<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 June 27, 1998
-----------------------
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
August 11, 1998 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>
Quarter Ended
June 27, June 28,
1998 1997
------------ -----------
<S> <C> <C>
Net sales $ 140,676 $ 124,726
Costs and expenses:
Cost of products sold 83,370 72,902
Selling, general and administrative 49,361 44,273
ESOP expense 1,358 1,558
Amortization of intangible assets 1,907 1,911
--------- ---------
135,996 120,644
--------- ---------
Income from operations 4,680 4,082
Interest expense, net 4,895 4,861
Other deductions, net 387 395
--------- ---------
Loss before income taxes (602) (1,174)
Provision for income tax benefit (280) (569)
--------- ---------
Net loss $ (322) $ (605)
========= =========
</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>
Six Months Ended
June 27, June 28,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 280,068 $ 258,142
Costs and expenses:
Cost of products sold 166,805 153,677
Selling, general and administrative 100,429 91,828
ESOP expense 2,833 2,809
Amortization of intangible assets 3,815 3,869
--------- ---------
273,882 252,183
--------- ---------
Income from operations 6,186 5,959
Interest expense, net 9,538 9,664
Other deductions, net 795 774
--------- ---------
Loss before income taxes (4,147) (4,479)
Provision for income tax benefit (1,999) (2,172)
--------- ---------
Net loss $ (2,148) $ (2,307)
========= =========
</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>
June 27, December 27,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,853 $ 9,108
Accounts receivable, less allowance for
doubtful accounts of $4,740 and $3,938 72,214 65,488
Inventories 23,647 19,970
Deferred income taxes 2,122 3,229
Other current assets 14,308 13,808
-------- --------
Total current assets 116,144 111,603
Property, plant and equipment, net 52,809 47,564
Patents, net of accumulated amortization of
$6,269 and $4,870 10,763 12,162
Goodwill, net of accumulated amortization of
$10,873 and $8,457 182,434 184,850
Deferred income taxes 11,655 8,453
Other assets 14,334 10,493
-------- --------
$388,139 $375,125
======== ========
</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>
June 27, December 27,
1998 1997
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,230 $ 27,847
Accrued advertising and incentives 23,125 15,457
Other accrued expenses 21,346 22,058
Current maturities of long-term obligations 8,327 10,873
--------- ---------
Total current liabilities 77,028 76,235
Noncurrent liabilities:
Long-term obligations 187,152 173,570
Other noncurrent liabilities 19,468 21,476
--------- ---------
Total liabilities 283,648 271,281
--------- ---------
Series A Preferred Stock--ESOP, net of related
unearned compensation of $14,289 and $17,122 14,063 11,230
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized,
31,964 shares issued 320 320
Additional paid-in capital 84,680 84,680
Retained earnings 5,526 7,674
Accumulated other comprehensive income (65) (55)
Series A Preferred Stock in treasury, at cost (33) (5)
--------- ---------
Total stockholders' equity 90,428 92,614
--------- ---------
$ 388,139 $ 375,125
========= =========
</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>
Six Months Ended
June 27, June 28,
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (6,751) $ 9,301
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,502) (7,488)
-------- --------
Net cash (used in) investing activities (9,502) (7,488)
-------- --------
Cash flows from financing activities:
Proceeds of long-term borrowings 30,234 18,000
Payments of long-term borrowings (19,198) (19,043)
Treasury stock purchases (28) -
-------- --------
Net cash provided by (used in) financing
activities 11,008 (1,043)
-------- --------
Net effect of exchange rate changes on cash (10) (8)
-------- --------
Change in cash and cash equivalents (5,255) 762
Cash and cash equivalents, beginning of period 9,108 4,573
-------- --------
Cash and cash equivalents, end of period $ 3,853 $ 5,335
======== ========
Supplemental cash flow information:
Depreciation $ 4,451 $ 2,497
======== ========
</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 June 27, 1998, 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 annual report on Form 10-K for the year ended December 27,
1997. Operating results for the period ended June 27, 1998, are not necessarily
indicative of future results that may be expected for the year ending December
26, 1998.
2. Inventories
Inventories consisted of the following at June 27, 1998 and December
27, 1997 (in thousands):
<TABLE>
<CAPTION>
June 27, December 27,
1998 1997
----------- ------------
<S> <C> <C>
Raw materials $14,599 $12,209
Work in progress 1,617 1,531
Finished goods 7,431 6,230
------- -------
$23,647 $19,970
======= =======
3. Long-Term Obligations
Long-term obligations consisted of the following at June 27, 1998 and
December 27, 1997 (in thousands):
June 27, December 27,
1998 1997
----------- ------------
Senior loans:
Tranche A term loan $ 28,233 $ 33,000
Tranche B term loan 32,562 34,700
Revolving loan 16,500 -
10.75% Series A Senior Subordinated
Notes due 2006 100,000 100,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 3.70%, due 2016 5,000 5,000
Construction loan 2,813 1,329
Other, including capital lease obligations 671 714
-------- --------
195,479 184,443
Less current portion (8,327) (10,873)
-------- --------
$187,152 $173,570
======== ========
</TABLE>
7
<PAGE> 8
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
The interest rates per annum in effect at June 27, 1998 for the
revolving credit, Tranche A term, and Tranche B term loans were 8.80%, 8.19%,
and 8.69%, respectively.
At June 27, 1998, the amount under the revolving credit portion of the
Senior Credit Facility that was available to be drawn was approximately $20.1
million, after giving effect to $16.5 million of borrowings and $3.4 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.
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 June 27, 1998, the Company was in
compliance with respect to all covenants under the Senior Credit Facility.
In December 1997, Simmons Caribbean Bedding, Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and new equipment installation. As of June 27,
1998, approximately $2.8 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
Future maturities of long-term obligations as of June 27, 1998 are as follows
(in thousands):
<TABLE>
<S> <C>
1998 $ 3,969
1999 8,777
2000 10,669
2001 30,379
2002 16,150
Thereafter 125,534
--------
$195,479
========
</TABLE>
4. Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosure about Pensions and Other Post Retirement Benefits." SFAS No. 132
standardizes the disclosure requirements for pensions and other post retirement
benefits to the extent practicable. This standard is effective beginning with
the Company's annual financial statements for the 1998 fiscal year, and prior
period disclosures are required to be restated. Management does not believe that
the adoption of SFAS No. 132 will have a material impact on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This
8
<PAGE> 9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, and financial statements of prior periods should not be restated.
Management is currently reviewing the provisions of SFAS No. 133 and does not
believe that the Company's financial statements will be materially impacted by
the adoption of this provision.
5. Subsequent Event
On July 17, 1998, the Company announced that an affiliate of Fenway
Partners, Inc., a New York-based private investment firm ("Fenway"), had signed
a definitive acquisition agreement to acquire a majority of the outstanding
common stock of Simmons Holdings, Inc., the Company's parent ("Holdings"), from
existing stockholders for approximately $500 million including the retirement of
substantially all of the Company's outstanding indebtedness (including without
limitation the retirement of all of the Company's outstanding 10.75% Series A
Senior Subordinated Notes due 2006). Upon completion of the acquisition, an
investment fund managed by Fenway will own approximately 71% of Holdings and the
Company's management, employees, Employee Stock Ownership Plan and other
existing Holdings' stockholders will own approximately 29% of Holdings. The
definitive agreement contains customary closing conditions including Fenway's
ability to secure financing on the terms and conditions set forth in commitment
letters supplied by Fenway's third party financing sources. Although no
assurances can be given as to when or if the acquisition will be completed, it
is currently expected that the acquisition will be completed on or around
September 30, 1998.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QUARTER ENDED JUNE 27, 1998 AS COMPARED TO QUARTER ENDED JUNE 28, 1997
Net Sales. Net sales for the quarter ended June 27, 1998 increased
12.8%, or $16.0 million, from $124.7 million in 1997 to $140.7 million in 1998.
This increase was due primarily to a 10.4% or $12.7 million increase in bedding
unit sales volume and a 2.2% or $3.0 million increase in bedding average unit
selling price. The growth in bedding unit sales volume resulted primarily from
increased BackCare(R) product shipments and an increase in contract bedding
sales. The increase in bedding average unit selling price is attributable to a
shift in mix of Beautyrest(R) and BackCare(R) to higher end price points.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the quarter ended June 27, 1998 increased 0.8 percentage point from 58.5% in
1997 to 59.3% in 1998. The increase in cost of goods sold as a percentage of net
sales is primarily attributable to a shift in the Company's overall product mix
to an increased percentage of BackCare(R) products.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended June
27, 1998 decreased 0.4 percentage point from 35.5% in 1997 to 35.1% in 1998. The
improvement in selling, general and administrative expenses is attributable to
lower discretionary spending, lower consulting fee expenditures and a lower bad
debt provision. This overall improvement was offset, in part, by an increase in
marketing expenditures and higher depreciation expense. The increase in
marketing expenditures is a result of higher cooperative advertising and
promotions. The increase in depreciation is due to the amortization of the
systems upgrade project.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
for the quarters ended June 27, 1998 and June 28, 1997 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
Net (Loss) Income. For the reasons set forth above, the quarter ended
June 27, 1998 resulted in a net loss of $0.3 million as compared to a net loss
of $0.6 million at June 27, 1997.
SIX MONTHS ENDED JUNE 27, 1998 AS COMPARED TO THE SIX MONTHS ENDED JUNE 28, 1997
Net Sales. Net sales for the six months ended June 27, 1998 increased
8.5%, or $22.0 million, from $258.1 million in 1997 to $280.1 million in 1998.
This increase was due primarily to a 4.3% or $11.4 million increase in bedding
average unit selling price and a 3.8% or $9.5 million increase in bedding unit
sales volume. The increase in bedding average unit selling price is attributable
to a shift in mix of Beautyrest(R) and BackCare(R) to higher end price points.
The growth in bedding unit sales volume resulted primarily from increased
BackCare(R) product shipments occurring during the second quarter and an
increase in contract bedding sales.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the six months ended June 27, 1998 remained stable at approximately 59.6% as
compared to the same time period a year ago. The shift in the Company's
overall product mix was offset by the growth in the Company's bedding average
unit selling price and a lower provision for plant relocations.
10
<PAGE> 11
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the six months ended
June 27, 1998 increased 0.3 percentage point from 35.6% in 1997 to 35.9% in
1998. The increase in selling, general and administrative expenses is
attributable to an increase in marketing expenditures and higher depreciation
expense, offset, in part, by lower discretionary spending, lower consulting fee
expenditures and a lower bad debt provision. The increase in marketing
expenditures is a result of higher cooperative advertising and promotions. The
increase in depreciation is due to the amortization of the systems upgrade
project.
Provision (Benefit) for Income Taxes. The Company's effective tax rates
for the six months ended June 27, 1998 and June 28, 1997 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
Net (Loss) Income. For the reasons set forth above, the six months
ended June 27, 1998 resulted in a net loss of $2.1 million as compared to a net
loss of $2.3 million at June 27, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its revolving
credit facility. Net cash used in operating activities was $6.6 million for the
six months ended June 27, 1998 compared to $9.3 million provided by operating
activities in 1997, due primarily to the timing of accounts receivable
collections and the timing of payments of accounts payable and accrued
liabilities. The Company's principal use of funds consists of payments of
principal, interest, and capital expenditures. Capital expenditures totaled $9.5
million for the six months ended June 27, 1998. These capital expenditures
consisted primarily of normal recurring capital expenditures in the amount of
$5.9 million, capital expenditures relating to the construction of a new
manufacturing facility in the amount of $1.5 million and capitalized
expenditures related to the Company's systems upgrade project in the amount of
$2.1 million. The Company estimates that total normal recurring capital
expenditures will be approximately $8.0 million in 1998. In addition, total
expenditures for the systems upgrade project are expected to be approximately
$2.3 million in 1998. 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 June 27, 1998, the amount under the revolving credit portion of the
Senior Credit Facility that was available to be drawn was approximately $20.1
million, after giving effect to $16.5 million of borrowings and $3.4 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. At June 27, 1998, the
Company's weighted average borrowing cost was 9.6%.
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 June 27, 1998, the Company
11
<PAGE> 12
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
was in compliance with respect to all covenants under the Senior Credit
Facility.
In December 1997, Simmons Caribbean Bedding, Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and new equipment installation. As of June 27,
1998, approximately $2.8 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
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.
SUBSEQUENT EVENT
On July 17, 1998, the Company announced that an affiliate of Fenway
Partners, Inc., a New York-based private investment firm ("Fenway"), had signed
a definitive acquisition agreement to acquire a majority of the outstanding
common stock of Simmons Holdings, Inc., the Company's parent ("Holdings"), from
existing stockholders for approximately $500 million including the retirement of
substantially all of the Company's outstanding indebtedness (including without
limitation the retirement of all of the Company's outstanding 10.75% Series A
Senior Subordinated Notes due 2006). Upon completion of the acquisition, an
investment fund managed by Fenway will own approximately 71% of Holdings and the
Company's management, employees, Employee Stock Ownership Plan and other
existing Holdings' stockholders will own approximately 29% of Holdings. The
definitive agreement contains customary closing conditions including Fenway's
ability to secure financing on the terms and conditions set forth in commitment
letters supplied by Fenway's third party financing sources. Although no
assurances can be given as to when or if the acquisition will be completed, it
is currently expected that the acquisition will be completed on or around
September 30, 1998.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
There are certain important factors that could cause results to differ from
those anticipated by some of the statements made above. Investors are cautioned
that all forward looking statements involve risk and uncertainty. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ are the following: consumer spending and debt levels;
continuity of relationships with and purchases by major customers; product mix;
competitive pressure on sales and pricing, and increase in material or
production cost which cannot be recouped in product pricing.
12
<PAGE> 13
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.
13
<PAGE> 14
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: August 11, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUN-27-1998
<CASH> 3,853
<SECURITIES> 0
<RECEIVABLES> 82,366
<ALLOWANCES> 10,152
<INVENTORY> 23,647
<CURRENT-ASSETS> 116,144
<PP&E> 64,704
<DEPRECIATION> 11,894
<TOTAL-ASSETS> 388,139
<CURRENT-LIABILITIES> 77,028
<BONDS> 187,152
14,063
0
<COMMON> 320
<OTHER-SE> 90,141
<TOTAL-LIABILITY-AND-EQUITY> 388,139
<SALES> 280,068
<TOTAL-REVENUES> 280,068
<CGS> 166,805
<TOTAL-COSTS> 166,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 906
<INTEREST-EXPENSE> 9,538
<INCOME-PRETAX> (4,147)
<INCOME-TAX> (1,999)
<INCOME-CONTINUING> (2,148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,148)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
