STOCK INCENTIVE PLAN
Holdings has adopted two management stock incentive plans, the 1999 Stock
Option Plan and the 2002 Stock Option Plan, to provide incentives to our
employees and directors and to the employees and directors of Holdings by
granting them awards tied to the common stock of Holdings. These incentive plans
are administered by the compensation committee of the Board of Directors of
Holdings, which has broad authority in administering and interpreting the
incentive plans. Awards to employees are not restricted to any specified form or
structure and may include, without limitation, restricted stock, stock options,
deferred stock or stock appreciation rights. Options granted under the incentive
plans may be
68
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code or options not intended to so qualify. An award granted
under one of the incentive plans to an employee may include a provision
terminating the award upon termination of employment under some circumstances or
accelerating the receipt of benefits upon the occurrence of specified events,
including, at the discretion of the compensation committee of the Board of
Directors of Holdings, any change of control of Simmons.
The incentive plans provide for issuance of regular options ("Regular
Options") and superincentive options ("Superincentive Options"). Regular Options
are subject to certain time and performance vesting restrictions and
Superincentive Options vest only in connection with the consummation of a change
of control or initial public offering of Holdings and the attainment by
shareholders affiliated with Fenway of certain internal rate of return
objectives. The incentive plans provide for the issuance of up to an aggregate
of 5,956,000 options for shares of common stock of Holdings which may be
designated Regular Options or Superincentive Options at the discretion of the
compensation committee of the Board of Directors of Holdings.
DIRECTOR COMPENSATION
We do not pay additional remuneration to our employees or to executives of
Fenway for serving as directors. See "Executive Compensation."
EMPLOYMENT ARRANGEMENTS
Charles R. Eitel, Chairman of the Board of Directors and Chief Executive
Officer, Holdings and the Company have entered into an employment agreement
effective as of January 4, 2000. Pursuant to his employment agreement, Mr. Eitel
is entitled to receive (i) a base salary, currently $587,600 per year, or such
other amount as approved by our Board of Directors, (ii) an annual cash bonus
based upon the achievement of specified levels of operating performance by us,
and (iii) specified fringe benefits, including country club dues and an
automobile allowance. In addition, on the commencement of his employment, Mr.
Eitel was granted, under our 1999 Stock Option Plan, stock options to purchase
1,350,000 shares of common stock of Holdings at an exercise price of $6.7315 per
share. If Mr. Eitel's employment is terminated other than for death, incapacity
or cause, Mr. Eitel will be entitled to (i) payment of his base salary then in
effect for two years following the date of termination, (ii) a lump sum
pro-rated bonus amount, and (iii) payment of health and dental premiums for two
years and participation in such programs for as long as applicable law and such
plans require or permit.
Robert W. Hellyer, President, and the Company entered into an employment
agreement which commenced on June 16, 2000. Pursuant to his employment
agreement, Mr. Hellyer is entitled to receive (i) a base salary, currently
$324,480 per year, or such other amount as approved by our Board of Directors,
(ii) an annual cash bonus based upon the achievement of specified levels of
operating performance by us, and (iii) specified fringe benefits, including
country club dues and an automobile allowance. In addition, Mr. Hellyer was
granted under our 1999 Stock Option Plan stock options to purchase shares of
common stock of Holdings at an exercise price of $6.7315 per share (currently
500,000). If Mr. Hellyer's employment is terminated other than for death,
incapacity or cause, Mr. Hellyer will be entitled to (i) payment of his base
salary then in effect for one year following the date of termination, subject to
reduction if he commences other employment, (ii) a lump sum pro-rata bonus
amount, and (iii) payment of health and dental premiums for one year and
participation in such benefit programs for as long as applicable law and such
plans require or permit.
William S. Creekmuir, Executive Vice President, Chief Financial Officer,
Assistant Treasurer and Assistant Secretary and the Company entered into an
employment agreement on April 1, 2000. Pursuant
69
to his employment agreement, Mr. Creekmuir is entitled to receive (i) a base
salary, currently $312,000 per year, or such other amount as approved by our
Board of Directors, (ii) an annual cash bonus based upon the achievement of
specified levels of operating performance by us, (iii) fringe benefit
arrangements generally available to our executive officers, (iv) relocation
assistance, (v) until March 31, 2002, housing and commute assistance, and (vi)
an automobile allowance. In addition, on commencement of his employment, Mr.
Creekmuir was granted under our 1999 Stock Option Plan stock options to purchase
500,000 shares of common stock of Holdings at an exercise price of $6.7315 per
share. If Mr. Creekmuir's employment is terminated other than for death,
incapacity or cause, Mr. Creekmuir will be entitled to (i) payment of his base
salary then in effect for two years following the date of termination, subject
to reduction if he commences other employment, (ii) a lump sum pro-rata bonus
amount, and (iii) payments of health and dental premiums for two years and
participation in such benefit programs for as long as applicable law and such
plans require or permit.
Mark A. Parrish, Executive Vice President & Chief Operations Officer, and
the Company entered into an employment agreement which commenced on July 15,
2001. Pursuant to his employment agreement, Mr. Parrish is entitled to receive
(i) a base salary, currently $270,400 per year, or such other amount as approved
by our Board of Directors, (ii) an annual cash bonus based upon the achievement
of specified levels of operating performance by us, (iii) fringe benefit
arrangements generally available to our executive officers, (iv) a loan of
$111,804 which has subsequently been forgiven, and (v) an automobile allowance.
In addition, on the commencement of his employment, Mr. Parrish was granted,
under our 1999 Stock Option Plan, stock options to purchase 275,000 shares of
common stock of Holdings at an exercise price of $7.15 per share. Upon achieving
specific performance based targets and after the release of the audited
financial statements for fiscal year 2001, Mr. Parrish was granted additional
stock options to purchase 25,000 shares of common stock of Holdings at an
exercise price of $7.15. If Mr. Parrish's employment is terminated other than
for death, incapacity or cause, Mr. Parrish will be entitled to (i) payment of
his base salary then in effect for one year following the date of termination,
(ii) a lump sum pro-rata bonus amount, and (iii) payments of health and dental
premiums for one year and participation in such benefit programs for as long as
applicable law and such plans require or permit.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions regarding the Company's executive officers are made
by the Compensation Committee (the "Committee") of the Board of Directors. The
members of the Committee as of December 28, 2002 are Messrs. Eitel, Lamm and
Dresdale. Mr. Eitel is the Chairman of the Board and Chief Executive Officer of
the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee is responsible for the general compensation policies of the
Company, and in particular is responsible for setting and administering the
policies that govern executive compensation. The Committee evaluates the
performance of management and determines the compensation levels for the Chief
Executive Officer (the "CEO") and the executive officers of the Company. The CEO
determines compensation levels for all other executive officers subject to the
informal approval of the Committee.
The objective of the Committee is to establish policies and programs to
attract and retain key executives, and to reward performance by these executives
which benefit the Company. The primary elements of executive compensation are
base salary, annual cash bonus and stock option awards. The salary is based on
factors such as the individual executive officer's level of responsibility, and
comparison to similar positions in the Company and in comparable companies. The
annual cash bonuses are currently based on the Company's performance measured
against attainment of financial objectives. Stock option awards are intended to
align the executive officer's interests with those of the Company and its
70
stockholders in promoting the long-term growth of the Company, and are
determined based on the executive officer's level of responsibility, number of
options previously granted, and contributions toward achieving the objectives of
the Company. Further information on each of these compensation elements follows.
SALARIES
Base salaries are adjusted annually, following a review by the CEO. In the
course of the review, performance of the individual with respect to specific
objectives is evaluated, as are any increases in responsibility, and salaries
for similar positions. The specific objectives for each executive officer are
set by the CEO, and will vary for each executive position and for each year.
Because the focus of the review is individual achievement, performance of the
Company does not weigh heavily in the result. When all reviews are completed,
the CEO makes a recommendation to the Committee for their review and final
approval.
With respect to the CEO, the Committee reviews and fixes his base salary
primarily on the Committee's assessment of his performance and its expectations
as to his future contributions. Competitive compensation data is also a major
factor in establishing the CEO's salary, but no precise formula is applied in
considering this data. The Committee's review takes place annually.
ANNUAL CASH BONUSES
Certain of our employees are eligible, pursuant to their employment
agreements, to receive annual cash bonuses based upon the financial performance
of the Company. The annual bonus plans prior to 2001 provided for bonuses based
upon the financial performance of the Company and an individual's performance.
STOCK OPTION AWARDS
Holdings has adopted a management stock incentive plan to provide
incentives to our employees and directors and the employees and directors of
Holdings by granting them awards tied to the common stock of Holdings. These
stock options are intended to provide an incentive to continue as employees over
a long term, and to align their interest with the Company by providing a stake
in Holdings. In making grants, the Holdings' compensation committee takes into
account the total number of shares available for grant, prior grants
outstanding, and estimated requirements for future grants. Individual awards
take into account the executive officer's contributions to the Company, scope of
responsibilities, strategies and operational goals, salary and number of
unvested options. In determining an option grant for the CEO, the Holdings'
compensation committee weighs all of the above factors, but also recognizes the
CEO's critical role in developing strategies for the long-term benefit of the
Company. Stock options are an important element in attracting and retaining
capable executives at all levels, and this is particularly so in the case of the
CEO.
OTHER BENEFITS
Periodically, the Compensation Committee assesses the other benefits
provided to Executive Officers of the Company. During 2002, the Committee
increased the term life insurance provided by the Company to the non-Fenway
Executive Officers of the Company. As a result, additional term life insurance
was provided to the Executive Officers in the following amounts: Mr. Eitel --
$2.0 million; Messrs. Hellyer, Creekmuir and Parrish -- $1.0 million; and Mdms.
Rousch and McGuffey and Messrs. Damewood, Hofmann and Podratsky -- $0.5 million.
71
The Committee continually reviews the Company's compensation programs to
ensure the overall package is competitive, balanced, and that proper incentives
and rewards are provided.
Compensation Committee:
Charles R. Eitel
Peter Lamm
Richard C. Dresdale
72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have one class of issued and outstanding common stock, all of which is
owned by Holdings. As of February 28, 2003, Holdings had 24,010,272.95 shares of
issued and outstanding common stock, par value $.01 per share, and 379,119.069
shares of Class B common stock, par value $.01 per share.
The following table describes the beneficial ownership as of February 28,
2003 of each class of issued and outstanding equity securities of Holdings by
each of our directors and Named Executive Officers, our directors and executive
officers as a group and each person who beneficially owns more than 5% of the
outstanding shares of any class of equity securities of Holdings. As used in
this table, beneficial ownership has the meaning set forth in Rule 13d-3(d)(1)
of the Exchange Act.
Number of
Number of Class B Common
Common Stock Percentage Stock Shares Percentage of
Name Shares of Class (1) Class
- ---- ---------------- ---------- -------------- -------------
Simmons Holdings, LLC (2) 21,964,966.22 (3) 85.59% -- --
c/o Fenway Partners, Inc
152 West 57th Street
New York, NY 10019
FPIP, LLC -- -- 379,119.069 100%
c/o Fenway Partners, Inc
152 West 57th Street
New York, NY 10019
ESOP shares 3,411,320.07 13.29% -- --
c/o State Street Bank & Trust
225 Franklin Street
Boston, MA 02110
Charles R. Eitel (4) 761,173.18 (5)(6) 2.88% -- --
Robert W. Hellyer 269,177.18 (5)(6) 1.04% -- --
William S. Creekmuir 198,673.18 (5)(6) * -- --
Mark A. Parrish 111,173.18 (5) *
Rhonda Rousch 29,923.18 (5) * -- --
Dale F. Morrison 12,500.00 (5) *
Peter Lamm (7) 21,964,966.22 (3) 84.53% 379,119.069 100%
Richard C. Dresdale (7) 21,964,966.22 (3) 84.53% 379,119.069 100%
Mark R. Genender (7) 21,964,966.22 (3) 84.53% 379,119.069 100%
All directors and executive officers
as a group (13 persons) 23,492,900.12 86.65% 379,119.069 100%
* Less than 1%.
(1) Class B common stock has the same rights and privileges as Holdings'
common stock except that each share of Class B common stock (a) has
16% of the amount of voting power of a share of common stock and (b)
entitles its holder to 16% of the amount of any distributions by
Holdings to which a share of common stock is entitled. The voting and
distribution rights of the Class B common stock shall be increased to
equal that of the common stock upon a determination of the board of
directors that the value of a share of
73
common stock, taking into account prior distributions, is equal to
$6.7315 plus an amount sufficient to generate an internal rate of
return of 7.5% per year, compounded annually.
(2) Substantially all of the voting interests of Simmons Holdings, LLC are
held by (a) Fenway Partners Capital Fund, L.P. ("Fenway Fund"), whose
general partner is Fenway Partners, L.P., whose general partner is
Fenway Management, Inc., and (b) Fenway Partners Capital Fund II, L.P.
("Fenway Fund II" and collectively with Fenway Fund, the "Fenway
Funds"), whose general partner is Fenway Partners II, LLC. The
remainder of the voting interests of Simmons Holdings, LLC are held by
FPIP, LLC and FPIP Trust, LLC, affiliates of Fenway. Fenway provides
investment advisory services to the Fenway Funds. Accordingly, such
entities may be deemed to beneficially own the shares of common stock
held by Simmons Holdings, LLC. Each of such entities disclaims
beneficial ownership of such shares except to the extent of its
pecuniary interest therein.
(3) Includes warrants for the purchase of 1,653,703.24 shares of common
stock. Includes 1,336,997.70 shares of common stock acquired from SH
Investment Limited as of January 25, 2002.
(4) As of October 29, 2002, all such shares and options are held by The
Charles R. Eitel Revocable Trust, of which Mr. Eitel is the trustee.
(5) Includes the following shares of common stock that may be acquired
upon the exercise of outstanding options, including those shares that
vest April 1, 2003:
Mr. Eitel 750,000 shares
Mr. Hellyer 244,375 shares
Mr. Creekmuir 187,500 shares
Mr. Parrish 100,000 shares
Ms. Rousch 18,750 shares
Mr. Morrison 12,500 shares
(6) Excludes the following shares of common stock that are held in an ESOP
account:
Mr. Eitel 1,027.57 shares
Mr. Hellyer 11,255.96 shares
Mr. Creekmuir 904.23 shares
(7) Messrs. Dresdale, Lamm and Genender are limited partners of Fenway
Partners, L.P. and members of Fenway Partners II, LLC, FPIP, LLC and
FPIP Trust, LLC. Accordingly, Messrs. Dresdale, Lamm and Genender may
be deemed to beneficially own the shares of common stock held by
Simmons Holdings, LLC and FPIP, LLC. Messrs. Dresdale, Lamm and
Genender disclaim beneficial ownership of such shares except to the
extent of their pecuniary interests therein. The business address of
each of the foregoing is c/o Fenway Partners, Inc., 152 West 57th
Street, New York, NY 10019.
74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SUBSCRIPTION AGREEMENTS
Pursuant to the subscription agreements entered into in connection with the
Recapitalization, Simmons Holdings, LLC purchased 19,030,131.18 shares of common
stock of Holdings for $128.1 million. Under the subscription agreement with
Simmons Holdings, LLC, Holdings agreed to indemnify and pay various expenses of
Simmons Holdings, LLC and its affiliates and their advisors and consultants.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, we entered into a stockholders
agreement with Holdings, Simmons Holdings, LLC, the ESOP, and the Investcorp
group. In addition, we entered into a stockholders agreement with Simmons
Holdings, LLC, Holdings and members of management. The stockholders agreements
provide, among other things, that in the event that Simmons Holdings, LLC
transfers to a non-affiliate sufficient common stock of Holdings that reduces
its ownership percentage below 75% of the shares it acquired in the
Recapitalization, the ESOP and the members of management may participate in the
transfer in proportion to their holdings, referred to as tag-along rights. If
Simmons Holdings, LLC sells at least 80% of the shares it acquired in the
Recapitalization, it may require the ESOP and the members of management to
participate in the transfer in proportion to their holdings, referred to as a
drag-along right. In addition, the stockholders agreement with management
provides, among other things, that:
(1) except under specific conditions, members of management may not
transfer their shares of common stock of Holdings; and
(2) upon termination of employment of a member of management, Holdings and
Simmons Holdings, LLC may purchase the shares of common stock owned by
such employee and such employee may require Holdings to purchase such
shares.
FENWAY
During fiscal 2002, we had sales of approximately $12.0 million of finished
mattress products pursuant to supply contracts to SC Holdings, Inc., an entity
controlled by Fenway that was acquired by the Company on February 28, 2003 for
approximately $18.4 million, plus transaction costs and additional consideration
based upon future performance. At December 28, 2002, accounts receivable in the
accompanying consolidated balance sheet included approximately $2.7 million due
from SC Holdings, Inc. Two directors of the Company were directors of SC
Holdings, Inc. We believe that the terms on which mattresses are supplied to
such related party are not materially less favorable than those that might
reasonably be obtained in a comparable transaction at such time in an arm's
length basis from a person that is not an affiliate or related party.
For a description of the relationship between Fenway and the Company, see
"Security Ownership of Certain Beneficial Owners and Management."
We, Holdings and Fenway entered into an advisory agreement effective upon
consummation of the Recapitalization pursuant to which Fenway agreed to provide
strategic advisory services to Holdings and us. The advisory agreement was
amended on October 21, 2002 to change the calculation of the annual management
fee. In exchange for such services, Holdings and we agreed to pay Fenway the
following beginning October 21, 2002:
(1) 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;
75
(2) fees in connection with the consummation of any acquisition
transactions for Fenway's assistance in negotiating such transactions;
and
(3) fees and expenses, including legal and accounting fees and any
out-of-pocket expenses incurred by Fenway in connection with providing
services to Holdings and us.
The annual management fees are subject to increase in the event of
acquisitions. Holdings and Simmons also agreed to indemnify Fenway under
specific circumstances. In addition, pursuant to the advisory agreement, upon
the consummation of the Recapitalization, Fenway and its affiliates received
$5.1 million and approximately 379,000 shares of Holdings' Class B common stock.
For a description of the Class B common stock, see "Security Ownership of
Certain Beneficial Owners and Management".
CONSULTING SERVICES
During fiscal 2002, Rousch Consulting Group, Inc. provided consulting
services to the Company for aggregate payments of approximately $126,000,
inclusive of out-of-pocket expenses of approximately $14,000. Rousch Consulting
Group, Inc. is wholly-owned by Ed Rousch, the husband of Rhonda Rousch,
Executive Vice President -- Human Resources, and Ms. Rousch.
OTHER
Messrs. Creekmuir, Eitel, Hellyer and Parrish and Ms. Rousch each purchased
11,173.18 shares of common stock of Holdings from Fenway Fund II, each for a
purchase price of $103,753.38, pursuant to a Securities Purchase Agreement dated
as of January 25, 2002.
On May 21, 2002, we approved a loan of up to $300,000 to Mr. Creekmuir for
bridge financing relating to Mr. Creekmuir's relocation to the Atlanta, Georgia
area. In exchange for this loan, we received a promissory note in the amount of
$300,000, of which approximately $258,000 was outstanding at December 28, 2002,
which is due upon the sale of Mr. Creekmuir's previous residence and does not
currently bear interest. If the note is not repaid concurrently with the sale of
such residence, then interest will accrue on the unpaid principal balance of the
note at a rate of 4.75% per annum.
ITEM 14. 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 annual 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.
76
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Simmons Company and
its subsidiaries are included in Part II, Item 8:
Report of Independent Accountants
Consolidated Statements of Operations for years ended December
28, 2002, December 29, 2001 and December 30, 2000
Consolidated Balance Sheets at December 28, 2002 and December 29,
2001
Consolidated Statement of Changes in Stockholder's Deficit for
the years ended December 28, 2002, December 29, 2001 and December
30, 2000
Consolidated Statements of Cash Flows for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000
Notes to the consolidated financial statements
(a)(2) Financial Statement Schedule
Schedule V -- Valuation Accounts
(a)(3) The exhibits to this report are listed in section (c) of Item 14 below.
(b) Reports on Form 8-K filed during the fourth quarter:
A report on Form 8-K was filed on October 30, 2002, reporting our
Fourth Amendment to the Credit and Guaranty Agreement dated as of
October 29, 1998, as amended.
(c) Exhibits:
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) a Registration Statement on Form S-4 under the Securities Act of 1933
for the Registrant, File No. 333-76723 (referred to as "S-4"), (ii) the Annual
Report on Form 10-K for the year ended December 25, 1999 for the Registrant
(referred to as "1999 10-K" ), (iii) the Quarterly Report on Form 10-Q for the
quarter ended September 25, 1999 for the Registrant (referred to as "9/25/99
10-Q"), (iv) the Quarterly Report on Form 10-Q for the quarter ended June 24,
2000 (referred to as "6/24/00 10-Q"), (v) the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 (referred to as "9/30/00 10-Q"), (vi) the
Annual Report on Form 10-K for the year ended December 30, 2000 for the
Registrant (referred to as "2000 10-K"), (vii) the Current Report on Form 8-K
dated January 19, 2001 for the Registrant (referred to as "1/19/01 8-K"), (viii)
the Annual Report on Form 10-K for the year ended December 29, 2001 for the
Registrant (referred to as "2001 10-K"), (ix) the Quarterly Report on Form 10-Q
for the quarter ended March 30, 2002 (referred to as "3/30/02 10-Q"), (x)
Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 (referred to
as "6/30/02 10-Q"), (xi) Quarterly Report on Form 10-Q for the quarter ended
September 28, 2002 (referred to as "9/28/02 10-Q"), or (xii) the Report on Form
8-K dated October 30, 2002 for the Registrant (referred to as "10/30/02 8-K").
Exhibits filed herewith have been denominated by a pound sign (#).
77
Exhibit
Number Exhibit Description
- ------ -------------------
*2.1 Agreement and Plan of Merger (the "Merger Agreement") dated July 16,
1998 by and among Simmons Company (the "Company"), Simmons Holdings,
Inc. ("Simmons Holdings") and REM (S-4).
*2.1.1 Amendment No. 1 to Merger Agreement dated as of September 22, 1998
(S-4).
*2.1.2 Amendment No. 2 to Merger Agreement dated as of October 26, 1998
(S-4).
*3(i) Certificate of Incorporation of the Company (S-4).
*3(ii) By-laws of the Company (S-4).
*4.1 Indenture between the Company and SunTrust Bank, Atlanta, as
Trustee, dated as of March 16, 1999 (S-4).
*10.1 ESOP Stock Sale and Exchange Agreement (the "ESOP Purchase
Agreement") dated as of July 22, 1998 by and among Simmons Holdings,
the Company, State Street Bank & Trust Company ("State Street"),
solely in its capacity as trustee of the ESOP, and REM (S-4).
*10.1.1 Amendment No. 1 to ESOP Purchase Agreement dated as of September 25,
1998 (S-4).
*10.2 1999 Stockholders' Agreement (9/25/99 10-Q).
*10.3 1998 Stockholders' Agreement (the "1998 Stockholders' Agreement")
dated as of October 29, 1998 among Simmons Holdings, the Company,
Simmons Holdings, LLC ("Simmons Holdings, LLC"), Investcorp, and
State Street, solely as trustee of the ESOP (S-4).
*10.4 Joinder to 1998 Stockholders' Agreement dated as of October 29, 1998
by SH Investment Limited (S-4).
*10.5 1998 Stockholders' Agreement dated as of October 29, 1998 by and
among Simmons Holdings, Simmons Holdings, LLC and the Management
Investors listed therein (S-4).
*10.6 Credit and Guaranty Agreement (the "Credit and Guaranty Agreement")
dated as of October 29, 1998, among the Company, Simmons Holdings
and Certain Subsidiaries of the Company, as Guarantors, the
financial institutions listed therein, as Lenders, Goldman Sachs
Credit Partners L.P., as a Joint Lead Arranger and as Syndication
Agent, Warburg Dillon Read LLC as a Joint Lead Arranger, and UBS
A.G., Stamford Branch, as Administrative Agent (S-4).
*10.6.1 First Amendment to Credit and Guaranty Agreement dated as of March
1, 1999 (S-4).
*10.6.2 Second Amendment to Credit and Guaranty Agreement dated as of March
22, 2000 (1999 10-K).
78
Exhibit
Number Exhibit Description
- ------ -------------------
*10.6.3 Third Amendment to Credit and Guaranty Agreement dated as of January
5, 2001 (1/19/01 8-K).
*10.6.4 Fourth Amendment to Credit and Guaranty Agreement dated as of
October 21, 2002 (10/30/02 8-K).
#10.6.5 Consent letter dated February 6, 2003 regarding Credit and Guaranty
Agreement.
*10.7 Labor Agreement between the Company and The United Steel Workers of
America, A.F.L., C.I.O., C.L.C., on behalf of its members in Local
No. 173, in the Shawnee, Kansas plant of the Company excluding
executives, sales employees, office workers, supervisors, foremen,
time keepers, mechanics or machinists for the period from April 23,
1999 to April 22, 2002 (2000 10-K).
*10.8 Advisory Agreement dated as of October 29, 1998 by and between
Simmons Holdings, the Company and Fenway Partners, Inc. (S-4).
*10.9 Simmons 1996 Management Stock Incentive Plan (S-4).
*10.10 Form of Stock Option Agreement (S-4).
*10.11 Form of Management Bonus Agreement (S-4).
*10.11.1 Form of 2001 Management Bonus Agreement (2001 10-K).
*10.11.2 Form of 2002 Management Bonus Agreement (2001 10-K).
#10.11.3 Form of 2003 Management Bonus Agreement.
*10.12 Labor Agreement between the Company and The United Steel Workers,
Local No. 425 for all employees at the Jacksonville, Florida plant
of the Company excluding executives, sales employees, office
workers, supervisors, inspectors, departmental coordinators or
persons in any way identified with management for the period from
October 16, 2001 to October 15, 2004 (2001 10-K).
*10.13 Labor Agreement between the Company and The United Steel Workers,
Local No. 422 for all production and maintenance employees at the
Dallas, Texas plant of the Company excluding supervisors, foremen,
factory clerks, office employees, time keepers, watchmen or persons
in any way identified with management for the period from October
16, 2001 to October 15, 2004 (2001 10-K).
*10.14 Labor Agreement between the Company and The United Steel Workers,
Local No. 2401 for all production at the Atlanta, Georgia plant of
the Company excluding office workers, supervisors, foremen,
inspectors, watchmen, plant guards, departmental coordinators,
carload checkers or persons in any way identified with management
for the period from October 16, 2001 to October 15, 2005 (2001
10-K).
*10.15 1999 Stock Option Plan (9/25/99 10-Q).
79
Exhibit
Number Exhibit Description
- ------ -------------------
*10.15.1 Amendment No. 1 dated March 22, 2000 to the 1999 Stock Option Plan
(2000 10-K).
*10.15.2 Amendment No. 2 dated November 17, 2000 to the 1999 Stock Option
Plan (2000 10-K).
*10.16 Labor Agreement between the Company and The United Steel Workers,
Local No. 515U for all employees at the Los Angeles, California
plant of the Company excluding executives, sales employees, office
workers, and supervisors for the period from October 16, 2001 to
October 15, 2005 (2001 10-K).
*10.17 Labor Agreement between the Company and The United Steel Workers,
Local No. 420 for employees at the Piscataway, New Jersey plant of
the Company excluding watchmen, office janitors, maintenance
department employees, truck drivers, tool makers, machinists,
supervisors, porters, matrons, main office, clerical, and
maintenance helpers for the period of October 16, 2001 to October
15, 2005 (2001 10-K).
*10.18 Labor Agreement between the Company and The United Steel Workers,
Local No. 424 for all production employees at the Columbus, Ohio
plant of the Company excluding executives, sales employees, office
workers, timekeepers, watchmen, office janitors, maintenance
department employees, truck drivers, foremen, supervisors, private
chauffeurs, main office, clerical, and engine room and power plant
employees for the period from October 16, 2001 to October 15, 2004
(2001 10-K).
*10.19 Lease Agreement at Concourse between Concourse I, Ltd., as Landlord,
and the Company, as Tenant, dated April 20, 2000, as amended
(9/30/00 10-Q).
*10.20 Lease between Beaver Ruin Business Center-Phase V between St. Paul
Properties, Inc., as Landlord, and the Company, as Tenant, dated
October 19, 1994, as amended by Addendum to Lease, dated September
1, 1995 (S-4).
*10.21 Loan Agreement, dated as of November 1, 1982, between the City of
Janesville, Wisconsin and the Company, as successor by merger to
Simmons Manufacturing Company, Inc., relating to $9,700,000 City of
Janesville, Wisconsin Industrial Development Revenue Bond, Series A
(S-4).
*10.22 Loan Agreement between the City of Shawnee and the Company relating
to the Indenture of Trust between City of Shawnee, Kansas and State
Street Bank and Trust Company of Missouri, N.A., as Trustee, dated
December 1, 1996 relating to $5,000,000 Private Activity Revenue
Bonds, Series 1996 (S-4).
*10.23 Loan Agreement dated December 12, 1997 between Simmons Caribbean
Bedding, Inc. and Banco Santander Puerto Rico (S-4).
*10.23.1 English Language Summary of Appendix to Exhibit 10.23.1 (S-4).
*10.24 Securities Purchase Agreement, dated as of October 29, 1998 among
the Company, Simmons Holdings and the Purchasers listed on Schedule
I attached thereto (S-4).
80
Exhibit
Number Exhibit Description
- ------ -------------------
*10.25 Warrant to purchase 601,346.63 shares of common stock of Simmons
Holdings (S-4).
*10.26 Warrant to purchase 2,104,713.22 shares of common stock of Simmons
Holdings dated October 29, 1998 (S-4).
*10.27 Simmons Retirement Savings Plan adopted February 1, 1987, as amended
and restated January 1, 2002 (3/30/02 10-Q).
*10.27.1 First Amendment to the Simmons Retirement Savings Plan effective for
years beginning after December 31, 2001 (3/30/02 10-Q).
*10.28 Separation Agreement dated as of February 22, 2000 by and among
Simmons Holdings, Inc., the Company and Zenon S. Nie (1999 10-K).
*10.29 Separation Agreement and General Release dated as of January 7, 2000
by and between the Company and Martin R. Passaglia (1999 10-K).
*10.30 Employment Agreement between Simmons Holdings, Inc., the Company and
Charles R. Eitel, dated as of January 4, 2000, as amended (1999
10-K).
*10.32 Employment Agreement between the Company and William S. Creekmuir,
dated as of April 1, 2000, as amended (6/24/00 10-Q).
*10.33 Employment Agreement between the Company and Robert Hellyer, dated
as of June 16, 2000 (6/24/00 10-Q).
*10.34 Employment Agreement between the Company and Mark A. Parrish, dated
as of July 15, 2001 (2001 10-K).
*10.35 Letter Agreement dated as of October 11, 2001 by and among Simmons
Holdings, Inc., the Company and Robert K. Barton (2001 10-K).
*10.36 Retirement Plan for Simmons Company Employees adopted October 31,
1987, as amended and restated May 1, 1997 (3/30/02 10-Q).
*10.36.1 First Amendment to the Retirement Plan for Simmons Company Employees
effective for years ending after December 31, 2001 (3/30/02 10-Q).
*10.37 Simmons Company Employee Stock Ownership Plan adopted January 31,
1988, as amended and restated December 29, 2001 (3/30/02 10-Q).
*10.37.1 First Amendment to the Simmons Company Employee Stock Ownership Plan
effective for years ending after December 31, 2001 (3/30/02 10-Q).
81
Exhibit
Number Exhibit Description
- ------ -------------------
*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 (6/29/02 10-Q).
*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 (9/28/02).
#10.40 2002 Stock Option Plan.
#21 Subsidiaries of the Company.
#99.1 Chief Executive Officer and Chief Financial Officer Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
82
EXHIBIT INDEX
-------------
Exhibit
Number Exhibit Description
- ------- -------------------
10.6.5 Consent letter dated February 6, 2003 regarding Credit and Guaranty
Agreement.
10.11.3 Form of 2003 Management Bonus Agreement.
10.40 2002 Stock Option Plan.
21 Subsidiaries of the Company.
99.1 Chief Executive Officer and Chief Financial Officer Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Simmons Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIMMONS COMPANY
Signature Title
--------- -----
By /s/ Charles R. Eitel Chairman of the Board of Directors, March 27, 2003
------------------------- Chief Executive Officer
Charles R. Eitel (Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
SIMMONS COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
By /s/ Charles R. Eitel Chairman of the Board of Directors, March 27, 2003
------------------------- Chief Executive Officer
Charles R. Eitel (Principal Executive Officer)
/s/ Robert W. Hellyer President and Director March 27, 2003
-------------------------
Robert W. Hellyer
/s/ William S. Creekmuir Executive Vice President, March 27, 2003
------------------------- Chief Financial Assistant Treasurer,
William S. Creekmuir Assistant Secretary and Director
(Principal Financial Officer)
/s/ Peter Lamm Director March 27, 2003
-------------------------
Peter Lamm
/s/ Richard C. Dresdale Director March 27, 2003
-------------------------
Richard C. Dresdale
/s/ Mark R. Genender Director March 27, 2003
-------------------------
Mark R. Genender
/s/ Dale F. Morrison Director March 27, 2003
-------------------------
Dale F. Morrison
/s/ Mark F. Chambless Vice President - Corporate Controller March 27, 2003
------------------------- (Principal Accounting Officer)
Mark F. Chambless
84
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, the Chief Executive Officer of Simmons Company (the "registrant"),
certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosures controls
and procedures as of a date within 90 days prior to the filing of this
annual report (the "Evaluation Date"); and
(c) presented in this annual 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 (or persons performing the
equivalent functions):
(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 annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated this 27th day of March 2003.
/s/ Charles R. Eitel
-----------------------------------------
Charles R. Eitel, Chief Executive Officer
85
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, the Chief Financial Officer of Simmons Company (the "registrant"),
certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 this annual report
is being prepared;
(e) evaluated the effectiveness of the registrant's internal disclosures
controls and procedures as of a date within 90 days prior to the
filing of this annual report (the "Evaluation Date"); and
(f) presented in this annual 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 (or persons performing the
equivalent functions):
(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 annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated this 27th day of March 2003.
/s/ William S. Creekmuir
---------------------------------------------
William S. Creekmuir, Chief Financial Officer
86
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE
YEAR ENDED DECEMBER 28, 2002, YEAR ENDED DECEMBER 29, 2001, AND
YEAR ENDED DECEMBER 30, 2000
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K
OF
SIMMONS COMPANY
87
SIMMONS COMPANY
SCHEDULE V -- VALUATION ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------
Balance at Balance at
Beginning of End of
Description Period Additions Deductions Period
----------- ------------ --------- ---------- ----------
(in thousands)
Fiscal year ended December 28, 2002
Doubtful accounts $ 1,810 $ 3,082 $ 1,786 $ 3,106
Discounts and returns, net 2,885 -- 740 2,145
------- ------- ------- -------
$ 4,695 $ 3,082 $ 2,526 $ 5,251
======= ======= ======= =======
Fiscal year ended December 29, 2001
Doubtful accounts $ 4,236 $ 6,172 $ 8,598 $ 1,810
Discounts and returns, net 5,190 -- 2,305 2,885
Tax valuation allowance 3,999 -- 3,999 --
------- ------- ------- -------
$13,425 $ 6,172 $14,901 $ 4,695
======= ======= ======= =======
Fiscal year ended December 30, 2000
Doubtful accounts $ 3,449 $12,929 $12,142 $ 4,236
Discounts and returns, net 3,408 1,782 -- 5,190
Tax valuation allowance 3,999 -- -- 3,999
------- ------- ------- -------
$10,856 $14,711 $12,142 $13,425
======= ======= ======= =======
88