<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
------------------
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 333-04841
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 600, Atlanta, Georgia 30328
- -------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ x ] Yes [ ] No
The number of shares of the registrant's common stock outstanding as of
November 8, 1996 was 31,964,452.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -------------
Quarter Ended Quarter Ended
September 28, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Net sales $ 154,527 $ 141,711
Costs and expenses:
Cost of products sold 91,593 82,215
Selling, general and administrative 45,924 44,334
ESOP expense 1,251 1,134
Amortization of intangible assets 1,805 1,438
-------- --------
140,573 129,121
-------- --------
Income from operations 13,954 12,590
Interest expense, net 5,022 2,033
Other (income) deductions, net (3,528) 73
-------- --------
Income before income taxes 12,460 10,484
Provision for income taxes 4,959 4,652
-------- --------
Net income $ 7,501 $ 5,832
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
------------ -------------------------
Period from Period from
March 22, December 31, Three
1996 1995 Quarters
through through Ended
September 28, March 21, September 30,
1996 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Net sales $ 288,576 $ 106,431 $ 369,726
Costs and expenses:
Cost of products sold 176,194 66,630 220,137
Selling, general and administrative 92,016 35,846 122,718
ESOP expense 2,546 1,203 3,401
Amortization of intangible assets 3,917 1,324 4,314
--------- --------- ---------
274,673 105,003 350,570
--------- --------- ---------
Income from operations 13,903 1,428 19,156
Interest expense, net 10,461 1,489 5,971
Other deductions, net 1,093 96 400
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item 2,349 (157) 12,785
Provision for income taxes 1,691 282 5,673
--------- --------- ---------
Income (loss) before extraordinary item 658 (439) 7,112
Extraordinary loss from early extinguishment
of debt, net of an income tax benefit of $1,137 1,706 -- --
--------- --------- ---------
Net (loss) income $ (1,048) $ (439) $ 7,112
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -----------
September 28, December 30,
1996 1995
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,636 $ 9,185
Accounts receivable, less allowance for
doubtful accounts of $6,081 and $4,600 in 1996
and 1995, respectively 69,486 49,453
Inventories 20,555 18,293
Deferred income taxes 7,972 7,565
Other current assets 7,320 5,372
------- -------
Total current assets 111,969 89,868
Property, plant and equipment, net 33,600 23,410
Patents, net of accumulated amortization of
$1,307 and $13,198 in 1996 and 1995, respectively 15,731 14,275
Goodwill, net of accumulated amortization of
$2,610 and $26,831 in 1996 and 1995, respectively 188,176 121,573
Deferred income taxes 8,885 --
Other assets 12,339 5,366
------- -------
$370,700 $254,492
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
------------- -----------
September 28, December 30,
1996 1995
------------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,838 $ 22,712
Accrued advertising and incentives 16,555 13,016
Accrued taxes 832 1,966
Other accrued expenses 21,665 22,818
Current maturities of long-term obligations 2,694 2,661
-------- --------
Total current liabilities 74,584 63,173
Noncurrent liabilities:
Long-term obligations 189,158 91,107
Deferred income taxes -- 6,537
Postretirement benefit obligations other than pensions 7,818 7,999
Other 12,648 8,352
-------- --------
Total liabilities 284,208 177,168
--------- --------
Redeemable preferred stock -- 680
Redeemable common stock under ESOP, net of related
unearned compensation of $29,674 -- 32,272
Series A Preferred Stock--ESOP, net of related
unearned compensation of $25,806 2,546 --
Common stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized,
31,964 and 36,312 shares issued, respectively 320 363
Additional paid-in capital 84,680 176,501
Unearned compensation under ESOP -- (47,531)
Accumulated deficit (1,048) (78,894)
Foreign currency translation adjustment (6) (288)
Treasury stock, 0 and 1,727 shares in 1996 and 1995,
respectively, at cost -- (5,779)
-------- --------
Total common stockholders' equity 83,946 44,372
-------- --------
$ 370,700 $ 254,492
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
--------- --------------------------
Period from Period from
March 22, December 31, Three
1996 1995 Quarters
through through Ended
September 28, March 21, September 30,
1996 1996 1995
-------------- ------------ -------------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities $ (5,137) $ 2,339 $ 13,656
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (7,959) (1,567) (1,772)
Net proceeds from sale of investment 4,011 -- --
Payment to the seller for the acquisition (151,625) -- --
Payments to option holders (6,950) -- --
Payments of acquisition costs (16,040) -- --
-------- -------- --------
Net cash (used in) investing activities (178,563) (1,567) (1,772)
-------- -------- --------
Cash flows from financing activities:
Proceeds from Predecessor revolving line of
credit and long-term borrowings -- 3,334 13,842
Predecessor principal payments on revolving
line of credit, long-term debt and capital
lease obligations -- (3,490) (18,945)
Payments of Predecessor debt (76,170) -- --
Proceeds of Successor debt 303,700 -- --
Payments of Successor debt (122,400) -- --
Payments of financing costs (8,940) -- --
Proceeds from issuance of Successor common
stock 85,000 -- --
Treasury stock purchases -- (660) (5,519)
-------- -------- --------
Net cash provided by (used in) financing
activities 181,190 (816) (10,622)
-------- -------- --------
Net effect of exchange rate changes on cash (4) 9 98
-------- -------- --------
Change in cash and cash equivalents (2,514) (35) 1,360
Cash and cash equivalents, beginning of period 9,150 9,185 8,477
-------- -------- --------
Cash and cash equivalents, end of period $ 6,636 $ 9,150 $ 9,837
======== ======== ========
Supplemental cash flow information:
Depreciation $ 2,362 $ 874 $ 2,987
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
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
Subsidiaries, collectively.
The Condensed Consolidated Financial Statements of the Company have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC"). 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 at September 28, 1996, 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 condensed
consolidated financial statements should be read in conjunction with the
year-end consolidated financial statements and accompanying notes included in
the Company's registration statement on Form S-4, as amended, dated July 31,
1996. Operating results for the period ended September 28, 1996, are not
necessarily indicative of future results that may be expected for the year
ending December 28, 1996.
2. The Acquisition
On March 22, 1996, Simmons Holdings, Inc. ("Holdings"), through its
subsidiary formed for this purpose, Simmons Acquisition Corp. ("SAC"), acquired
100% of the outstanding common stock of the Company. Holdings was formed to
consummate the Acquisition on behalf of affiliates of INVESTCORP S.A.
("Investcorp"), management and certain other investors. Immediately following
the completion of the Acquisition, SAC merged into the Company, as a result of
which 100% of the common stock of the Company became owned by Holdings. For
purposes of identification and description, Simmons Company is referred to as
the "Predecessor" for the period prior to the Acquisition, the "Successor" for
the period subsequent to the Acquisition, and the "Company" for both periods.
The purchase price for the Acquisition was approximately $269.6 million
(including approximately $94.6 million in refinancing or assumption of existing
indebtedness, purchase of certain stock options, and the payments of fees and
expenses) which was allocated to the assets and liabilities of the Company based
upon their estimated fair market value at the date of the Acquisition, under the
purchase method of accounting.
The financing for the Acquisition (including the refinancing of
outstanding debt) was provided for by (i) borrowings under a new $115.0 million
Senior Credit Facility, which refinanced the Company's existing senior and
subordinated loans, (ii) the $100.0 million proceeds under a new Subordinated
Loan Facility, and (iii) $85.0 million of capital provided by affiliates of
Investcorp, management and certain other investors from Holdings.
In connection with the Acquisition, the Simmons ESOP sold 6,001,257
shares of the Company's common stock (representing all of the allocated shares)
for cash, and converted all of the remaining 5,670,406 shares of common stock of
the Company (unallocated shares) into 5,670,406 shares of Series A Preferred
Stock. The Series A Preferred Stock is convertible into common stock of the
Company on a one-to-one basis and is entitled to an aggregate liquidation
preference of approximately $28.4 million ($5.00 per share). The ESOP also has
the right, upon the occurrence of certain events, to require the Company to
purchase the stock owned by the ESOP for $5.00 per share.
On April 18, 1996, the Company issued $100.0 million in 10.75% Senior
Subordinated Notes, pursuant to an offering (the "Offering") (See Note 4). The
proceeds of the offering were used to retire
7
<PAGE> 8
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
loans under the Subordinated Loan Facility mentioned above.
3. Inventories
Inventories consisted of the following at September 28, 1996 and
December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor
--------- ------------
September 28, December 30,
1996 1995
-------------- ------------
<S> <C> <C>
Raw materials $12,277 $11,807
Work in progress 2,458 1,942
Finished goods 5,820 4,544
------- -------
$20,555 $18,293
====== ======
</TABLE>
4. Long-Term Obligations
Long-term obligations consisted of the following at September 28, 1996
and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor
-------------- ------------
September 28, December 30,
1996 1995
-------------- ------------
<S> <C> <C>
Senior loans:
Old Tranche A term loan - $ 36,045
Old Tranche C term loan - 17,700
New Tranche A term loan $ 35,516 -
New Tranche B term loan 34,784 -
Revolving loan 11,000 2,000
Adjustable rate senior subordinated notes - 2,618
Adjustable rate junior subordinated notes - 24,328
10.75% Series A Senior Subordinated
Notes due 2006 100,000 -
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Other, including capital lease obligations 852 1,377
------- -------
191,852 93,768
Less current portion (2,694) (2,661)
------- -------
$ 189,158 $ 91,107
======== =======
</TABLE>
In connection with the Acquisition, the Company entered into a new
Senior Credit Facility (the "Senior Credit Facility"). The Senior Credit
Facility provides for a $40.0 million revolving credit facility. The revolving
credit facility will expire on the earlier of (a) March 31, 2001 or (b) such
other date as the revolving credit commitments thereunder shall terminate in
accordance with the terms of the Senior Credit Facility. The Senior Credit
Facility also provides for a $75.0 million term loan facility, which is divided
into two tranches, Tranche A and Tranche B term loans. The Tranche A term loan
has a final scheduled maturity date of March 31, 2001, and the Tranche B term
loan has a final scheduled maturity date of March 31, 2003.
8
<PAGE> 9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
The interest rate under the Senior Credit Facility is based, at the
Company's option, on an Alternate Base Rate or a Eurodollar Rate (both as
defined), plus margins as follows:
<TABLE>
<CAPTION>
Revolving Tranche A Tranche B
Credit Loan Term Loan Term Loan
----------- --------- ---------
<S> <C> <C> <C>
Alternate base rate margin 1.25% 1.25% 1.75%
Eurodollar rate (LIBOR-based) 2.50% 2.50% 3.00%
</TABLE>
The interest rates per annum in effect at September 28, 1996 for the
revolving credit, Tranche A term, and Tranche B term loans were 7.9% - 9.5%,
8.0%, and 8.6%, respectively.
Management of the Company has developed and implemented a policy to
maintain the percentage of fixed and variable rate debt within certain
parameters. The Company enters into interest rate swap agreements whereby the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount linked to LIBOR. Any differences paid or received on the
interest rate swap agreement are recognized as adjustments to interest expense
over the life of the swap, thereby adjusting the effective interest rate on the
underlying obligation. On June 11, 1996, the Company entered into two interest
rate swap agreements to effectively convert $40.0 million of the variable
Tranche A and Tranche B debt to fixed rate debt with effective interest rates of
8.8% - 9.3%. The interest rate swap agreements have a duration of two years.
At September 28, 1996, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$22.8 million, after giving effect to $11.0 million of borrowings and $6.2
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 acquisitions and capital expenditures.
During the third quarter of 1996, the Company recorded a $4.0 million
gain on the sale of minority interests in certain foreign affiliates. The net
proceeds from the sale were used to prepay term loan payments as required by the
Senior Credit Facility. (See Note 5 to "Notes to Condensed Consolidated
Financial Statements," included herein.)
The Senior Credit Facility contains certain covenants and restrictions
on actions by the Company and its subsidiaries. In addition, the Senior Credit
Facility requires that the Company comply with specified financial ratios and
tests, including minimum cash flow, a maximum ratio of indebtedness to cash flow
and a minimum interest coverage ratio. As of September 28, 1996, the Company was
in compliance with respect to all covenants under the Senior Credit Facility.
On April 18, 1996, the Company completed a refinancing, which consisted
of (i) the sale of $100.0 million of 10.75% Senior Subordinated Notes due 2006
(the "Notes") pursuant to a private offering, (ii) the application of
approximately $96.0 million (after deduction of discounts to the Initial
Purchaser and other expenses of the Offering), together with other available
funds, to repay the outstanding indebtedness under the Company's Subordinated
Loan Facility.
The Notes mature on April 15, 2006 and bear interest at the rate of
10.75% per annum from April 15, 1996 payable semiannually on April 15th and
October 15th of each year, commencing October 15, 1996. The Notes may be
redeemed at the option of the Company on or after April 15, 2001, under the
conditions and at the redemption price as specified in the Note Indenture, dated
as of April 18, 1996, under which the Notes were issued. The Notes are
subordinated to all existing and future Senior
9
<PAGE> 10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Indebtedness (as defined) of the Company and will be effectively subordinated to
all obligations of any subsidiaries of the Company.
On September 4, 1996, the Company had issued 10.75% Series A Senior
Subordinated Notes due 2006 (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.
Future maturities of long-term obligations as of September 28, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 28
1997 2,701
1998 7,309
1999 9,318
2000 11,328
Thereafter 161,168
-------
$191,852
=======
</TABLE>
5. Sale of Investment
During the third quarter of 1996, the Company sold to a third party
unaffiliated with the Company, its minority interests in Simmons Asia, Ltd.
(10.0%), Simmons Bedding & Furniture (HK) Ltd. (8.1%) and Simmons Company, Ltd.
(6.8%). The sale of these minority interests resulted in a gain for financial
accounting purposes of $4.0 million which is included in other (income)
deductions, net in the condensed consolidated statement of operations.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
The Company employed the purchase method of accounting for the
Acquisition completed in March 1996. As a result of the required purchase
accounting adjustments, the post-Acquisition financial statements for the period
from March 22, 1996 to September 28, 1996 (the "Successor Financials") are not
comparable to the financial statements for the periods prior to the Acquisition
(the "Predecessor Financials").
RESULTS OF OPERATIONS
For purposes of the discussion below, the results of operations for the
nine month period ended September 28, 1996 represent the mathematical addition
of the historical amounts for the Predecessor period (December 31, 1995 through
March 21, 1996) and the Successor period (March 22, 1996 through September 28,
1996) and are not indicative of the results that would actually have been
obtained if the Acquisition had occurred on December 30, 1995.
QUARTER ENDED SEPTEMBER 28, 1996 AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
Net Sales. Net sales for the quarter ended September 28, 1996 increased
9.0%, or $12.8 million, from $141.7 million in 1995 to $154.5 million in 1996.
This increase was due primarily to a 10.8% or $15.3 million increase in bedding
unit sales volume, offset, in part, by a decline in bedding average unit selling
price aggregating 2.0% or $3.1 million. Sales of bedding accessories during the
quarter also increased $0.6 million compared to 1995. The growth in bedding unit
sales volume resulted from increased contract and Beautyrest(R) bedding sales
and the continued growth of the BackCare(R) product line due to incremental
product placements and retailer acceptance. The decline in average unit selling
price is attributable to a higher mix percentage of BackCare(R) and contract
bedding.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the quarter ended September 28, 1996 increased 1.3 percentage points from
58.0% in 1995 to 59.3% in 1996. The increase is primarily attributable to: (i)
introductory selling prices associated with the introduction of the Company's
new product line; (ii) a higher product mix concentration of contract bedding;
and (iii) costs resulting from the redesigned layout of certain plant facilities
pursuant to the Company's reengineering project.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended
September 28, 1996 improved 1.6 percentage points from 31.3% in 1995 to 29.7% in
1996. The improvement reflects management's efforts to contain costs in these
areas and the Company's fixed expenses being spread over a larger revenue base.
Offsetting these improvements, in part, are an increase in expenditures related
to the Company's reengineering and systems upgrade projects and an increase in
distribution costs due to higher volume and increased fuel costs.
Amortization of Intangible Assets. Amortization of intangible assets
for the quarter ended September 29, 1996 increased $0.4 million due in part to
the effect of an increase in goodwill resulting from purchase accounting
adjustments made in connection with the Acquisition in March 1996.
Interest Expense, Net. Interest expense, net increased $3.0 million to
$5.0 million due primarily to interest expense on increased total indebtedness,
which resulted from the issuance of senior subordinated notes
11
<PAGE> 12
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
and a new senior credit facility as financing for the Acquisition. ("See Notes
to Condensed Consolidated Financial Statements")
Other (Income) Deductions, Net. Other (income) deductions, net for the
quarter ended September 28, 1996 includes a $4.0 million gain on the sale of
minority interests in certain foreign affiliates. (See "Notes to Condensed
Consolidated Financial Statements," included elsewhere herein.) This income was
offset, in part, by normal recurring non-operating expenses.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
for the quarters ended September 28, 1996 and September 30, 1995 differ from the
federal statutory rate because of non tax-deductible amortization of goodwill
and the utilization, in 1995, of net operating loss carryforwards.
Net (Loss) Income. For the reasons set forth above, the quarter ended
September 28, 1996 resulted in income of $7.5 million as compared to $5.8
million at September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 28, 1996 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net Sales. Net sales for the nine months ended September 28, 1996
increased 6.8%, or $25.3 million, from $369.7 million in 1995 to $395.0 million
in 1996. This increase was due primarily to a 7.0% or $25.6 million increase in
bedding unit sales volume, offset, in part, by a decline in bedding average unit
selling price aggregating 0.4% or $1.7 million. Sales of bedding accessories
during the first nine months increased $1.4 million compared to 1995. The growth
in unit sales volume resulted from increased contract bedding sales, primarily
in the flagship Beautyrest(R) product line, an increase in flagship
Beautyrest(R) bedding and the continued growth of the BackCare(R) product line
due to incremental product placements and retailer acceptance. The decline in
average unit selling price is attributable to a higher mix percentage of
BackCare(R) and contract and promotional bedding.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the nine months ended September 28, 1996 increased 2.0 percentage points
from 59.5% in 1995 to 61.5% in 1996. The increase is primarily attributable to:
(i) introductory selling prices associated with the introduction of the
Company's new product line; (ii) a higher product mix concentration of contract
and promotional bedding; (iii) costs resulting from the redesigned layout of
certain plant facilities pursuant to the Company's reengineering project; and
(iv) the sale of the Company's finished goods inventory which had been written
up, as required by generally accepted accounting principles, to fair market
value as of the date of the Acquisition.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the nine months ended
September 28, 1996 improved 0.8 percentage point, from 33.2% in 1995 to 32.4% in
1996. The selling, general and administrative improvement reflects management's
efforts to contain costs in these areas and the Company's fixed expenses being
spread over a larger revenue base. Offsetting these improvements, in part, are
an increase in expenditures related to the Company's reengineering and systems
upgrade projects and an increase in distribution costs due to higher volume and
increased fuel costs.
Amortization of Intangible Assets. Amortization of intangible assets
for the nine months ended September 28, 1996 increased $0.9 million due in part
to the effect of an increase in goodwill resulting from purchase accounting
adjustments made in connection with the Acquisition in March 1996.
Interest Expense, Net. Interest expense, net increased $6.0 million to
$12.0 million due primarily to
12
<PAGE> 13
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
interest expense on increased total indebtedness, which resulted from the
issuance of senior subordinated notes and a new senior credit facility as
financing for the Acquisition.
Other Deductions, Net. Other deductions, net increased $0.8 million to
$1.2 million due primarily to non-recurring expenses of $4.4 million incurred in
connection with the Acquisition. Approximately $3.8 million was attributable to
special compensation agreements entered into by the Company with certain members
of management of the Company and $1.5 million was comprised of fees for
management advisory, consulting services and certain other fees. These expenses
were offset, in part, by a $4.0 million gain on the sale of minority interests
in certain foreign affiliates.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
for the nine months ended September 28, 1996 and September 30, 1995 differ from
the federal statutory rate because of non tax-deductible amortization of
goodwill and the utilization, in 1995, of net operating loss carryforwards.
Extraordinary Item. In April 1996, the Company recorded a $1.7 million
charge, net of an income tax benefit of $1.1 million, representing the remaining
unamortized debt issuance costs related to long term obligations repaid as a
result of the refinancing of certain Acquisition debt.
Net (Loss) Income. For the reasons set forth above, the nine months
ended September 28, 1996 resulted in a loss of $1.5 million, as compared to a
net income of $7.1 million at September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities. Net cash used in operating activities was
$2.8 million for the combined nine months ended September 28, 1996 compared to
$13.7 million provided in 1995, due primarily to (i) increased cash interest
expense; (ii) non-recurring transaction charges associated with the Acquisition;
and (iii) the timing of payments of accounts payable. The Company's principal
use of funds consists of payments of principal, interest, and capital
expenditures. Capital expenditures totaled $9.5 million for the combined periods
ended September 28, 1996. These capital expenditures consisted primarily of
normal recurring capital expenditures in the amount of $3.9 million, capital
expenditures relating to the construction of a new manufacturing facility in the
amount of $0.6 million and capitalized expenditures related to the Company's
systems upgrade project in the amount of $5.0 million. The Company estimates
that total normal recurring capital expenditures will be approximately $5.0
million in 1996. In addition, total expenditures for completing the systems
upgrade project are expected to be approximately $7.0 million in 1996.
Management believes that annual capital expenditure limitations in its Senior
Credit Facility will not significantly inhibit the Company from meeting its
ongoing capital needs.
The Company may seek to make selective acquisitions in the bedding
industry. Although the Company has discussions from time to time with potential
candidates, the Company currently has no commitments with respect to any such
acquisitions.
At September 28, 1996, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$22.8 million, after giving effect to $11.0 million of borrowings and $6.2
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 acquisitions and
13
<PAGE> 14
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
capital expenditures. At September 28, 1996, the Company's weighted average
borrowing cost was 9.7%.
During the third quarter of 1996, the Company sold to a third party
unaffiliated with the Company, its minority interests in Simmons Asia, Ltd.
(10.0%), Simmons Bedding & Furniture (HK) Ltd. (8.1%) and Simmons Company, Ltd.
(6.8%). The sale of these minority interests resulted in a gain for financial
accounting purposes of $4.0 million. The net proceeds from the sale were used to
prepay term loan payments as required by the Senior Credit Facility.
Management believes that the Company will have the necessary liquidity
for the foreseeable future from cash flow from operations, and amounts available
under its revolving credit facility in the Senior Credit Facility to fund: (i)
its obligations under the Senior Credit Facility and the New Notes; (ii)
expected capital expenditures; (iii) selective acquisitions in the bedding
industry; and (iv) other needs required to manage and operate its business.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
By: /s/ Zenon S. Nie
------------------------------------
Zenon S. Nie
Chairman of the Board of Directors,
Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Jonathan C. Daiker
-----------------------------------
Jonathan C. Daiker
Executive Vice President-Finance and
Administration, Chief Financial Officer
and Director
(Principal Accounting Officer)
Date: November 12, 1996
16
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<FISCAL-YEAR-END> DEC-28-1996
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