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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-76723
---------
SIMMONS COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1007444
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 800, Atlanta, Georgia 30328-5369
- -------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
[ ] Yes [X] No
The number of shares of the registrant's common stock outstanding as of
August 11, 2003 was 3,196.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
Quarter Ended Six Months Ended
------------- ----------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- --------- --------- ---------
(Restated)* (Restated)*
Net sales $ 199,299 $ 163,804 $ 385,914 $ 350,611
Cost of products sold 104,738 85,088 202,971 181,969
--------- --------- --------- ---------
Gross profit 94,561 78,716 182,943 168,642
Operating expenses:
Selling, general and administrative expenses 71,515 60,940 137,439 130,084
Non-cash variable stock compensation expense 9,591 6,358 10,421 9,485
Amortization of intangibles 98 366 170 1,118
Other 50 - 822 -
--------- --------- --------- ---------
81,254 67,664 148,852 140,687
--------- --------- --------- ---------
Operating income 13,307 11,052 34,091 27,955
Interest expense, net 5,702 7,001 11,993 14,260
Other expense, net 716 642 1,592 936
--------- --------- --------- ---------
Income before income taxes and
minority interest 6,889 3,409 20,506 12,759
Income tax expense 2,573 1,731 7,882 5,367
--------- --------- --------- ---------
Income before minority interest 4,316 1,678 12,624 7,392
Minority interest in loss - (70) - (70)
--------- --------- --------- ---------
Net income 4,316 1,748 12,624 7,462
Other comprehensive income:
Foreign currency translation adjustment 134 7 225 22
--------- --------- --------- ---------
Comprehensive income $ 4,450 $ 1,755 $ 12,849 $ 7,484
========= ========= ========= =========
* Restated for the acquisition of an entity under common control (Note 2).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 28, December 28,
2003 2002*
-------- --------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 1,625 $ 7,108
Accounts receivable, less allowances for
doubtful receivables, discounts, returns and
allowances of $5,789 and $5,245 84,227 67,192
Inventories 25,243 21,049
Deferred income taxes 2,793 3,264
Other current assets 23,726 20,781
Assets held for sale 37,282 36,617
-------- --------
Total current assets 174,896 156,011
-------- --------
Property, plant and equipment, net 32,729 37,673
Goodwill, net 165,519 165,519
Intangible assets, net 6,774 6,711
Deferred income taxes 21,011 24,505
Other assets 21,479 16,678
-------- --------
$422,408 $407,097
======== ========
* Derived from the Company's 2002 audited Consolidated Financial Statements and
restated for the acquisition of an entity under common control (Note 2).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 28, December 28,
2003 2002*
--------- ---------
(Restated)
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 436 $ 19,039
Accounts payable 36,607 38,711
Accrued wages and benefits 18,502 18,051
Accrued advertising and incentives 20,994 18,310
Accrued interest 5,189 5,084
Other accrued expenses 10,299 11,713
Liabilities held for sale 17,587 13,239
--------- ---------
Total current liabilities 109,614 124,147
--------- ---------
Non-current liabilities:
Long-term debt 254,736 249,401
Accrued stock compensation 34,931 26,778
Other 9,659 14,582
--------- ---------
Total liabilities 408,940 414,908
--------- ---------
Commitments and contingencies
Redemption obligation - ESOP 71,095 61,218
Common stockholder's deficit:
Common stock, $.01 par value; 5,000 shares
authorized; 3,196 issued and outstanding 1 1
Additional paid-in-capital - 319
Accumulated deficit (57,709) (69,205)
Accumulated other comprehensive loss 81 (144)
--------- ---------
Total common stockholder's deficit (57,627) (69,029)
--------- ---------
$ 422,408 $ 407,097
========= =========
* Derived from the Company's 2002 audited Consolidated Financial Statements and
restated for the acquisition of an entity under common control (Note 2).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
-----------------------
June 28, June 29,
2003 2002
-------- --------
(Restated)*
Cash flows from operating activities:
Net income $ 12,624 $ 7,462
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,380 9,906
Provision for bad debts 1,836 1,434
Provision for deferred income taxes 3,966 4,907
Non-cash interest expense 902 1,406
Non-cash variable stock option compensation expense 10,421 9,485
Other, net (250) (70)
Net changes in operating assets and liabilities:
Accounts receivable (18,557) 498
Inventories (4,155) 3,099
Other current assets (7,698) (8,913)
Accounts payable (2,408) 1,271
Accrued liabilities 3,864 1,629
Other, net (7,305) 4,398
-------- --------
Net cash provided by operating activities 4,620 36,512
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,162) (2,087)
Proceeds from disposals of property, plant and equipment, net 34 204
Acquisition and development of intellectual properties (123) (2,963)
-------- --------
Net cash used in investing activities (2,251) (4,846)
-------- --------
Cash flows from financing activities:
Repurchase of SC Holdings, Inc. minority interest (25) -
Distributions to Simmons Holdings (2,025) (3,126)
Repurchase of SC Holdings, Inc. debt to stockholder (628) (1,000)
Payment of SC Holdings, Inc. bank debt (18,000) (500)
Proceeds from (payments of) Senior Credit Facility, net 13,000 (26,140)
Payments of other long-term debt (399) (361)
-------- --------
Net cash used in financing activities (8,077) (31,127)
-------- --------
Net effect of exchange rate changes on cash 225 9
-------- --------
Change in cash and cash equivalents (5,483) 548
Cash and cash equivalents, beginning of period 7,108 3,264
-------- --------
Cash and cash equivalents, end of period $ 1,625 $ 3,812
======== ========
* Restated for the acquisition of an entity under common control (Note 2).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Simmons Company and Subsidiaries
Consolidated Statements of Changes in Common Stockholder's Deficit
(in thousands, except share amounts)
Accumulated Total
Additional Other
Common Common Paid-In Accumulated Comprehensive Stockholder's
Shares Stock Capital Deficit (Loss) Income Deficit
----------- --------- ------------- ------------ ------------- -----------
Balance at December 29, 2001* 3,196 $ 1 $ 319 $ (50,697) $ (125) $ (50,502)
(Note 8)
Net income - - - 2,719 - 2,719
Other comprehensive loss:
Change in foreign currency
translation - - - - (19) (19)
---------- -------- -----------
Comprehensive income - - - 2,719 (19) 2,700
Increase in redemption
obligation - ESOP based on
fair market value - - - (17,139) - (17,139)
Distributions to Holdings - - (4,088) - (4,088)
----------- --------- ------------- ------------ --------- -----------
Balance at December 28, 2002* 3,196 1 319 (69,205) (144) (69,029)
Net income - - - 12,624 - 12,624
Other comprehensive income:
Change in foreign currency
translation - - - - 225 225
---------- -------- -----------
Comprehensive income - - - 12,624 225 12,849
Contribution of shareholder's
debt to SC Holdings, Inc. - - 7,916 - - 7,916
Acquisition of SC Holdings,
Inc. minority interest - - (25) - - (25)
Increase in redemption
obligation - ESOP based on
fair market value - - (8,749) (1,128) - (9,877)
Capital contribution from
Holdings - - 2,564 - - 2,564
Distributions to Holdings - - (2,025) - - (2,025)
----------- --------- ------------- ------------ --------- -----------
Balance at June 28, 2003
(unaudited) 3,196 $ 1 $ - $ (57,709) $ 81 $ (57,627)
=========== ========= ============= ============ ========= ===========
* Derived from the Company's 2002 audited Consolidated Financial Statements and
restated for the acquisition of an entity under common control (Note 2).
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
For purposes of this report the "Company" refers to Simmons Company and
its subsidiaries, collectively. The Condensed Consolidated Financial Statements
of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission (the "Commission"). The accompanying unaudited condensed consolidated
financial statements contain all adjustments, which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of June 28, 2003, and its results of operations and cash flows for
the periods presented herein. All adjustments in the periods presented herein
are normal and recurring in nature unless otherwise disclosed. These unaudited
condensed consolidated financial statements should be read together with the
Company's Annual Report on Form 10-K for the year ended December 28, 2002.
Operating results for the period ended June 28, 2003, are not necessarily
indicative of future results that may be expected for the year ending December
27, 2003.
2. Business Combination
On February 28, 2003, the Company acquired the stock of SC Holdings,
Inc. ("Sleep Country") from an affiliate of Fenway Partners, Inc. ("Fenway") for
approximately $18.4 million, plus additional contingent consideration based upon
future performance. Sleep Country is a leading mattress retailer in the Pacific
Northwest which operates 48 stores under the Sleep Country USA and Mattress
Gallery names. This acquisition was financed from borrowings under the Company's
Senior Credit Facility. Sleep Country used the proceeds received to repay bank
debt of $17.8 million plus $0.1 million of interest and Fenway debt of $0.6
million.
Because the Company and Sleep Country were controlled by affiliates of
Fenway at the time of the acquisition, the Company is required to account for
the acquisition as a transfer of assets within a group under common control.
Under this accounting methodology, the Company and Sleep Country are treated as
if they had been combined for accounting and financial reporting purposes for
the periods in which both entities were controlled by Fenway (from March 1,
2000). As a result, the Company's consolidated financial statements have been
restated for all periods prior to the business combination to reflect the
combined results of the Company and Sleep Country as of the beginning of the
earliest period presented. In addition to combining the separate historical
results of the Company and Sleep Country, the consolidated financial statements
include all adjustments necessary to conform accounting methods and
presentation, to the extent they were different, and to eliminate significant
intercompany transactions.
The Company intends to file under Form 8-K a revised Annual Report on
Form 10-K for the year ended December 28, 2002 to restate fiscal years 2000,
2001 and 2002 to reflect the combined results of the Company and Sleep Country.
7
Selected combining financial data for the six months ended June 28,
2003 and June 29, 2002 are as follows:
June 28, 2003
- ----------------------------------------------------------------------------------------------------------------------
Simmons
(in thousands) Company Sleep Country Adjustments Combined
------- ------------- ----------- --------
Net sales $365,340 $ 27,507 $ (6,933) $385,914
Net income 12,333 431 (140) 12,624
June 29, 2002
- ----------------------------------------------------------------------------------------------------------------------
Simmons
(in thousands) Company Sleep Country Adjustments Combined
------------- ----------- --------
Net sales $331,775 $ 23,835 $ (4,999) $ 350,611
Net income (loss) 8,389 (977) 50 7,462
3. Assets/Liabilities Held For Sale
In April 2003, the Company, continuing its strategy to focus on the
wholesale bedding business, initiated a sales process of its retail operations
in one or more transactions in 2003. However, no assurances can be given that a
proposed transaction or transactions will be completed or will be completed on
terms favorable to the Company.
In accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has reflected assets and liabilities for its
retail segment as held for sale in the June 28, 2003 and June 29, 2002 balance
sheets.
The components of the assets and liabilities held for sale as of June
28, 2003 are as follows (amounts in thousands):
Assets Held for Sale
--------------------
Accounts receivable, net $ 1,008
Inventories 5,481
Other current assets 1,525
Property, plant and equipment, net 5,436
Goodwill, net 22,383
Intangible assets, net 422
Other assets 1,027
-------
Total assets held for sale $37,282
=======
Liabilities Held for Sale
-------------------------
Accounts payable $ 4,840
Other current liabilities 5,610
Other long-term liabilities 7,137
-------
Total liabilities held for sale $17,587
=======
8
4. Inventories
A summary of inventory follows (amounts in thousands):
June 28, December 28,
2003 2002
---- ----
Raw materials $12,548 $11,198
Work in progress 1,053 1,240
Finished goods 11,642 8,611
------- -------
$25,243 $21,049
======= =======
5. Warranty Liability
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 costs of warranty coverage at the time the sale is recorded. Accrued
warranties totaled $3.8 million and $3.4 million, respectively, as of June 28,
2003 and December 28, 2002. The following table presents a reconciliation of the
Company's warranty liability at June 28, 2003 (amounts in thousands):
Warranty Liability
------------------
Balance at December 28, 2002 $ 3,434
2003 warranty provisions 2,257
2003 warranty settlements (1,938)
-------
Balance at June 28, 2003 $ 3,753
=======
9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
6. Long-Term Debt
A summary of long-term debt follows (amounts in thousands):
June 28, December 28,
2003 2002
---- ----
Senior Credit Agreement:
Tranche A Term Loan $ 7,500 $ 14,500
Tranche B Term Loan 42,505 42,505
Tranche C Term Loan 39,006 19,006
--------- ---------
Total Senior Credit Facility 89,011 76,011
Sleep Country Senior Credit Facility:
Revolving Loan - 1,500
Term Loan - 16,500
--------- ---------
Total Sleep Country Senior Credit Facility - 18,000
Sleep Country Shareholder Debt:
Shareholder Note Payable - 3,000
Bridge Loan I - net of original issue discount - 1,000
Shareholder Term Loan I - 2,123
Shareholder Loan II - net of original issue discount - 1,942
--------- ---------
Total Sleep Country Shareholder Debt - 8,065
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 4.52%, due 2016 4,200 4,200
Banco Santander Loan, 3.91% 2,204 2,329
10.25% Series Subordinated Notes, due 2009 150,000 150,000
Other, including capital lease obligations 57 135
--------- ---------
255,172 268,440
Less current portion (436) (19,039)
--------- ---------
$ 254,736 $ 249,401
========= =========
The 10.25% Series B Senior Subordinated Notes ("Notes") bear interest
at the rate of 10.25% per annum and are payable semi-annually in cash in arrears
on March 15 and September 15. The Notes are subordinated in right of payment to
all existing and future senior indebtedness of the Company.
The Notes are redeemable at the option of the Company on or 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 Notes.
10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
The indenture for the Notes requires the Company to comply with certain
restrictive covenants, including a restriction on dividends and limitations on
the incurrence of indebtedness, certain payments and distributions, and sales of
the Company's assets and stock.
The Notes are fully and unconditionally guaranteed on an unsecured,
senior subordinated basis by all of the Company's active domestic subsidiaries.
Exclusive of the allocation of the debt and related interest of the Company, the
total sales, total assets, cash flow from operations, income before income
taxes, and stockholder's equity of the three active non-guarantor international
subsidiaries combined was $4.9 million, $8.0 million, $0.1 million, $0.1
million, and $5.6 million, respectively, as of and for the six months ended June
28, 2003.
On June 6, 2003, the Company entered into a Joinder Agreement which
supplements its Senior Credit Facility whereby an additional $20.0 million was
borrowed under the Tranche C Term Loan. The proceeds from this additional loan
were utilized to repay borrowings under the Revolving Loan Facility.
Following the incremental Tranche C Term Loan on June 6, 2003, the
Senior Credit Facility, as supplemented, provided for loans of up to $149.0
million, consisting of a Term Loan Facility of $89.0 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 Simmons
Holdings, Inc., the Company's parent company ("Simmons Holdings"), and all of
our active domestic subsidiaries, and is collateralized by substantially all of
the Company's assets.
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 June 28,
2003 for the Tranche A term, Tranche B term and Tranche C term loans were 3.40%,
4.61% and 4.75%, respectively.
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. The Company elected to set its interest rate at the
six-month LIBOR rate for approximately $78.5 million of the Term Loan Facility,
which fixed the LIBOR base rate at rates ranging from 1.25% to 1.375% that
expire between August 4, 2003 and November 24, 2003 for approximately 82% of
floating rate debt outstanding as of June 28, 2003.
11
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
In connection with the acquisition of Sleep Country by the Company,
Sleep Country used a portion of the $18.4 million proceeds received to repay its
outstanding bank debt at February 28, 2003 of $17.8 million. Additionally, $0.6
million of proceeds received were utilized to repay shareholder debt. The
remaining balance of Sleep Country shareholder debt at February 28, 2003 of $7.7
million was contributed to Sleep Country paid-in capital.
As of June 28, 2003, the amount under the Revolving Credit Facility
that was available to be drawn was $54.6 million, after giving effect to $5.4
million 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 Simmons Holdings, acquisitions and capital
expenditures.
The Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge, cash interest coverage and leverage
ratios. The Senior Credit Facility also contains covenants which, among other
things, limit capital expenditures, the incurrence of additional indebtedness,
investments, dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. As of June 28, 2003,
the Company was in compliance with all of its financial covenants.
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.
7. Segment Information
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker or group in deciding how to allocate resources and in assessing
performance. The Company operates in two business segments, (1) wholesale
bedding and (2) retail bedding. The wholesale bedding segment consists of the
manufacture, sale and distribution of premium branded bedding products, as well
as the licensing of intellectual property to other manufacturers. The retail
bedding segment operates specialty sleep stores in California, Washington and
Oregon, that sell to consumers principally premium branded bedding products.
The Company plans to pursue the sale of its retail bedding segment in
2003 and has classified the assets and liabilities for this segment as held for
sale in the accompanying balance sheets (see footnote 3 for further
explanation).
12
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
The Company evaluates performance and allocates resources based on net
sales, operating income and earnings before income taxes, depreciation and
amortization. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies as reported in
the Company's Annual Report on Form 10-K for the year ended December 28, 2002.
The following tables summarize the segment information for the quarters and six
months ended June 28, 2003 and June 29, 2002:
Quarter Ended June 28, 2003
- -----------------------------------------------------------------------------------------------------------------
Wholesale
(in thousands) Bedding Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------
Net sales $184,001 $ 23,389 $ (8,091) $199,299
Operating income 13,192 358 (243) 13,307
Income (loss) before income taxes 7,754 (622) (243) 6,889
Adjusted EBITDA* 28,471 413 (243) 28,641
Depreciation and amortization expense 5,585 55 - 5,640
Segment assets 427,503 41,273 (46,368) 422,408
Expenditures for long-lived assets 1,651 69 - 1,720
Quarter Ended June 29, 2002
- -----------------------------------------------------------------------------------------------------------------
Wholesale
(in thousands) Bedding Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------
Net sales $153,833 $ 16,837 $ (6,866) $163,804
Operating income (loss) 11,158 (73) (33) 11,052
Income (loss) before income taxes 4,262 (860) 7 3,409
Adjusted EBITDA* 21,688 562 (33) 22,217
Depreciation and amortization expense 4,125 635 - 4,760
Segment assets 386,661 58,530 (25,332) 419,859
Expenditures for long-lived assets 1,390 92 - 1,482
13
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Six Months Ended June 28, 2003
- -----------------------------------------------------------------------------------------------------------------
Wholesale
(in thousands) Bedding Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------
Net sales $356,144 $ 45,650 $(15,880) $385,914
Operating income 33,946 577 (432) 34,091
Income (loss) before income taxes 22,672 (1,734) (432) 20,506
Adjusted EBITDA* 55,996 1,253 (432) 56,817
Depreciation and amortization expense 10,890 490 - 11,380
Segment assets 427,503 41,273 (46,368) 422,408
Expenditures for long-lived assets 1,958 204 - 2,162
Six Months Ended June 29, 2002
- -----------------------------------------------------------------------------------------------------------------
Wholesale
(in thousands) Bedding Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------
Net sales $326,824 $ 33,942 $(10,155) $350,611
Operating income (loss) 28,349 (156) (238) 27,955
Income (loss) before income taxes 14,394 (1,397) (238) 12,759
Adjusted EBITDA* 46,847 823 (238) 47,432
Depreciation and amortization expense 8,927 979 - 9,906
Segment assets 386,661 58,530 (25,332) 419,859
Expenditures for long-lived assets 1,672 415 - 2,087
* EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, management fees, minority
interest and the impairment of an investment. Adjusted EBITDA, as
defined by the Company's Senior Credit Facility, is calculated as
EBITDA plus interest income, transaction fees and non-cash variable
stock compensation. The Company believes that EBITDA is a widely
accepted financial indicator of a company's ability to service or
incur debt and a similar measure, Adjusted EBITDA, is utilized
frequently by our debt securities analysts, investors and other
interested parties in the evaluation of companies in our industry.
Additionally, Adjusted EBITDA is used for purposes of the covenants
contained in the Senior Credit Facility and by management in
evaluating the Company's operating performance. 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 the Company's
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. The Company's calculation of
EBITDA and Adjusted EBITDA may not be comparable to those recorded by
other companies.
14
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
In the "Eliminations" column of each period presented above, the
segment assets consists primarily of investments in subsidiaries, receivables
and payables, and gross wholesale bedding profit in ending retail inventory. The
segment operating loss elimination consists of the removal of the wholesale
bedding profit in ending retail inventory.
8. Reverse Stock Split
On May 30, 2003, the Company's Board of Directors approved a
one-for-ten thousand reverse stock split of the Company's authorized and
outstanding Common Stock shares. The reverse stock split reduced the Company's
50,000,000 authorized Common Stock shares to 5,000 authorized Common Stock
shares and the Company's 31,964,452 outstanding Common Stock shares to 3,196
outstanding Common Stock shares. The par value of the Common Stock was not
affected by the reverse stock split and remains at $0.01 per share after the
reverse stock split. Consequently, the aggregate par value of the issued Common
Stock was reduced by reclassifying the par value amount of the reversed common
shares from Common Stock to Additional Paid-in-Capital for all periods
presented. All outstanding shares have been retroactively restated in the
accompanying consolidated financial statements for all periods presented to
reflect the reverse stock split.
9. Contingencies
On December 11, 2001, FDL, Inc. ("FDL"), one of the Company's
licensees, filed a lawsuit against the Company and United Sleep Products Denver,
Inc. ("United Sleep"), another Company licensee, alleging that the Company had
licensed overlapping trademark rights to both FDL and United Sleep. The Company
has denied the material allegations of FDL's initial and amended complaints and
has brought counterclaims against FDL for breach of the parties' license
agreement. The Company has also assumed the defense of and agreed to indemnify
United Sleep with respect to FDL's claims. On July 24, 2003, in response to a
joint motion by the parties, the Court vacated the current trial date of
November 3, 2003, and entered a temporary stay of discovery until the earlier of
October 15, 2003 and the date upon which the Court issues a written decision on
the Company's pending summary judgment motion filed April 10, 2003. The Court
has not yet ruled on the Company's summary judgment motion and has not set a new
trial date. The Company intends to maintain its vigorous defense of this
lawsuit.
From time to time the Company has been involved in various legal
proceedings. The Company believes that all current litigation is routine in
nature and incidental to the conduct of its business, and that none of this
litigation, if determined adversely to the Company, would have a material
adverse effect on its financial condition or results of its operations.
At June 28, 2003, Simmons Holdings had $22.0 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. Simmons Holdings is
unable to repay the debt without receiving dividends from the Company. The
Company's indenture for the Notes and Senior Credit Facility restrict the
payment of dividends by the Company to Simmons Holdings.
15
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
10. Accounting Pronouncements
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 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 adoption of SFAS 146
did not have a material impact on the Company's financial position or results of
operations.
In November 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
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 cannot be
revised or restated to reflect the effect of the recognition and measurement
provisions of FIN 45. The adoption of FIN 45 did not 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 were 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
16
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
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 have any variable interest entities.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 113
on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. The amendments set forth by SFAS 149 improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003. The guidance is to be applied prospectively. The
Company does not have any derivative instruments.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new guidance
requires that those instruments be classified as liabilities in statements of
financial position. The Company does not believe that the adoption of this
pronouncement will have a material impact on its consolidated financial
statements.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
consolidated financial statements, including related notes, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the 2002 Annual Report on Form 10-K, and the unaudited interim
financial statements included elsewhere in this report.
BUSINESS COMBINATION
On February 28, 2003, we acquired the stock of SC Holdings, Inc.
("Sleep Country") from an affiliate of Fenway Partners, Inc. ("Fenway") for
approximately $18.4 million, plus additional contingent consideration based upon
future performance. Sleep Country is a leading mattress retailer in the Pacific
Northwest which operates 48 stores under the Sleep Country USA and Mattress
Gallery names. This acquisition was financed from borrowings under our Senior
Credit Facility. Sleep Country used the proceeds received to repay bank debt of
$17.8 million and Fenway debt of $0.6 million.
Because Sleep Country and we were controlled by affiliates of Fenway at
the time of the acquisition, we are required to account for the acquisition as a
transfer of assets within a group under common control. Under this accounting
methodology, Sleep Country and the Company are treated as if they had been
combined for accounting and financial reporting purposes for the period in which
both entities were controlled by affiliates of Fenway (from March 1, 2000). As a
result, our consolidated financial statements have been restated for all periods
prior to the business combination to reflect the combined results of Sleep
Country and us as of the beginning of the earliest periods presented. In
addition to combining the separate historical results of Sleep Country and us,
the consolidated financial statements include all adjustments necessary to
conform accounting methods and presentation, to the extent they were different,
and to eliminate significant intercompany transactions.
We intend to file under Form 8-K a revised Annual Report on Form 10-K
for the year ended December 28, 2002 to restate fiscal years 2002, 2001 and 2000
to reflect the combined results of the Company and Sleep Country.
18
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Condensed
Consolidated Statements of Operations expressed as a percentage of net sales:
Quarter Ended Six Months Ended
----------------------------- -----------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 52.6% 51.9% 52.6% 51.9%
----- ------- ----- -----
Gross margin 47.4% 48.1% 47.4% 48.1%
Selling, general and administrative expenses 35.9% 37.3% 35.6% 37.1%
Non-cash variable stock compensation expense 4.8% 3.9% 2.7% 2.7%
Amortization of intangibles 0.0% 0.2% 0.0% 0.4%
Other operating expenses 0.0% 0.0% 0.3% 0.0%
---- ---- ---- ----
Operating income 6.7% 6.7% 8.8% 7.9%
Interest expense, net 2.9% 4.3% 3.1% 4.1%
Other expense, net 0.3% 0.2% 0.4% 0.2%
---- ----- ---- -----
Income before income taxes and
minority interest 3.5% 2.2% 5.3% 3.6%
Income tax expense 1.3% 1.1% 2.0% 1.5%
---- ---- ---- ----
Income before minority interest 2.2% 1.1% 3.3% 2.1%
Minority interest 0.0% 0.0% 0.0% 0.0%
---- ---- ---- ----
Net income 2.2% 1.1% 3.3% 2.1%
==== ==== ==== ====
QUARTER ENDED JUNE 28, 2003 AS COMPARED TO QUARTER ENDED JUNE 29, 2002
Net sales. Net sales for the quarter ended June 28, 2003 increased $35.5
million, or 21.7%, to $199.3 million from $163.8 million for the quarter ended
June 29, 2002. Our second quarter sales increase was due in part to growth in
wholesale bedding segment sales of $30.2 million, or 19.6%, from $153.8 million
to $184.0 million. Our growth in wholesale bedding segment sales was
attributable to increases in unit shipments and average unit selling price
("AUSP") of 11.5% and 6.9%, respectively, versus the second quarter of 2002. Our
second quarter 2003 sales, exclusive of certain sales deductions, which is the
methodology used by the International Sleep Products Association ("ISPA") in
calculating market share, were up 18.3% over the prior year. In comparison, ISPA
reported that for its leading U.S. manufacturer reporting sample, of which the
Company is included, second quarter 2003 industry sales were up 1.9% over the
prior year, comprised of a decline in unit shipments of 1.3% and an increase in
AUSP of 3.2%. Our wholesale bedding sales continue to benefit from a shift in
sales mix toward our higher priced Beautyrest(R) and BackCare(R) products and
the addition of floor placements at new and existing customers in comparison to
the prior year.
Our retail segment sales for the quarter ended June 28, 2003 increased $6.6
million, or 38.9%, to $23.4 million from $16.8 million for the second quarter of
2002, due principally to the purchase of 26 retail stores in Southern California
from Mattress Discounters Corporation ("Mattress Discounters") in December 2002.
On a comparable store basis, sales for our retail stores increased 13.3% in the
second quarter of 2003 versus the comparable period of 2002.
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cost of Products Sold. Cost of products sold, as a percentage of net sales, for
the quarter ended June 28, 2003 increased 0.7 percentage points to 52.6% from
51.9% in the second quarter of 2002. Our second quarter gross margin decreased
principally due to an increase in certain raw material costs resulting from
supplier price increases without a corresponding sales price increase in our
Beautyrest(R) product line in 2003, partially offset by fixed manufacturing
costs remaining relatively flat with the prior year.
Selling, General and Administrative Expenses. For the quarter ended June 28,
2003, selling, general and administrative expenses, as a percentage of net
sales, decreased 1.4 percentage points to 35.9% from 37.3% in the second quarter
of 2002. The decrease as a percentage of net sales from the second quarter of
2002 was principally attributable to (i) greater leverage of our fixed selling,
general and administrative expenditures resulting from the above mentioned
increase in sales versus the prior year comparable period; and (ii) a decrease
in certain advertising and promotional expenditures.
Non-Cash Variable Stock Compensation Expense. Non-cash variable stock
compensation expense increased $3.2 million to $9.6 million for the quarter
ended June 28, 2003 from $6.4 million in the second quarter of 2002. The
increase was attributable to a 16.9% increase in the underlying value of Simmons
Holdings' common stock in the second quarter of 2003 and an increase in the
number of vested stock options outstanding at June 28, 2003 versus June 29,
2002.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles decreased $0.3 million to $0.1 million for the quarter ended June
28, 2003 from $0.4 million in the second quarter of 2002 due to the expiration
of the amortization period for certain patents.
Interest Expense, Net. Interest expense, net, decreased $1.3 million, or 18.6%,
to approximately $5.7 million for the quarter ended June 28, 2003, from $7.0
million in the second quarter of 2002 due to (i) decreased average outstanding
borrowings; (ii) lower Prime and LIBOR base rates on our Senior Credit Facility
borrowings; and (iii) lower interest rate margins on our Senior Credit Facility
obligations.
Other Expense, Net. Other expense, net, increased $0.2 million to $0.7 million
for the quarter ended June 28, 2003 compared to $0.5 million in the second
quarter of 2002. This increase was primarily attributable to higher management
advisory fees paid to Fenway Partners.
Income Taxes. Our effective income tax rate of 37.3% for the quarter ended June
28, 2003 differs from the federal statutory rate primarily because of state
income taxes. Our effective income tax rate of 50.8% for the quarter ended June
29, 2002 differs from the federal statutory rate primarily because of state
income taxes and a valuation allowance on Sleep Country operating losses.
Net Income. For the reasons set forth above, our net income increased $2.6
million, or 146.9%, to $4.3 million for the quarter ended June 28, 2003 compared
to $1.7 million for the quarter ended June 29, 2002.
EBITDA - Non-GAAP Financial Measure. For the reasons set forth above, we had an
EBITDA of $18.9 million, or 9.5% of net sales, for the quarter ended June 28,
2003 compared to $15.8
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
million, or 9.7% of net sales, for the second quarter of 2002. Our Adjusted
EBITDA, as defined below, was $28.6 million, or 14.4% of net sales, in 2003,
compared to $22.2 million, or 13.6% of net sales, in 2002. The following table
sets forth a reconciliation of consolidated net income to Adjusted EBITDA, which
is a non-GAAP financial measure.
Quarter Ended
--------------------------
June 28, June 29,
2003 2002
-------- --------
Net income $ 4,316 $ 1,748
Depreciation and amortization 5,640 4,760
Income tax expense 2,573 1,731
Interest expense 5,702 7,001
Minority interest - (70)
Other expense, net 716 642
-------- --------
EBITDA(a) 18,947 15,812
Transaction fees 50 -
Non-cash variable stock compensation 9,591
6,358
Interest income 53 47
-------- --------
Adjusted EBITDA(a) $ 28,641 $ 22,217
======== ========
(a) EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, management fees,
minority interest and the impairment of an investment. Adjusted
EBITDA, as defined by our Senior Credit Facility, is calculated
as EBITDA plus interest income, transaction fees 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, Adjusted EBITDA, is
utilized frequently by our debt securities analysts, investors
and other interested parties in the evaluation of companies in
our industry. Additionally, Adjusted EBITDA is used for purposes
of the covenants contained in the Senior Credit Facility and by
management in evaluating the Company's operating performance.
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.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
SIX MONTHS ENDED JUNE 28, 2003 AS COMPARED TO SIX MONTHS ENDED JUNE 29, 2002
Net sales. Net sales for the six months ended June 28, 2003 increased $35.3
million, or 10.1%, to $385.9 million from $350.6 million for the six months
ended June 29, 2002. Our six months sales increase was due in part to growth in
wholesale bedding segment sales of $29.3 million, or 9.0%, from $326.8 million
to $356.1 million. Our growth in wholesale bedding segment sales was
attributable to increases in unit shipments and AUSP of 5.7% and 4.9%,
respectively, versus the first six months of 2002. Our sales for the first six
months of 2003, exclusive of certain sales deductions, which is the methodology
used by ISPA in calculating market share, were up 10.0% over the prior year. In
comparison, ISPA reported that for its leading U.S. manufacturer reporting
sample, of which the Company is included, the first six months of 2003 industry
sales were up 1.5% over the prior year, comprised of a decline in unit shipments
of 2.3% and an increase in AUSP of 3.9%. Our wholesale bedding sales continue to
benefit from a shift in sales mix toward our higher priced Beautyrest(R) and
BackCare(R) products and the addition of floor placements at new and existing
customers in comparison to the prior year.
Our retail segment sales for the six months ended June 28, 2003 increased $11.7
million, or 34.5%, to $45.7 million from $33.9 million for the first six months
of 2002, due principally to the purchase of 26 retail stores in Southern
California from Mattress Discounters in December 2002. On a comparable store
basis, sales for our retail stores increased 11.0% in the first six months of
2003 versus the comparable period of 2002.
Cost of Products Sold. Cost of products sold, as a percentage of net sales, for
the six months ended June 28, 2003 increased 70 basis points to 52.6% from 51.9%
in the first six months of 2002. Our first six months gross margin decreased due
to an increase in certain raw material costs resulting from supplier price
increases without a corresponding sales price increase in our Beautyrest(R)
product line in 2003 and a shift in sales toward dealers that purchase our
mattresses at lower gross margins, but also with lower advertising and selling
expenses than we pay for comparable customers. The gross margin decrease was
partially offset by fixed manufacturing costs remaining relatively flat with the
prior year.
Selling, General and Administrative Expenses. For the six months ended June 28,
2003, selling, general and administrative expenses, as a percentage of net
sales, decreased 1.5 percentage points to 35.6% from 37.1% in the first six
months of 2002. The decrease as a percentage of net sales from the second
quarter of 2002 was principally attributable to (i) less co-op advertising and
selling support expenditures classified as a selling expense instead of a
reduction of gross sales; (ii) greater leverage in our fixed selling, general
and administrative expenditures resulting from the sales increase versus the
prior year comparable period; and (iii) a decrease in certain advertising and
promotional expenditures
Non-Cash Variable Stock Compensation Expense. Non-cash variable stock
compensation expense increased $0.9 million to $10.4 million for the six months
ended June 28, 2003 from $9.5 million in the first six months of 2002. The
increase was attributable to a 16.4% increase in the underlying value of Simmons
Holdings' common stock in the first six months of 2003 and an increase in the
number of vested stock options outstanding at June 28, 2003 versus June 29,
2002.
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles decreased $0.9 million to $0.2 million for the six months ended June
28, 2003 from $1.1 million in the first six months of 2002 due to the expiration
of the amortization period for certain patents.
Interest Expense, Net. Interest expense, net, decreased $2.3 million, or 15.9%,
to approximately $12.0 million for the six months ended June 28, 2003, from
$14.3 million in the first six months of 2002 due to (i) decreased average
outstanding borrowings; (ii) lower Prime and LIBOR base rates on our Senior
Credit Facility borrowings; and (iii) lower interest rate margins on our Senior
Credit Facility obligations.
Other Expense, Net. Other expense, net, increased $0.8 million to $1.6 million
for the six months ended June 28, 2003 compared to $0.8 million in the first six
months of 2002. This increase was primarily attributable to higher management
advisory fees paid to Fenway Partners.
Income Taxes. Our effective income tax rate of 38.4% for the six months ended
June 28, 2003 differs from the federal statutory rate primarily because of state
income taxes. Our effective income tax rate of 42.1% for the six months ended
June 29, 2002 differs from the federal statutory rate primarily because of state
income taxes and a valuation allowance on Sleep Country operating losses.
Net Income. For the reasons set forth above, our net income increased $5.2
million, or 69.2%, to $12.6 million for the six months ended June 28, 2003
compared to $7.5 million for the same period of 2002.
EBITDA - Non-GAAP Financial Measure. For the reasons set forth above, we had an
EBITDA of $45.4 million, or 11.8% of net sales, for the six months ended June
28, 2003 compared to $37.9 million, or 10.8% of net sales, for the first six
months of 2002. Our Adjusted EBITDA, as defined below, was $56.8 million, or
14.7% of net sales, in 2003, compared to $47.4 million, or 13.5% of net sales,
in 2002. The following table sets forth a reconciliation of consolidated net
income to Adjusted EBITDA, which is a non-GAAP financial measure.
Six Months Ended
---------------------------
June 28, June 29,
2003 2002
-------- --------
Net income $ 12,624 $ 7,462
Depreciation and amortization 11,380 9,906
Income tax expense 7,882 5,367
Interest expense 11,993 14,260
Minority interest - (70)
Other expense, net 1,592 936
-------- --------
EBITDA(a) 45,471 37,861
Transaction fees 822 -
Non-cash variable stock compensation 10,421 9,485
Interest income 103 86
-------- --------
Adjusted EBITDA(a) $ 56,817 $ 47,432
======== ========
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(a) EBITDA represents earnings before interest expense, income tax
expense, depreciation and amortization, management fees,
minority interest and the impairment of an investment. Adjusted
EBITDA, as defined by our Senior Credit Facility, is calculated
as EBITDA plus interest income, transaction fees 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, Adjusted EBITDA, is
utilized frequently by our debt securities analysts, investors
and other interested parties in the evaluation of companies in
our industry. Additionally, Adjusted EBITDA is used for purposes
of the covenants contained in the Senior Credit Facility and by
management in evaluating the Company's operating performance.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of cash to fund liquidity needs are (i) cash provided by
operating activities; and (ii) borrowings available under our Senior Credit
Facility. Our primary use of funds consists of payments of principal and
interest for our debt, capital expenditures, distributions to Simmons Holdings
principally for the repurchase of stock and vested stock options held by former
employees, acquisitions, and funding for working capital increases. In the first
six months of 2003, we repaid $13.3 million of debt to reduce our total debt to
$255.2 million. In comparison, in the first six months of 2002, total debt
decreased by $27.8 million.
In the first six months of 2003, our working capital, exclusive of assets and
liabilities of our retail segment which are held for sale, increased $24.0
million. The working capital increase was principally due to (i) an increase in
accounts receivable due to increased sales volumes late in the second quarter;
and (ii) an increase in inventories to meet increased sales demand supplemented
by having more expensive components in our inventory to support our high-end
bedding lines.
Our capital expenditures totaled $2.2 million for the six months ended June 28,
2003. We expect to spend an aggregate of approximately $10.0 million for capital
expenditures in fiscal year 2003. We believe that annual capital expenditure
limitations in our Senior Credit Facility will not significantly inhibit us from
meeting our ongoing capital expenditure needs.
On February 28, 2003, we acquired the stock of Sleep Country from a related
party for approximately $18.4 million, plus additional contingent consideration
based upon future performance. This acquisition was financed from borrowings
under our Senior Credit Facility.
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sleep Country used the proceeds received to repay bank debt of $17.8 million and
stockholder debt of $0.6 million. We incurred approximately $0.8 million in
costs associated with this transaction.
On June 6, 2003, the Company entered into a Joinder Agreement with certain banks
party to its Senior Credit Facility whereby an additional $20.0 million was
borrowed under the Tranche C Term Loan. The proceeds from this additional loan
were utilized to repay borrowings under the Revolving Loan Facility.
As of June 28, 2003, we had availability to borrow $54.6 million under our
Revolving Credit Facility after giving effect to $5.4 million reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit. We were in compliance as of June 28, 2003 with the financial covenants
contained in all of our credit facilities.
We believe that cash generated from operations, together with the borrowings
available under our Revolving Credit Facility, will be sufficient to meet our
working capital and capital expenditure needs in the foreseeable future.
The Revolving Credit Facility expires on October 29, 2004. We expect to have the
ability to renew the existing facility or have the ability to find new financing
with comparable terms prior to expiration. If we are unable to renew our
existing arrangement or obtain new financing, this could have an adverse affect
on our ability to fund operations.
SEASONALITY/OTHER
For the past several years, there has not been significant seasonality to our
wholesale bedding business. Our retail bedding business has historically
experienced, and we expect to continue to experience, seasonal and quarterly
fluctuations in net sales, operating income and Adjusted EBITDA. As is the case
with many bedding retailers, our retail business is subject to seasonal
influences, characterized by strong sales for the months of May through
September, which impact our second and third quarter results.
ACCOUNTING PRONOUNCEMENTS
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 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 adoption of SFAS 146 did not
have a material impact on our financial position or results of operations.
In November 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 fair value
of the obligation it assumes
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 cannot be revised or restated to
reflect the effect of the recognition and measurement provisions of FIN 45. The
adoption of FIN 45 did not have a material impact on our 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 were 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. We do not have any variable interest entities.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 113 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The amendments set forth by SFAS 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003. The guidance is to be applied prospectively. We do
not have any derivative instruments.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150").
SFAS 150 improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new guidance
requires that those instruments be classified as liabilities in statements of
financial position. We do not believe that the adoption of this Statement will
have a significant impact on our consolidated financial statements.
27
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995. When used in this Quarterly Report on Form 10-Q, the words "believes,"
"anticipates," "expects," "intends," "projects" and similar expressions are used
to identify forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future financial and operating results, including expected benefits from our
Better Sleep Through Science(R) philosophy. Any forward-looking statements
contained in this report represent management's current expectations, based on
present information and current assumptions, and are thus prospective and
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed in such forward-looking statements. Actual
results could differ materially from those anticipated or projected due to a
number of factors. These factors include, but are not limited to, anticipated
sales growth, success of new products, increased market share, reduction of
manufacturing costs, generation of free cash flow and reduction of debt, changes
in consumer confidence or demand, planned sale of our 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
2002 and the Form 10-Qs for the first quarter of 2003 and 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information relative to our market risk sensitive instruments by major
category at December 28, 2002 is presented under Item 7A of our Annual Report on
Form 10-K for the fiscal year ended December 28, 2002. There have been no
material changes to this information as of June 28, 2003.
Item 4. Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's management,
including the Chief Executive Officer and Chief Financial Officer, have
conducted an evaluation of the Company's disclosure controls and procedures (as
defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) as of the end of the period covered by this report and have concluded that
the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls and Procedures. There were no changes in the
Company's internal control over financial reporting during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting. The
Company is committed to ongoing periodic reviews and enhancements of its
controls and their effectiveness.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Chief Executive Officer Certification pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following Forms 8-K were filed with or furnished to the
Commission:
On May 15, 2003, the Company filed with the Commission a
Form 8-K which reported under Item 7 the Press Release dated
May 13, 2003 announcing the results of operations for the
first quarter of 2003.
On June 11, 2003, the Company filed with the Commission a
Form 8-K which reported under Item 5 the execution of a
Joinder Agreement, dated June 6, 2003, which supplements the
Credit and Guaranty Agreement dated as of October 29, 1998.
The Company furnished the Joinder Agreement as an exhibit
under Item 7 to the Form 8-K.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, Simmons Company has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SIMMONS COMPANY
By: /s/ William S. Creekmuir
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William S. Creekmuir
Executive Vice President & Chief Financial Officer
Date: August 11, 2003
31