<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 26, 1999
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
incorporation or organization) Identification No.)
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. [ ] Yes [ X ] No
The number of shares of the registrant's common stock outstanding as of
August 31, 1999 was 31,964,452.
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
Quarter Ended
--------------------------------------------
June 26, June 27,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 147,689 $ 140,676
Costs and expenses:
Cost of products sold 83,901 83,370
Selling, general and administrative 54,260 49,361
ESOP expense 1,793 1,358
Amortization of intangibles 1,908 1,907
Interest expense, net 7,813 4,895
Other expense, net 601 387
--------- ---------
Loss before income taxes (2,587) (602)
Benefit for income taxes (1,872) (280)
--------- ---------
Net loss $ (715) $ (322)
--------- ---------
Other comprehensive income:
Foreign currency translation adjustment 20 4
--------- ---------
Comprehensive loss $ (695) $ (318)
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
Six Months Ended
--------------------------------------------
June 26, June 27,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 294,037 $ 280,068
Costs and expenses:
Cost of products sold 169,487 166,805
Selling, general and administrative 109,452 100,429
ESOP expense 3,585 2,833
Amortization of intangibles 3,814 3,815
Interest expense, net 15,754 9,538
Other expense, net 1,122 795
--------- ---------
Loss before income taxes and
extraordinary item (9,177) (4,147)
Benefit for income taxes (3,982) (1,999)
--------- ---------
Loss before extraordinary item (5,195) (2,148)
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,095 2,173 --
--------- ---------
Net loss $ (7,368) $ (2,148)
--------- ---------
Other comprehensive income:
Foreign currency translation adjustment 40 8
--------- ---------
Comprehensive loss $ (7,328) $ (2,140)
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
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<TABLE>
<CAPTION>
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 26, December 26,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,305 $ 6,004
Accounts receivable, less allowance for
doubtful accounts of $4,993 and $4,177 81,501 71,354
Inventories 20,559 20,462
Deferred income taxes 13,791 7,440
Other current assets 14,333 14,792
-------- --------
Total current assets 132,489 120,052
-------- --------
Property, plant and equipment, net 54,347 54,153
Patents, net of accumulated amortization of
$9,063 and $7,666 7,969 9,366
Goodwill, net of accumulated amortization of
$15,707 and $13,290 177,600 180,017
Deferred income taxes 16,713 17,704
Other assets 24,114 18,769
-------- --------
$413,232 $400,061
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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<TABLE>
<CAPTION>
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 26, December 26,
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,296 $ 29,950
Accrued advertising and incentives 26,074 15,321
Accrued interest 6,420 3,260
Accrued taxes 1,972 6,578
Other accrued expenses 14,358 12,372
Current maturities of long-term obligations 532 1,832
--------- ---------
Total current liabilities 65,652 69,313
Noncurrent liabilities:
Long-term obligations 333,832 311,637
Other noncurrent liabilities 17,709 19,328
--------- ---------
Total liabilities 417,193 400,278
Commitments and contingencies
Redemption Obligation--ESOP, net of related unearned
compensation of $8,790 and $11,400 14,694 12,084
Common stockholders' deficit:
Common stock, $.01 par value; 50,000 shares
authorized 31,964 issued and outstanding 320 320
Paid in capital 974 --
Accumulated deficit (19,903) (12,535)
Accumulated other comprehensive loss (46) (86)
--------- ---------
Total common stockholders' deficit (18,655) (12,301)
--------- ---------
$ 413,232 $ 400,061
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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<TABLE>
<CAPTION>
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
-----------------------------------------
June 26, June 27,
1999 1998
---- ----
<S> <C> <C>
Net cash used in operating activities $ (13,948) $ (6,751)
Cash flows from investing activities:
Purchases of property, plant and equipment, net (5,382) (9,502)
--------- ---------
Net cash used in investing activities (5,382) (9,502)
--------- ---------
Cash flows from financing activities:
Proceeds of 10.25% Senior Subordinated
Notes due 2009 150,000 --
Payments on Senior Bridge Loans (75,000) --
Payments on Junior Simmons Notes (30,391) --
Proceeds of long-term borrowings -- 30,234
Payments on long-term borrowings (24,105) (19,198)
Payments of financing costs (4,913) --
Treasury stock purchases -- (28)
--------- ---------
Net cash provided by financing activities 15,591 11,008
--------- ---------
Net effect of exchange rate changes on cash 40 (10)
--------- ---------
Change in cash and cash equivalents (3,699) (5,255)
Cash and cash equivalents, beginning of period 6,004 9,108
--------- ---------
Cash and cash equivalents, end of period $ 2,305 $ 3,853
========= =========
Supplemental cash flow information:
Depreciation $ 5,188 $ 4,451
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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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 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 26, 1999, 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. Operating results for the period ended June 26, 1999, are not necessarily
indicative of future results that may be expected for the year ending December
25, 1999.
2. Inventories
Inventories consisted of the following at June 26, 1999 and December
26, 1998 (in thousands):
<TABLE>
<CAPTION>
June 26, December 26,
1999 1998
---- ----
<S> <C> <C>
Raw materials $11,974 $12,823
Work in progress 1,294 1,376
Finished goods 7,291 6,263
------- -------
$20,559 $20,462
======= =======
</TABLE>
7
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Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
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3. Long-Term Obligations
Long-term obligations consisted of the following at June 26, 1999 and
December 26, 1998 (in thousands):
<TABLE>
<CAPTION>
June 26, December 26,
1999 1998
---- ----
<S> <C> <C>
New Senior Credit Agreement:
Tranche A Term Loan $ 48,607 $ 70,000
Tranche B Term Loan 68,657 70,000
Tranche C Term Loan 48,764 50,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 3.20%, due 2016 5,000 5,000
Banco Santander Loan 3,075 3,164
10.25% Series Subordinated Notes due 2009 150,000 --
Senior Bridge Loans -- 75,000
Junior Simmons Notes -- 30,000
Other, including capital lease obligations 561 605
--------- ---------
334,364 313,469
Less current portion (532) (1,832)
--------- ---------
$ 333,832 $ 311,637
========= =========
</TABLE>
The New Senior Credit Agreement provides for loans of up to $270.0
million, consisting of the Term Loan Facility of $190.0 million and the
Revolving Loan Facility of $80.0 million. We distributed a portion of the
proceeds of the Term Loan Facility and our initial borrowings under the
Revolving Credit Facility to Simmons Holdings Inc., our parent company ("Simmons
Holdings") to provide a portion of the funds necessary to consummate a
recapitalization agreement (as amended to date, the "Merger Agreement") with
Simmons Holdings and REM Acquisition, Inc., a transitory Delaware merger
corporation ("REM") sponsored by Fenway. The Merger Agreement provided for REM
to merge with and into Simmons Holdings, with Simmons Holdings being the
surviving corporation. Following the prepayments made from the proceeds of a
private offering of 10.25% Series B Senior Subordinated Notes due 2009, the Term
Loan Facility was reduced to approximately $166.0 million and such facility will
require no principal amortization payments in 1999. Our indebtedness under the
New Senior Credit Agreement bears interest at a floating rate, is guaranteed by
Simmons Holdings and one of our current domestic subsidiaries and is
collateralized by substantially all of our assets.
The interest rates per annum in effect at June 26, 1999 for the Tranche
A term, Tranche B term and Tranche C term loans were 7.7%, 8.2% and 8.5%,
respectively.
At June 26, 1999, the amount under the Revolving Credit Facility that
was available to be drawn was approximately $79.4 million, after giving effect
to $0.6 million that was reserved for our reimbursement obligations with respect
to outstanding letters of credit.
8
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Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
On March 16, 1999, we completed a refinancing, which consisted of the
sale of $150.0 million of 10.25% Senior Subordinated Notes due 2009 (the
"Notes") pursuant to a private offering. We used the net proceeds from this
offering to:
(1) repay the indebtedness under the senior bridge loan agreement and
the junior subordinated notes issued by us and accrued interest;
(2) repay the amounts outstanding under our revolving credit facility
and accrued interest; and
(3) prepay a portion of the amounts outstanding under our term loan
facility and accrued interest.
On August 5, 1999 our registration statement became effective. On April
21, 1999, we filed a registration statement on Form S-4 to issue 10.25% Series B
Senior Subordinated Notes due 2009 (the "New Notes") pursuant to an exchange
offer whereby holders of the Notes have an opportunity to receive New Notes
which will be registered under the Securities Act of 1933, but are otherwise
identical to the Notes.
In November 1998, Simmons Caribbean Bedding, Inc., our wholly owned
subsidiary, entered into a permanent loan facility with Banco Santander in the
amount of $3.2 million accruing interest at a fluctuating rate based on the
London Interbank Offered Rate (or LIBOR) plus an applicable margin; the interest
rate was 7.0% as of June 26, 1999.
Future maturities of long-term obligations as of June 26, 1999 are as
follows:
<TABLE>
<S> <C>
1999.............................................. $ 366
2000.............................................. 799
2001.............................................. 3,974
2002.............................................. 16,865
2003.............................................. 18,045
Thereafter....................................... 294,315
--------
$334,364
========
</TABLE>
4. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments 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 statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Financial statements for prior periods need not
be restated. We are currently reviewing the provisions of SFAS No. 133 and we do
not believe that the financial statements will be materially impacted by the
adoption of this pronouncement.
9
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Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
5. Contingencies
On April 3, 1998, Serta, Inc. filed a complaint against Simmons in the
United States District Court for the Northern District of Illinois, Eastern
Division, alleging that some Simmons products--including those sold in
connection with the trademarks Connoisseur(R)collection, Crescendo(TM), and some
World Class Beautyrest(R) and BackCare(R) Ultimate models--infringe one of their
U.S. patents and that our use of the term "Crescendo" infringes their alleged
common-law trademark, "Crescendo". Serta seeks compensatory damages in an
unspecified amount, interest, an accounting and disgorgement of profits derived
from allegedly infringing acts, treble damages, an order enjoining further
alleged infringement and requiring destruction of allegedly infringing items,
costs, expenses and attorney's fees. We have denied the material allegations of
the complaint. We also have asserted affirmative defense and/or counterclaims
against Serta alleging non-infringement, invalidity and unenforceability of the
patent-in-suit, and alleging infringement by Serta of our rights in the term
"Crescendo" in various geographic areas to the extent usage of the term by both
Serta and us would be confusingly similar. Serta requested the Patent and
Trademark Office, the PTO, to reexamine the patent-in-suit. Pending the outcome
of the reexamination, and by agreement of the parties, the pending lawsuit was
stayed. In April 1999, the PTO reinstated Serta's patent and the stay in action
was lifted. While we deny that Serta is entitled to any relief and intend to
defend the action vigorously, we cannot assure you that we will prevail in this
action.
From time to time, we have been involved in various legal proceedings.
We believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of operations.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Quarter Ended June 26, 1999 as Compared to Quarter Ended June 27,1998
Net Sales. Net sales for the quarter ended June 26, 1999 increased
5.0%, or $7.0 million, from $140.7 million in 1998 to $147.7 million in 1999.
The increase was due primarily to a 4.2% or $6.1 million increase in bedding
average unit selling price and a 0.8% or $0.9 million increase in bedding unit
sales volume. The increase in bedding average unit selling price is attributable
to sales of higher priced products, particularly in the BackCare(R) line. The
growth in bedding unit sales volume resulted primarily from increased
BackCare(R) and Beautyrest(R) product shipments.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the quarter ended June 26, 1999 decreased 2.5 percentage points from
59.3% in 1998 to 56.8% in 1999. Our gross margin improvement for the quarter
reflects raw material cost efficiencies resulting from higher levels of
procurement and increased productivity in certain of our manufacturing
facilities. Gross margins during the quarter also benefited from the increase in
bedding average unit selling price described above.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended June
26, 1999 increased 1.6 percentage points from 35.1% in 1998 to 36.7% in 1999. We
attribute this increase to an increase in marketing expenditures. Marketing
expenditures increased due to higher cooperative advertising and promotion
costs. Offsetting, in part, the increase in marketing expenditures were lower
distribution costs and various selling expenses.
ESOP Expense. ESOP expense increased from $1.4 million for the quarter
ended June 27, 1998 to $1.8 million for the quarter ended June 26, 1999. We
attribute this increase to an increase in the appraised value of the shares
subject to the Simmons ESOP in 1999.
Amortization of Intangibles. Amortization of intangibles for the
quarter remained relatively stable at approximately $1.9 million.
Interest Expense, Net. Interest expense, net increased $2.9 million
from $4.9 million for the quarter ended June 27, 1998 to $7.8 million for the
quarter ended June 26, 1999 due primarily to increased indebtedness resulting
from the Fenway acquisition.
Other Expense, Net. Other expense, net increased slightly from $0.4
million for the quarter ended June 27, 1998 to $0.6 million for the quarter
ended June 26, 1999. We attribute this increase to an increase in management
advisory service fees paid to Fenway.
Provision for Income Taxes. Our effective tax rates for the quarters
ended June 26, 1999 and June 27, 1998 differ from the federal statutory rate
primarily because of non tax-deductible amortization of goodwill.
11
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Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
Net Loss. For the reasons set forth above, we incurred a net loss of
$0.7 million for the quarter ended June 26, 1999 compared to a $0.3 million loss
for the quarter ended June 27, 1998.
Six Months Ended June 26, 1999 as Compared to Six Months Ended June 27,1998
Net Sales. Net sales for the six months ended June 26, 1999 increased
5.0%, or $14.0 million, from $280.1 million in 1998 to $294.1 million in 1999.
The increase was due primarily to a 3.6% or $12.1 million increase in bedding
average unit selling price and a 1.4% or $1.9 million increase in bedding unit
sales volume. The increase in bedding average unit selling price is attributable
to sales of higher priced products, particularly in the BackCare(R) line. The
growth in bedding unit sales volume resulted primarily from increased
BackCare(R) and Beautyrest(R) product shipments.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the six months ended June 26, 1999 decreased 2.0 percentage points from
59.6% in 1998 to 57.6% in 1999. Our gross margin improvement for the six months
reflects raw material cost efficiencies resulting from higher levels of
procurement and increased productivity in certain of our manufacturing
facilities. Gross margins during the six months also benefited from the increase
in bedding average unit selling price described above.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the six months ended
June 26, 1999 increased 1.3 percentage points from 35.9% in 1998 to 37.2% in
1999. We attribute this increase to an increase in marketing expenditures.
Marketing expenditures increased due to higher cooperative advertising and
promotion costs. Offsetting, in part, the increase in marketing expenditures
were lower distribution costs and various selling expenses.
ESOP Expense. ESOP expense increased from $2.8 million for the six
months ended June 27, 1998 to $3.6 million for the six months ended June 26,
1999. We attribute this increase to an increase in the appraised value of the
shares subject to the Simmons ESOP in 1999.
Amortization of Intangibles. Amortization of intangibles for the six
months remained relatively stable at approximately $3.8 million.
Interest Expense, Net. Interest expense, net increased $6.2 million
from $9.5 million for the six months ended June 27, 1998 to $15.7 million for
the six months ended June 26, 1999 due primarily to increased indebtedness
resulting from the Fenway acquisition.
Other Expense, Net. Other expense, net increased from $0.8 million for
the six months ended June 27, 1998 to $1.1 million for the six months ended June
26, 1999. We attribute this increase to an increase in management advisory
service fees paid to Fenway.
Provision for Income Taxes. Our effective tax rates for the six months
ended June 26, 1999 and June 27, 1998 differ from the federal statutory rate
primarily because of non tax-deductible amortization of goodwill.
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<PAGE> 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
Extraordinary Item. In the first quarter of 1999, we recorded a $3.3
million extraordinary charge representing the remaining unamortized debt
issuance costs related to certain long-term obligations repaid in connection
with the Offering.
Net Loss. For the reasons set forth above, we incurred a net loss of
$7.4 million for the six months ended June 26, 1999 compared to a $2.1 million
loss for the six months ended June 27, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to fund liquidity needs is net cash
provided by operating activities and availability under the New Senior Credit
Agreement. Our primary use of funds consists of payments of principal and
interest, and capital expenditures.
Our operating activities used cash of $13.9 million in the first six
months of 1999 compared to $6.8 million used in the first six months of 1998.
The difference is due primarily to a higher net loss during the six months, the
timing of payments of accounts payable and the timing of accounts receivable
collections.
Our capital expenditures totaled $5.5 million for the six months ended
June 26, 1999. These capital expenditures consisted primarily of normal
recurring capital expenditures. We expect to spend approximately $9.0 million
for 1999 capital expenditures. We believe that annual capital expenditure
limitations in the New Senior Credit Agreement and the indenture for the 10.25%
Senior Subordinated Notes due 2009 will not significantly inhibit us from
meeting our ongoing capital needs.
As of June 26, 1999, we had no borrowings and $79.4 million available
under our Revolving Credit Facility. As of June 26, 1999, we were in compliance
with the financial covenants contained in all our credit facilities.
SEASONALITY
Our volume of sales is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than the margin
percentages obtained in the remaining part of the year. We believe that
seasonality of profitability is a factor that affects the conventional bedding
industry generally and that it is primarily due to retailers' emphasis in the
first quarter on price reductions and promotional bedding and manufacturers'
emphasis on close-outs of the prior year's product lines. These two factors
together result in lower profit margins.
13
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Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments 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 statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Financial statements for prior periods need not
be restated. We are currently reviewing the provisions of SFAS No. 133 and we do
not believe that the financial statements will be materially impacted by the
adoption of this pronouncement.
IMPACT OF THE YEAR 2000 ISSUE
Issues relating to the year 2000 are the result of computer programs
and certain embedded-chip systems being written or developed using two digits
rather than four to define the applicable year. Any of our computer programs or
embedded-chip systems that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, obtain raw
materials, manufacture or ship products, generate invoices, or engage in similar
normal business activities.
We formed a committee consisting of personnel from all of our major
disciplines to address risks associated with the year 2000 issue. The committee
developed a list of all of our information systems and investigated each system
to determine its year 2000 readiness.
With the upgrade of our enterprise wide information system we undertook
in 1995, which is substantially complete today, our information systems are
largely year 2000 compliant. However, certain of office computer systems are not
year 2000 compliant. We will complete a year 2000 upgrade of these remaining
systems that are not year 2000 compliant by the end of the third quarter of
1999. We currently expect costs to complete the year 2000 upgrade will include
internal data processing resources, as well as some external consultant fees to
assist in the effort. The fiscal year 1999 cost of this initiative through June
26, 1999 was approximately $0.3 million all of which was expensed in the first
six months of 1999. We anticipate that additional costs to bring all of our
systems into year 2000 compliance, consisting of costs related to personal
computer replacements and upgrades will be approximately $2.2 million, of which
we estimate $1.6 will be expensed in 1999. Our internal resources to address the
year 2000 issue consist of approximately 5 full-time employees.
We believe that our main system hardware and operating systems, as well
as our networking operating systems are all year 2000 compliant. We also use
manufacturing processes that include computer controlled equipment. We have
completed the assessment and remediation of equipment with embedded chips or
software. We have completed approximately 95% of the testing of remediation of
our equipment. Once testing is complete, our equipment should be
14
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
compliant. We expect to complete testing and implementation of updated equipment
by October 1999.
Our facilities staff is also investigating the status of our
non-information systems with respect to year 2000 compliance. These
non-information systems include phones, voicemail, heating/air conditioning,
electricity and security systems. We believe that all of our non-information
systems are year 2000 compliant.
In addition to reviewing our internal systems, we have polled our
significant suppliers, customers and freight carriers to determine whether they
are year 2000 compliant, and, if not, the extent to which our operations may be
adversely affected as a result of their failure to be year 2000 compliant. Of
104 third party sources of goods and services we surveyed, we received 84
responses reflecting approximately 90% of our purchase volume. In particular,
Leggett & Platt, our major supplier, has informed us that all of its critical
central systems have been converted to year 2000 compliant software and
individual system testing is substantially complete. In total, Leggett & Platt
management estimates that the year 2000 systems conversion effort is nearly 100%
complete as of June 1999. We do not anticipate material adverse effects from
foreign suppliers of goods and services as a result of the date change to year
2000. We have received written confirmations regarding year 2000 compliance from
all of our equipment manufacturers, including foreign manufacturers. Although we
have received assurances from most of our suppliers, customers and freight
carriers we cannot determine the extent to which our operations may be adversely
affected by the failure of our suppliers to be year 2000 compliant or assure you
that such adverse effect will not occur.
The costs of our year 2000 initiatives and their completion dates are
based upon best estimates and derived using various assumptions of future events
including the continued availability of resources, third party statements of
compliance and other factors. To date, we have not encountered any problems
implementing year 2000 remediation. However, we cannot guarantee that these
estimates will be achieved and actual results could differ materially from these
plans.
Based upon progress made to date in assessing our year 2000 issues and
our compliance with year 2000 issues related to primary business information
systems, we do not foresee significant adverse effects from the date change to
year 2000 at this time.
With respect to the risks associated with our information and
non-information systems, we believe that the most likely worst case scenario is
that we may experience minor system malfunctions and errors in the early days
and weeks of the year 2000 that were not detected during our testing and
remediation efforts. We also believe that these problems will not have a
material effect on our financial condition or results of operations, although if
our remediation and testing program is delayed or inadequate, our financial
condition or results of operations could be materially adversely affected.
With respect to the risks associated with third parties, as our
manufacturing processes rely on the "just-in-time" delivery of raw materials
from our major suppliers, we believe that the most likely worst case scenario is
that some of our suppliers will not be year 2000 compliant and will have
difficulty filling orders and delivering goods. As noted above, we have surveyed
most of our suppliers about their year 2000 readiness postures and, based on
their responses, expect
15
<PAGE> 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
that they will be in substantial compliance with year 2000 protocols. If
shipments of raw materials from one or more of our suppliers are disrupted or
delayed in the early days and weeks of year 2000, we intend to use alternate
suppliers. If we are unable to obtain raw materials from alternate suppliers, or
if Leggett & Platt, which provides us several types of materials that are not
available from other suppliers, has its operations disrupted or delayed in the
early days and weeks of year 2000, our financial condition or results of
operations could be materially affected.
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.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 5 to the Condensed Consolidated Financial Statements,
Part I, Item 1 included herein.
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.
17
<PAGE> 18
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/ Zenon S. Nie
----------------------------------------
Zenon S. Nie
Chairman of the Board of Directors,
Chief Executive Officer and President
(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: September 1, 1999
18
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