<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 24, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-76723
---------
SIMMONS COMPANY
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1007444
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 600, Atlanta, Georgia 30328-5369
-------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of the registrant's common stock outstanding as of
August 7, 2000 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 Six Months Ended
------------- ----------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 183,269 $ 147,689 $ 327,905 $ 294,037
Cost of products sold 103,098 83,901 186,941 169,487
--------- --------- --------- ---------
Gross margin 80,171 63,788 140,964 124,550
Operating expenses:
Selling, general and administrative expenses 71,130 54,260 127,360 109,452
ESOP expense 1,674 1,793 3,664 3,585
Management compensation-severance related -- -- 3,777 --
Amortization of intangibles 2,096 1,908 4,131 3,814
--------- --------- --------- ---------
74,900 57,961 138,932 116,851
--------- --------- --------- ---------
Operating income 5,271 5,827 2,032 7,699
Interest expense, net 8,749 7,957 17,309 16,017
Other expense, net 443 457 902 859
--------- --------- --------- ---------
Loss before income taxes and
extraordinary item (3,921) (2,587) (16,179) (9,177)
Income tax benefit 7,108 1,872 15,320 3,982
--------- --------- --------- ---------
Income (loss) before extraordinary item 3,187 (715) (859) (5,195)
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,095 -- -- -- 2,173
--------- --------- --------- ---------
Net income (loss) 3,187 (715) (859) (7,368)
--------- --------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment (8) 20 (7) 40
--------- --------- --------- ---------
Comprehensive income (loss) $ 3,179 $ (695) $ (866) $ (7,328)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
<PAGE> 3
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 24, December 25,
2000 1999*
---- -----
ASSETS
Current assets:
Cash and cash equivalents $ 2,209 $ 4,533
Accounts receivable, less allowance for
doubtful accounts of $6,200 and $3,449 104,217 74,326
Inventories 23,856 19,164
Deferred income taxes 7,276 8,713
Current tax benefit 13,634 --
Other current assets 12,802 10,394
-------- --------
Total current assets 163,994 117,130
-------- --------
Property, plant and equipment, net 52,206 52,863
Patents, net 5,172 6,570
Goodwill, net 187,850 175,185
Deferred income taxes 22,020 18,778
Long-term receivables 3,998 22,220
Other assets 12,096 13,354
-------- --------
$447,336 $406,100
======== ========
* Derived from the Company's 1999 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
<PAGE> 4
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 24, December 25,
2000 1999*
---- -----
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 1,213 $ 799
Bank overdrafts 2,843 --
Accounts payable 27,692 15,984
Accrued advertising and incentives 30,172 15,413
Other accrued expenses 26,538 27,303
-------- --------
Total current liabilities 88,458 59,499
Long-term debt 342,112 333,184
Other non-current liabilities 22,386 19,445
-------- --------
Total liabilities 452,956 412,128
-------- --------
Commitments and contingencies
Redemption obligation--ESOP, net of related unearned
compensation of $3,511 and $6,180 19,973 17,304
Common stockholders' deficit:
Common stock, $.01 par value; 50,000 shares
authorized; 31,964 issued and outstanding 320 320
Paid-in-capital 455 --
Accumulated deficit (26,317) (23,608)
Accumulated other comprehensive loss (51) (44)
-------- --------
Total common stockholders' deficit (25,593) (23,332)
-------- --------
$447,336 $406,100
======== ========
* Derived from the Company's 1999 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
<PAGE> 5
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
----------------------
June 24, June 26,
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (859) $ (7,368)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 9,477 9,002
ESOP expense 3,665 3,584
Non-cash portion of extraordinary loss -- 2,173
Provision for doubtful accounts 5,988 1,302
Provision for deferred income taxes (1,805) (4,265)
Non-cash interest expense 892 742
Net changes in operating assets and liabilities:
Accounts receivable (30,310) (11,449)
Inventories (4,692) (97)
Other current assets (16,042) 459
Accounts payable 11,708 (13,654)
Accrued liabilities 13,994 11,293
Other, net 961 (5,670)
-------- ---------
Net cash used in operating activities (7,023) (13,948)
-------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (4,689) (5,382)
-------- ---------
Net cash used in investing activities (4,689) (5,382)
-------- ---------
Cash flows from financing activities:
Distribution to Simmons Holdings (2,391) --
Proceeds (payments) of Senior Credit Facility, net 9,500 (23,972)
Proceeds from Senior Subordinated Notes -- 150,000
Payments on Senior Bridge Loans -- (75,000)
Payments on Junior Simmons Notes -- (30,391)
Payments on other long-term debt (158) (133)
Payments of financing costs (399) (4,913)
Bank overdrafts 2,843 --
-------- ---------
Net cash provided by financing activities 9,395 15,591
-------- ---------
Net effect of exchange rate changes on cash (7) 40
-------- ---------
Change in cash and cash equivalents (2,324) (3,699)
Cash and cash equivalents, beginning of period 4,533 6,004
-------- ---------
Cash and cash equivalents, end of period $ 2,209 $ 2,305
======== =========
Supplemental cash flow information:
Acquisition of business in exchange for receivables $ 15,449 $ --
======== =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
<PAGE> 6
Simmons Company and Subsidiaries
Consolidated Statements of Changes in Common Stockholders' Deficit
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Common
Common Common Paid-In Accumulated Comprehensive Stockholders'
Shares Stock Capital Deficit Income Deficit
---------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 26, 1998 31,964,432 $320 $ -- $(12,535) $(86) $(12,301)
Net loss -- -- -- (9,129) -- (9,129)
Other comprehensive income:
Change in foreign currency
translation -- -- -- -- 42 42
Excess of ESOP expense at fair
market value over cost -- -- 1,949 -- -- 1,949
Distribution to Holdings -- -- (1,949) (1,944) -- (3,893)
---------- ---- ------- -------- ---- --------
Balance at December 25, 1999 31,964,432 320 -- (23,608) (44) (23,332)
Net loss -- -- -- (859) -- (859)
Other comprehensive income:
Change in foreign currency
translation -- -- -- -- (7) (7)
Excess of ESOP expense at fair
market value over cost -- -- 996 -- -- 996
Distribution to Holdings -- -- (541) (1,850) -- (2,391)
---------- ---- ------- -------- ---- --------
Balance at June 24, 2000 (unaudited) 31,964,432 $320 $ 455 $(26,317) $(51) $(25,593)
========== ==== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these unaudited 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 its
subsidiaries, collectively. The unaudited Condensed Consolidated Financial
Statements of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information and 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 24, 2000, and its results
of operations and cash flows for the periods presented herein. All adjustments
in the periods presented herein are normal and recurring in nature unless
otherwise disclosed. These unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended December 25, 1999. Operating results for the period ended June 24,
2000, are not necessarily indicative of future results that may be expected for
the year ending (53 weeks) December 30, 2000. Certain reclassifications of
previously reported financial information were made to conform to the current
presentation.
2. Inventories
A summary of inventory follows (amounts in thousands):
June 24, December 25,
2000 1999
---- ----
Raw materials $14,854 $11,664
Work in progress 1,731 1,357
Finished goods 7,271 6,143
------- -------
$23,856 $19,164
======= =======
7
<PAGE> 8
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
3. Long-Term Debt
A summary of long-term debt follows (amounts in thousands):
June 24, December 25,
2000 1999
---- ----
Senior Credit Agreement:
Revolving Loan Facility $ 9,500 $ --
Tranche A Term Loan 48,607 48,607
Tranche B Term Loan 68,657 68,657
Tranche C Term Loan 48,764 48,764
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 4.85%, due 2016 4,800 4,800
Banco Santander Loan, 8.82% 2,862 2,969
10.25% Series Subordinated Notes due 2009 150,000 150,000
Other, including capital lease obligations 435 486
--------- ---------
343,325 333,983
Less current portion (1,213) (799)
--------- ---------
$ 342,112 $ 333,184
========= =========
The Senior Credit Agreement provides for loans of up to $270.0 million,
consisting of a Term Loan Facility of $190.0 million and a Revolving Loan
Facility of $80.0 million. 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. Our indebtedness
under the Senior Credit Agreement bears interest at a floating rate, generally
based on LIBOR, is guaranteed by Simmons Holdings, Inc. ("Simmons Holdings") our
sole shareholder, 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 24, 2000 for the Tranche A
term, Tranche B term and Tranche C term loans were 9.125%, 9.625% and 9.875%,
respectively.
The use of interest rate risk management instruments, such as collars, is
required under the terms of the Senior Credit Facility. The Company has
developed and implemented a policy to maintain the percentage of fixed and
variable debt within certain parameters. Through the use of collars the Company
limits its exposure to and benefits from interest rate fluctuations on variable
rate debt to be within a certain range of rates. At June 24, 2000, the amount
covered by collars was $95.0 million, with effective interest rates between
5.75% and 9.50%. The estimated fair value of these collars at June 24, 2000 was
approximately $1.3 million. While collars represent an integral part of the
Company's interest rate risk management program, their impact on interest
expense for the quarter and six months ended June 24, 2000 was not significant.
At June 24, 2000, the amount under the Revolving Credit Facility that was
available to be drawn was $70.3 million, after giving effect to $9.5 million in
borrowings and $0.2 million that was reserved for the Company's reimbursement
obligations with respect to outstanding letters of
8
<PAGE> 9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
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 requires the Company to maintain certain financial
ratios including fixed-charge, cash interest coverage and leverage ratios. The
Senior Credit Facility also contains covenants which, among other things, limit
capital expenditures, the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances, and
other matters customarily restricted in such agreements. At June 24, 2000, the
Company was in compliance with these financial covenants.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated Notes due
2009 (the "New Notes") in exchange for all Notes, pursuant to an exchange offer
whereby holders of the Notes received New Notes which have been registered under
the Securities Act of 1933, as amended, but are otherwise identical to the
Notes.
Future maturities of long-term obligations as of June 24, 2000 are as follows
(amounts in thousands):
2000 $ 642
2001 1,617
2002 15,472
2003 16,779
2004 21,713
Thereafter 287,102
--------
$343,325
========
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities,
except for the 10.25% Series B Senior Subordinated Notes due 2009 which are at
quoted market values. The fair value of the Company's 10.25% Series B Senior
Subordinated Notes due 2009 was approximately $132.0 million at June 24, 2000.
All other long-term debt approximates the carrying value at June 24, 2000.
4. Retail Operations
On January 21, 2000, one of our wholly-owned subsidiaries, Gallery Corp.
("Gallery"), acquired substantially all of the retail store locations and other
assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and CBMC
had previously operated retail stores in the Los Angeles, Orange County and San
Diego, California areas, selling primarily mattresses and related bedding
products. Through Gallery, we acquired the H&H and CBMC assets in resolution of
those companies' outstanding debt obligations to us, and our assumption of
certain other liabilities of H&H and CBMC for a purchase price of $15.5 million.
As a result of these
9
<PAGE> 10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
transactions, Gallery is currently operating approximately 40 retail locations
in Southern California previously owned by H&H and CBMC.
The results of operations of Gallery totaled a pre-tax loss of $0.5 million
and $0.8 million for the quarter ended June 24, 2000 and for the period from the
acquisition date to June 24, 2000, respectively. Such loss is included in
operating income in the Condensed Consolidated Statement of Operations. Pro
forma results had Gallery been acquired at the beginning of the year do not
differ significantly from actual results. Pro forma results had the business
been acquired at the beginning of 1999 are not determinable.
Management has announced its intention to dispose of Gallery, and any other
retail operations subsequently acquired.
The eventual recovery of our investment in this business or other retail
businesses subsequently acquired is dependent upon the ability of the operations
to achieve improvements sufficient to generate profitable operations and
positive cash flows. We currently believe that such improvements are achievable,
based upon our expertise in bedding manufacturing and distribution, our
knowledge of these business markets, and Gallery's established presence in its
markets.
5. Recent Developments - Customers
At June 24, 2000, a customer was indebted to us for notes and trade
receivables totaling approximating $5.9 million. We have been pursuing an
acquisition of this customer at an amount equal to the fair market value of the
business less obligations owed to us. Management has decided that a strategy of
further investment in its retail customers is not in the best interest of the
Company. We currently believe that collectability on the full amounts owed to us
is remote. Therefore, we have recorded in the second quarter ended June 24,
2000, a $2.9 million charge, in the aggregate, to write-off transaction fees
incurred to date and to adjust the receivable (net of an allowance for doubtful
accounts) to our current estimate of its net realizable value.
Additionally, at June 24, 2000 a customer, which at one time represented our
direct entry into retail operations, was indebted to us for receivables totaling
approximating $3.2 million. Collection of the total balance of this receivable
is remote without a further investment in the retailer by us. In light of our
decision not to further invest in our retail customers, we have recorded a $1.8
million reserve in the second quarter ended June 24, 2000 to adjust the
receivable to our current estimate of its net realizable value.
On August 1, 2000, our largest customer (approximately 7.4% and 11.2% of net
sales for the six months ended June 24, 2000 and the year ended December 25,
1999, respectively) issued a press release announcing that it was going to defer
scheduled August 1, 2000 interest payments on three series of long-term notes.
The press release also announced that the customer had engaged an investment
banking firm "to assist it in exploring available strategic alternatives with
respect to a possible reorganization, restructuring, sale, divestiture program
or recapitalization". As of August 4, 2000, we had current receivables
outstanding from this customer of
10
<PAGE> 11
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
approximately $5.5 million. Based on our experience with and credit review of
the customer, we believe that we will be adequately reserved for amounts that
may ultimately prove uncollectible from the customer. There can be no assurance,
however, that the amounts reserved will be adequate, nor can there be any
assurance as to future sales levels with respect to this customer, until the
customer's financial condition becomes more certain.
6. Organizational Changes - Severance Arrangements
During January 2000, we completed an assessment of the effectiveness of the
Company's organizational structure and, in early February 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
for the future. The management reorganization resulted in the termination of 14
management employees. During February 2000, we recorded non-recurring severance
expense of $3.8 million, including compensation expense related to vested stock
option cancellations. In addition, in connection with Simmons Holding's
repurchase of Simmons Holdings common stock from former management employees, we
have accrued $2.4 million in distributions payable to Simmons Holdings.
7. Accounting Pronouncements
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 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 statement, as amended by SFAS No. 137, 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 do not believe that our financial statements will be materially
impacted by the adoption of this provision.
In December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The adoption of SAB 101, which will be required for the fourth
quarter of fiscal 2000, will not have a material impact on our financial
position and results of operations.
8. Contingencies
On April 3, 1998, Serta, Inc. filed a complaint against us in the United
States District Court for the Northern District of Illinois, Eastern Division,
alleging that some of our products infringe one of their U.S. patents and that
our use of the term "Crescendo" infringes their alleged common-law trademark,
"Crescendo". As more fully described in our annual report on Form 10-K for our
fiscal year ended December 25, 1999, we have denied the material allegations of
the complaint and have asserted affirmative defenses and counterclaims against
Serta. Serta
11
<PAGE> 12
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
moved to dismiss our counterclaims and we have filed a response. The court has
not yet ruled on the motion. While we deny that Serta is entitled to any relief
and intend to defend the action vigorously, a settlement could be material and
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 our operations.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of net sales to
certain items included in the Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
---------------------- -----------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 56.3% 56.8% 57.0% 57.6%
----- ----- ----- -----
Gross margin 43.7% 43.2% 43.0% 42.4%
Selling, general and administrative expenses 38.8% 36.7% 38.9% 37.2%
ESOP expense 0.9% 1.2% 1.1% 1.2%
Management compensation - severance -- -- 1.1% --
Amortization of intangibles 1.1% 1.2% 1.3% 1.3%
----- ----- ----- -----
Operating income 2.9% 3.9% 0.6% 2.7%
Interest expense, net 4.8% 5.4% 5.3% 5.5%
Other expense, net 0.2% 0.3% 0.3% 0.3%
----- ----- ----- -----
Loss before income taxes
and extraordinary item (2.1)% (1.8)% (5.0)% (3.1)%
Income tax benefit 3.9% 1.3% 4.7% 1.3%
----- ----- ----- -----
Income (loss) before extraordinary item 1.8% (0.5)% (0.3)% (1.8)%
Extraordinary loss from early extinguishment
of debt, net of income tax benefit -- -- -- (0.7)%
----- ----- ----- -----
Net income (loss) 1.8% (0.5)% (0.3)% (2.5)%
===== ===== ===== =====
</TABLE>
QUARTER ENDED JUNE 24, 2000 AS COMPARED TO QUARTER ENDED JUNE 26, 1999
Net Sales. Net sales for the quarter ended June 24, 2000 increased 24.1%, or
$35.6 million, to $183.3 million in 2000 from $147.7 million in 1999. The
increase was due primarily to an 18.2%, or $26.7 million, increase in bedding
unit sales volume and a 6.6%, or $9.6 million, increase in bedding average unit
selling price. The increase in unit shipments is attributable to increases
throughout the Beautyrest(R) 2000 product line. The increase in bedding average
unit selling price was attributable to a higher product mix concentration of
Beautyrest(R) 2000 products.
Cost of Products Sold. As a percentage of net sales, cost of products sold
for the quarter ended June 24, 2000 decreased 0.5 percentage points to 56.3% in
2000, from 56.8% in 1999. Our gross margin improvement for the quarter reflects
the increased absorption of fixed costs through higher sales volume and improved
product mix of Beautyrest(R) 2000 products. Offsetting these improvements, in
part, were temporary labor inefficiencies related to training new employees to
man second and third shifts in our manufacturing facilities.
13
<PAGE> 14
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 quarter ended June 24, 2000
increased 2.1 percentage points to 38.8% in 2000 from 36.7% in 1999. This
increase is primarily attributable to the following:
(1) a charge of $4.7 million (2.6% of net sales), in the aggregate, to
write-off transaction fees incurred to date and to adjust the receivable
balances for two customers to estimated net realizable value;
(2) an increase in cooperative advertising and promotion costs related to the
rollout of the new Beautyrest(R) 2000 product line; and
(3) higher distribution expenses due to the increase in sales volume and
higher fuel costs.
Offsetting these increases, in part, were lower operating costs being spread
over a larger revenue base.
ESOP Expense. ESOP expense declined to $1.7 million for the quarter ended
June 24, 2000 from $1.8 million for the quarter ended June 26, 1999. This
decrease was due to a decline in the estimated allocable number of the shares
subject to the Simmons ESOP in 2000.
Amortization of Intangibles. Amortization of intangibles for the quarter
increased $0.2 million to $2.1 million for the quarter ended June 24, 2000 from
$1.9 million for the quarter ended June 26, 1999 due to amortization of goodwill
related to our retail operations.
Interest Expense, Net. Interest expense, net increased $0.8 million to $8.7
million for the quarter ended June 24, 2000 from $7.9 million for the quarter
ended June 26, 1999 due primarily to higher interest rates on our senior debt
obligations, interest on borrowings under our Revolving Credit Facility, and
increased amortization of deferred financing costs.
Other Expense, Net. Other expense, net remained relatively stable at $0.4
million for the quarters ended June 24, 2000 and June 26, 1999.
Income Tax Benefit. Our effective income tax rates for the quarters ended
June 24, 2000 and June 26, 1999 differ from the federal statutory rate primarily
because of non tax-deductible amortization of goodwill. During the second
quarter ended June 24, 2000, we revised our estimate of annual pre-tax income
for the current year. This revision resulted in a change in our projected
effective tax rate for fiscal 2000 to 94.7%. The cumulative effect of this
change was an additional benefit of $3.4 million recorded in the quarter ended
June 24, 2000. During the quarter ended June 24, 2000 we recorded a current
income tax benefit of $6.5 million which is included in current assets. We
expect this current tax asset to be fully utilized as we recognize tax expense
during the remainder of 2000.
Net Income. For the reasons set forth above, we had a net income of $3.2
million for the quarter ended June 24, 2000 compared to a loss of $0.7 million
for the quarter ended June 26, 1999.
14
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
EBITDA. For the reasons set forth above, we had an EBITDA of $11.7 million,
or 6.4% of net sales, for the quarter ended June 24, 2000 compared to $12.2
million, or 8.3% of net sales, for the quarter ended June 26, 1999. Excluding
the charge recorded of $4.7 million, in the aggregate, to write-off transaction
fees incurred to date and to adjust the receivable balances of two customers,
our EBITDA would have been $16.4 million, or 9.0% of net sales, for the quarter
ended June 24, 2000.
SIX MONTHS ENDED JUNE 24, 2000 AS COMPARED TO SIX MONTHS ENDED JUNE 26, 1999
Net Sales. Net sales for the six months ended June 24, 2000 increased 11.5%,
or $33.8 million, to $327.9 million in 2000 from $294.1 million in 1999. The
increase was due primarily to a 6.1%, or $17.7 million, increase in bedding unit
sales volume and a 6.0%, or $17.5 million, increase in bedding average unit
selling price. The increase in unit shipments is attributable to second quarter
increases throughout the Beautyrest(R) 2000 product line. The increase in
bedding average unit selling price was attributable to a higher product mix
concentration of Beautyrest(R) 2000 products.
Cost of Products Sold. As a percentage of net sales, cost of products sold
for the six months ended June 24, 2000 decreased 0.6 percentage points to 57.0%
in 2000 from 57.6% in 1999. Our gross margin improvement for the six months
reflects the increased absorption of fixed costs through higher sales volume and
improved product mix of Beautyrest(R) 2000 products. Offsetting these
improvements, in part, were temporary labor inefficiencies related to training
new employees to man second and third shifts in our manufacturing facilities.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses for the six months ended June 24,
2000 increased 1.7 percentage points to 38.9% in 2000 from 37.2% in 1999. This
increase is primarily attributable to the following:
(1) a charge of $4.7 million (1.4% of net sales), in the aggregate, to
write-off transaction fees incurred to date and to adjust the receivable
balances for two customers to estimated net realizable value;
(2) an increase in cooperative advertising and promotion costs related to the
rollout of the new Beautyrest(R) 2000 product line; and
(3) higher distribution expenses due to the increase in sales volume and
higher fuel costs.
ESOP Expense. ESOP expense remained stable at approximately $3.6 million for
the six months ended June 24, 2000 and June 24, 1999.
Management Compensation--Severance Related. In connection with the
termination of certain senior executives, we incurred costs in 2000 of $3.8
million consisting of:
(1) $2.4 million related to the severance provisions contained in certain
executive employment agreements and other severance agreements; and
(2) $1.4 million related to the cancellation of vested compensatory incentive
stock options.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
Amortization of Intangibles. Amortization of intangibles for the six months
increased $0.3 million to $4.1 million for the six months ended June 24, 2000
from $3.8 million for the six months ended June 26, 1999 due to amortization of
goodwill related to our retail operations.
Interest Expense, Net. Interest expense, net increased approximately $1.3
million to $17.3 million for the six months ended June 24, 2000 from $16.0
million for the six months ended June 26, 1999 due primarily to higher interest
rates on our senior debt obligations, interest on borrowings under our Revolving
Credit Facility, and increased amortization of deferred financing costs.
Other Expense, Net. Other expense, net remained relatively stable at $0.9
million for the six months ended June 24, 2000 and June 26, 1999.
Income Tax Benefit. Our effective income tax rates of 94.7% and 43.4% for the
six months ended June 24, 2000 and June 26, 1999, respectively, differ from the
federal statutory rate primarily because of non tax-deductible amortization of
goodwill. During the six months ended June 24, 2000, we recorded a current
income tax benefit of $13.6 million which is included in current assets. We
expect this current tax asset to be utilized as we recognize tax expense during
the remainder of 2000.
Net Income. For the reasons set forth above, we incurred a net loss of $0.9
million for the six months ended June 24, 2000 compared to a loss of $7.4
million for the six months ended June 26, 1999.
EBITDA. For the reasons set forth above, we had an EBITDA of $15.2 million,
or 4.6% of net sales, for the six months ended June 24, 2000 compared to $20.3
million, or 6.9% of net sales, for the six months ended June 26, 1999. Excluding
the charges of $3.8 million relating to severance recorded in the first quarter
and $4.7 million, in the aggregate, to write-off transaction fees incurred to
date and to adjust the receivable balances of two customers recorded in the
second quarter, our EBITDA would have been $23.6 million, or 7.2% of net sales,
for the six months ended June 24, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to fund liquidity needs is net cash provided by
operating activities and availability under our senior credit facility. Our
primary use of funds consists of payments of principal and interest, capital
expenditures, severance and equity related repurchases.
Our operating activities used cash of $7.0 million in the first six months of
2000 compared to $13.9 million used in the first six months of 1999. As a result
of our second quarter sales growth, inventories increased $4.7 million and trade
accounts receivable increased $29.9 million from December 25, 1999 levels. The
increase in inventories was due to production demands in the first six months of
2000 to service our increased sales volume. In addition, our trade accounts
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
payable and accrued expenses increased a total of $25.7 million during the first
six months of 2000, primarily due to higher production levels.
Our capital expenditures totaled $4.8 million for the six months ended
June 24, 2000. These capital expenditures consisted primarily of normal
recurring capital expenditures. We expect to spend an aggregate of approximately
$12.5 million for capital expenditures in 2000. We believe that annual capital
expenditure limitations in our Senior Credit Facility and the indenture related
to our 10.25% Series B Senior Subordinated Notes due 2009 will not significantly
inhibit us from meeting our ongoing capital expenditure requirements.
At June 24, 2000, the amount under the Revolving Credit Facility that was
available to be drawn was $70.3 million, after giving effect to $9.5 million in
borrowings and $0.2 million that was reserved for the Company's reimbursement
obligations with respect to outstanding letters of credit. As of June 24, 2000,
we were in compliance with the financial covenants contained in all of our
credit facilities.
RETAIL OPERATIONS
On January 21, 2000, one of our wholly-owned subsidiaries, Gallery Corp.
("Gallery"), acquired substantially all of the retail store locations and other
assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and CBMC
had previously operated retail stores in the Los Angeles, Orange County and San
Diego, California areas, selling primarily mattresses and related bedding
products. Through Gallery, we acquired the H&H and CBMC assets in resolution of
those companies' outstanding debt obligations to us, and our assumption of
certain other liabilities of H&H and CBMC for a purchase price of $15.5 million.
As a result of these transactions, Gallery is currently operating approximately
40 retail locations in Southern California previously owned by H&H and CBMC.
The results of operations of Gallery totaled a pre-tax loss of $0.5 million
and $0.8 million for the quarter ended June 24, 2000 and for the period from the
acquisition date to June 24, 2000, respectively. Such loss is included in
operating income in the Condensed Consolidated Statement of Operations. Pro
forma results had Gallery been acquired at the beginning of the year do not
differ significantly from actual results. Pro forma results had the business
been acquired at the beginning of 1999 are not determinable.
Management has announced its intention to dispose of Gallery, and any other
retail operations subsequently acquired.
The eventual recovery of our investment in this business or other retail
businesses subsequently acquired is dependent upon the ability of the operations
to achieve improvements sufficient to generate profitable operations and
positive cash flows. We currently believe that such improvements are achievable,
based upon our expertise in bedding manufacturing and distribution, our
knowledge of these business markets, and Gallery's established presence in its
markets.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
RECENT DEVELOPMENTS - CUSTOMERS
At June 24, 2000, a customer was indebted to us for notes and trade
receivables totaling approximating $5.9 million. We have been pursuing an
acquisition of this customer at an amount equal to the fair market value of the
business less obligations owed to us. Management has decided that a strategy of
further investment in its retail customers is not in the best interest of the
Company. We currently believe that collectability on the full amounts owed to us
is remote. Therefore, we have recorded in the second quarter ended June 24,
2000, a $2.9 million charge, in the aggregate, to write-off transaction fees
incurred to date and to adjust the receivable (net of an allowance for doubtful
accounts) to our current estimate of its net realizable value.
Additionally, at June 24, 2000 a customer, which at one time represented our
direct entry into retail operations, was indebted to us for receivables totaling
approximating $3.2 million. Collection of the total balance of this receivable
is remote without a further investment in the retailer by us. In light of our
decision not to further invest in our retail customers, we have recorded a $1.8
million reserve in the second quarter ended June 24, 2000 to adjust the
receivable to our current estimate of its net realizable value.
On August 1, 2000, our largest customer (approximately 7.4% and 11.2% of net
sales for the six months ended June 24, 2000 and the year ended December 25,
1999, respectively) issued a press release announcing that it was going to defer
scheduled August 1, 2000 interest payments on three series of long-term notes.
The press release also announced that the customer had engaged an investment
banking firm "to assist it in exploring available strategic alternatives with
respect to a possible reorganization, restructuring, sale, divestiture program
or recapitalization". As of August 4, 2000, we had current receivables
outstanding from this customer of approximately $5.5 million. Based on our
experience with and credit review of the customer, we believe that we will be
adequately reserved for amounts that may ultimately prove uncollectible from the
customer. There can be no assurance, however, that the amounts reserved will be
adequate, nor can there be any assurance as to future sales levels with respect
to this customer, until the customer's financial condition becomes more certain.
ORGANIZATIONAL CHANGES - SEVERANCE ARRANGEMENTS
During January 2000, we completed an assessment of the effectiveness of the
Company's organizational structure and in early February 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
for the future. The management reorganization resulted in the termination of 14
management employees. During February 2000, we recorded non-recurring severance
expense of $3.8 million, including compensation expense related to vested stock
option cancellations. In addition, in connection with Simmons Holding's
repurchase of Simmons Holdings common stock from former management employees, we
have accrued $2.4 million in distributions payable to Simmons Holdings.
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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 gross
profit 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.
ACCOUNTING PRONOUNCEMENTS
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 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 statement, as amended by SFAS No. 137, 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 do not believe that our financial statements will be materially
impacted by the adoption of this provision.
In December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB 101,
"Revenue Recognition," which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the SEC. The adoption of SAB 101, which will be required for the fourth
quarter of fiscal 2000, will not have a material impact on our financial
position and results of operations.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. The
words "intend," "believe," "plan," "expect," "anticipate," and similar
expressions identify forward-looking statements. Such forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements include, but are not limited to,
those contained under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Recent Developments" and
"Liquidity and Capital Resources" and may relate to anticipated revenues, income
or loss, expenses, capital expenditures, plans for future operations, financing
needs or plans, disposition of retail operations, and plans relating to products
and services of the Company.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Several factors could cause
actual results to differ materially from those anticipated by the
forward-looking statements, such as those detailed in
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
connection with the specific forward-looking statement, as well as, generally,
consumer spending and debt levels, continuity of relationships with and
purchases by major customers, product mix, competitive pressure on sales and
pricing, and increases in material or production cost which cannot be recouped
in product pricing. Other factors are set forth herein and in other materials
filed by the Company from time to time with the Securities and Exchange
Commission.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information relative to our market risk sensitive instruments by major
category at December 25, 1999 is presented under Item 7a of our Annual Report on
Form 10-K for the fiscal year ended December 25, 1999. During the first six
months ended June 24, 2000 there has been no material change to this disclosure.
Interest Rate Risk
Since our obligations under the Senior Credit Facility bear interest at
floating rates, we are sensitive to changes in prevailing interest rates. We use
derivative instruments to manage our long-term debt interest rate exposure,
rather than for trading purposes. A 10% increase or decrease in market interest
rates that effect our interest rate derivative instruments would not have a
material impact on earnings during the next fiscal year.
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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
10.33.1 Second Amendment dated June 16, 2000 to Employment
Agreement between the Company and Robert K. Barton, dated
as of June 29, 1998, as amended.
10.35.1 First Amendment dated June 16, 2000 to Employment
Agreement between Simmons Holdings, Inc., the Company and
Charles R. Eitel, dated as of January 4, 2000.
10.36.1 First Amendment dated June 16, 2000 to Employment
Agreement between the Company and Peter Brink, dated as of
February 8, 2000.
10.40 Employment Agreement between the Company and William S.
Creekmuir, dated April 1, 2000.
10.40.1 First Amendment dated June 16, 2000 to Employment
Agreement between the Company and William S. Creekmuir,
dated as of April 1, 2000.
10.41 Employment Agreement between the Company and Robert
Hellyer, dated as of June 16, 2000.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, Simmons Company has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SIMMONS COMPANY
By: /s/ William S. Creekmuir
----------------------------------------------------
William S. Creekmuir
Executive Vice President and Chief Financial Officer
Date: August 7, 2000
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