<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 800, Atlanta, Georgia 30328-5369
-------------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
The number of shares of the registrant's common stock outstanding as of
November 6, 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 Nine Months Ended
------------- -----------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
(14 weeks) (13 weeks) (40 weeks) (39 weeks)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 227,819 $ 172,964 $ 555,724 $ 467,001
Cost of products sold 125,662 98,133 312,603 267,620
--------- --------- --------- ---------
Gross margin 102,157 74,831 243,121 199,381
Operating expenses:
Selling, general and administrative expenses 82,357 56,249 209,717 165,701
ESOP expense 1,675 1,792 5,339 5,377
Management compensation-severance related -- -- 3,777 --
Amortization of intangibles 2,110 1,907 6,241 5,721
--------- --------- --------- ---------
86,142 59,948 225,074 176,799
--------- --------- --------- ---------
Operating income 16,015 14,883 18,047 22,582
Interest expense, net 9,285 8,098 26,594 24,115
Other expense, net 438 408 1,340 1,267
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item 6,292 6,377 (9,887) (2,800)
Income tax provision (benefit) 13,983 2,624 (1,337) (1,358)
--------- --------- --------- ---------
Income (loss) before extraordinary item (7,691) 3,753 (8,550) (1,442)
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,095 -- -- -- 2,173
--------- --------- --------- ---------
Net income (loss) (7,691) 3,753 (8,850) (3,615)
--------- --------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment (16) (3) (23) 37
--------- --------- --------- ---------
Comprehensive income (loss) $ (7,707) $ 3,750 $ (8,573) $ (3,578)
========= ========= ========= =========
</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)
September 30, December 25,
2000 1999*
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 4,084 $ 4,533
Accounts receivable, less allowance for
doubtful accounts of $9,289 and $3,449 113,863 74,326
Inventories 23,493 19,164
Deferred income taxes 11,508 8,713
Other current assets 14,074 10,394
-------- --------
Total current assets 167,022 117,130
-------- --------
Property, plant and equipment, net 54,939 52,863
Patents, net 4,473 6,570
Goodwill, net 186,681 175,185
Deferred income taxes 21,346 18,778
Long-term receivables 2,567 22,220
Other assets 11,102 13,354
-------- --------
$448,130 $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)
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999*
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 1,807 $ 799
Accounts payable 35,865 15,984
Accrued advertising and incentives 27,923 15,413
Accrued taxes 5,866 1,992
Accrued interest 1,377 7,098
Other accrued expenses 18,749 18,213
--------- ---------
Total current liabilities 91,587 59,499
Long-term debt 346,887 333,184
Other non-current liabilities 21,622 19,445
--------- ---------
Total liabilities 460,096 412,128
--------- ---------
Commitments and contingencies
Redemption obligation--ESOP, net of related unearned
compensation of $2,292 and $6,180 21,192 17,304
Common stockholders' deficit:
Common stock, $.01 par value; 50,000 shares
authorized; 31,964 issued and outstanding 320 320
Paid-in-capital 470 --
Accumulated deficit (33,881) (23,608)
Accumulated other comprehensive loss (67) (44)
--------- ---------
Total common stockholders' deficit (33,158) (23,332)
--------- ---------
$ 448,130 $ 406,100
========= =========
</TABLE>
* 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)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------
September 30, September 25,
2000 1999
(40 weeks) (39 weeks)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,550) $ (3,615)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 14,309 13,663
ESOP expense 5,339 5,377
Non-cash portion of extraordinary loss - 2,173
Provision for doubtful accounts 10,474 1,991
Provision for deferred income taxes (5,363) (1,942)
Non-cash interest expense 1,347 914
Net changes in operating assets and liabilities:
Accounts receivable (42,926) (18,348)
Inventories (4,329) 713
Other current assets (3,680) 3,406
Accounts payable 19,881 (3,710)
Accrued liabilities 11,199 7,322
Other, net 411 (13,505)
------------ ---------
Net cash used in operating activities (1,888) (5,561)
------------ ---------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (10,144) (7,615)
------------ ---------
Net cash used in investing activities (10,144) (7,615)
------------ ---------
Cash flows from financing activities:
Distribution to Simmons Holdings (2,704) -
Proceeds (payments) of Senior Credit Facility, net 14,944 (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 (233) (207)
Payments of financing costs (401) (5,367)
------------ ---------
Net cash provided by financing activities 11,606 15,063
------------ ---------
Net effect of exchange rate changes on cash (23) 37
------------ ---------
Change in cash and cash equivalents (449) 1,924
Cash and cash equivalents, beginning of period 4,533 6,004
------------ ---------
Cash and cash equivalents, end of period $ 4,084 $ 7,928
============ =========
Supplemental cash flow information:
Acquisition of business in exchange for receivables $ 15,449 $ -
============ =========
</TABLE>
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 - - - (8,550) - (8,550)
Other comprehensive income:
Change in foreign currency
translation - - - - (23) (23)
Excess of ESOP expense at fair
market value over cost - - 1,451 - - 1,451
Distribution to Holdings - - (981) (1,723) - (2,704)
---------- --- ------- ------- --- --------
Balance at September 30, 2000 31,964,432 $320 $ 470 $(33,881) $(67) $(33,158)
========== === ======= ======= === =======
(unaudited)
</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 September 30, 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
September 30, 2000, are not necessarily indicative of future results that may be
expected for the year ending (53 weeks) December 30, 2000. The extra week in
this fiscal year is included in the third quarter. 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):
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
---- ----
<S> <C> <C>
Raw materials $14,250 $11,664
Work in progress 1,785 1,357
Finished goods 7,458 6,143
------- ------
$23,493 $19,164
====== ======
</TABLE>
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):
<TABLE>
<CAPTION>
September 30, December 25,
2000 1999
---- ----
<S> <C> <C>
Senior Credit Agreement:
Revolving Loan Facility $ 15,000 $ -
Tranche A Term Loan 48,607 48,607
Tranche B Term Loan 68,600 68,657
Tranche C Term Loan 48,764 48,764
------- -------
Total Senior Credit Agreement 180,971 166,028
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 5.70%, due 2016 4,800 4,800
Banco Santander Loan, 8.69% 2,809 2,969
10.25% Series B Subordinated Notes due 2009 150,000 150,000
Other, including capital lease obligations 414 486
------- -------
348,694 333,983
Less current portion (1,807) (799)
------- -------
$346,887 $333,184
======= =======
</TABLE>
The Senior Credit Agreement originally provided 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 prepayments made from the
proceeds of a private offering of 10.25% Series A Senior Subordinated Notes due
2009 (the "Notes"), the Term Loan Facility was reduced in March 1999 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 September 30, 2000 for the
Tranche A term, Tranche B term and Tranche C term loans were 9.375%, 9.875% and
10.125%, 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. At September 30, 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 September 30, 2000 was approximately $0.7
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
nine months ended September 30, 2000 was not significant.
8
<PAGE> 9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
At September 30, 2000, the amount under the Revolving Credit Facility
that was available to be drawn was $64.8 million, after giving effect to $15.0
million in borrowings and $0.2 million that was reserved for the Company's
reimbursement obligations with respect to outstanding letters of credit. The
remaining availability under the Revolving Credit Facility may be utilized to
meet the Company's current working capital requirements, including issuance of
stand-by and trade letters of credit. The Company also may utilize the remaining
availability under the Revolving Credit Facility to fund acquisitions and
capital expenditures.
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 September 30, 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 of the Notes, pursuant to
an exchange offer whereby holders of the Notes received New Notes which have
been registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.
Future maturities of long-term obligations as of September 30, 2000 are
as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 511
2001 1,617
2002 15,472
2003 16,779
2004 21,713
Thereafter 292,602
-------
$348,694
=======
</TABLE>
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 $141.0 million at
September 30, 2000. All other long-term debt approximates the carrying value at
September 30, 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
9
<PAGE> 10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
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 loss from operations (pre-tax) for the quarter ended September 30,
2000 and for the period from the acquisition date to September 30, 2000 of
Gallery totaled $0.6 million and $1.4 million, 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. While we believe that the
eventual recovery of our investment in this business is dependent upon the
ability of the operations to achieve improvements sufficient to generate
profitable operations and positive cash flows, there can be no assurance this
business will achieve such improvements, therefore the amount of any future
recovery cannot be estimated.
5. Recent Developments - Customers
As previously disclosed, management has decided that a strategy of
further investment into retail operations through acquisition of certain
customers is not in the best interests of the Company. We had been pursuing an
acquisition of a customer at an amount equal to the fair market value of the
business less obligations owed to us. Consistent with management's decision,
acquisition discussions were terminated. We believe that collectability on the
full amounts owed to us by this former customer is remote. Therefore, in the
third quarter ended September 30, 2000, we recorded an additional $0.6 million
charge to further adjust the receivable to our current estimate of its net
realizable value. The total amount recorded year-to-date to write-off
transaction fees incurred and to adjust the receivable (net of an allowance for
doubtful accounts) to our current estimate of its net realizable value is
approximately $3.5 million.
Additionally, during the third quarter ended September 30, 2000 a
customer, which at one time represented our direct entry into retail operations,
was liquidated. We have recorded an additional $2.5 million charge in the third
quarter to write-off the receivable and provide for lease termination fees
relating to certain lease obligations of the customer which were guaranteed by
the Company. The total year-to-date costs incurred by the Company relating to
the liquidation of this customer is approximately $4.3 million.
On August 1, 2000, The Heilig-Meyers Company, our largest customer
(approximately 6.4% and 11.2% of net sales for the nine months ended September
30, 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 Heilig-Meyers had engaged an investment banking firm "to assist it in
exploring available strategic alternatives with respect to a possible
reorganization,
10
<PAGE> 11
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
restructuring, sale, divestiture program or recapitalization". On August 16,
2000, Heilig-Meyers and certain subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code. Following the filing,
Heilig-Meyers received a commitment from a group of lenders for $215 million in
debtor-in-possession (DIP) financing to provide funding for its post-petition
trade and employee obligations, as well as their ongoing operating needs during
the restructuring process.
On September 12, 2000, Heilig-Meyers received approval from the
Bankruptcy Court of their new credit program and approval of their plan for
closing over 300 stores. Due to the Heilig-Meyers bankruptcy, we have recorded a
charge of $1.8 million to reserve for amounts that may ultimately prove
uncollectible. Based on our experience with and credit review of Heilig-Meyers,
we believe that we are adequately reserved for pre-petition accounts receivable
balances that may ultimately prove uncollectible. There can be no assurance,
however, that amounts reserved will be adequate, nor can there be any assurance
as to future sales levels with respect to Heilig-Meyers.
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 $2.7 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 balance sheet 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.
On December 3, 1999, the staff of the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes some of the
staff's interpretations of the application of generally accepted accounting
principles to revenue recognition. SAB 101 was originally required to be adopted
no later than the first quarter of the fiscal year beginning after December 15,
1999. However, SAB 101A extended the implementation date for certain
11
<PAGE> 12
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
--------------------------------------------------------------------------------
registrants with fiscal years that begin between December 16, 1999, and March
15, 2000, to report a change in accounting principle no later than their second
quarter of the fiscal year beginning after December 15, 1999. SAB 101B extended
the implementation date until the fourth quarter of the fiscal year beginning
after December 15, 1999. Management believes that 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.
During May 2000, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF No. 00-14
addresses the classification of various sales incentives and will be effective
for the fourth quarter of 2000. Management has determined that the adoption of
EITF Issue No. 00-14 will have no effect on our financial position. Management
is in the process of determining the potential effect on its statement of
earnings presentation and upon adoption, if necessary, previously issued
financial statements may need to be revised to conform to the new presentation.
During July 2000, the EITF issued EITF Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF 00-10 addresses the income statement
classification for shipping and handling fees and costs by companies that record
revenue based on the gross amount billed to customers. Management has determined
that adoption of EITF Issue No. 00-10 will have no effect on our current
classification and disclosure.
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 moved to dismiss our counterclaims and we
have filed a response. The court has not yet ruled on the motion. The parties
have entered into court supervised non-binding mediation in an attempt to reach
a settlement of all of the matters relating to this lawsuit. This mediation
process is ongoing and may not result in a settlement. 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 Nine Months Ended
------------------------------ -----------------------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
(14 weeks) (13 weeks) (40 weeks) (39 weeks)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 55.2% 56.7% 56.3% 57.3%
------ ------ ------ ------
Gross margin 44.8% 43.3% 43.7% 42.7%
Selling, general and administrative expenses 36.2% 32.5% 37.7% 35.5%
ESOP expense 0.7% 1.1% 1.0% 1.2%
Management compensation - severance - - 0.7% -
Amortization of intangibles 0.9% 1.1% 1.1% 1.2%
------ ------ ------ ------
Operating income 7.0% 8.6% 3.2% 4.8%
Interest expense, net 4.1% 4.6% 4.8% 5.1%
Other expense, net 0.2% 0.3% 0.2% 0.3%
------ ------ ------ ------
Income (loss) before income taxes
and extraordinary item 2.7% 3.7% (1.8)% (0.6)%
Income tax provision (benefit) 6.1% 1.5% (0.3)% (0.3)%
------ ------ ------ ------
Income (loss) before extraordinary item (3.4)% 2.2% (1.5)% (0.3)%
Extraordinary loss from early extinguishment
of debt, net of income tax benefit - - - (0.5)%
------ ------ ------ ------
Net income (loss) (3.4)% 2.2% (1.5)% (0.8)%
====== ====== ===== =====
</TABLE>
QUARTER ENDED SEPTEMBER 30, 2000 AS COMPARED TO QUARTER ENDED SEPTEMBER 25, 1999
Net Sales. Net sales for the quarter ended September 30, 2000 increased
31.7%, or $54.8 million, to $227.8 million in 2000 from $173.0 million in 1999.
The increase was due primarily to a 22.3%, or approximately $38.1 million,
increase in bedding unit sales volume and a 8.5%, or approximately $17.8
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. The fiscal year
ending December 30, 2000 is a 53 week year and the extra week in this fiscal
year is included in the current quarter. Sales for the current quarter, after
adjusting for the extra week, would have increased approximately 22.3% on a
comparable basis to 1999.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the quarter ended September 30, 2000 decreased 1.5 percentage points to
55.2% in 2000, from 56.7% 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 which occurred during
the quarter related to training new employees to man second and third shifts in
our
13
<PAGE> 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
manufacturing facilities; increased overtime; and inter-plant sales transfers,
all of which occurred to meet peak demand.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended
September 30, 2000 increased 3.7 percentage points to 36.2% in 2000 from 32.5%
in 1999. This increase is primarily attributable to the following:
(1) a charge of $2.5 million to write-off the remaining receivable
balance and provide for lease termination fees relating to
certain lease obligations of a liquidated customer which were
guaranteed by the Company;
(2) a charge of approximately $0.6 million to further adjust the
receivable balance for a former customer to its estimated net
realizable value;
(3) a charge of $1.8 million to further reserve for amounts that
may ultimately prove uncollectible from Heilig-Meyers;
(4) increased distribution expenses due to the increase in sales
volume and higher fuel costs;
(5) increased legal expenses related to litigation; and
(6) an increase in cooperative advertising and promotion costs
related to the Beautyrest(R) 2000 product line.
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 September 30, 2000 from $1.8 million for the quarter ended September 25,
1999. This decrease was due to a decline in the estimated allocable number of
the shares subject to the ESOP in 2000.
Amortization of Intangibles. Amortization of intangibles for the
quarter increased $0.2 million to $2.1 million for the quarter ended September
30, 2000 from $1.9 million for the quarter ended September 25, 1999 due to
amortization of goodwill related to our retail operations.
Interest Expense, Net. Interest expense, net increased $1.2 million to
$9.3 million for the quarter ended September 30, 2000 from $8.1 million for the
quarter ended September 25, 1999 due primarily to higher interest rates on our
senior debt obligations; increased average outstanding borrowings; an extra week
of interest on senior indebtedness during the current quarter; and increased
amortization of deferred financing costs.
Other Expense, Net. Other expense, net remained relatively stable at
$0.4 million for the quarters ended September 30, 2000 and September 25, 1999.
Income Tax Provision (Benefit). Our effective income tax rates for the
quarters ended September 30, 2000 and September 25, 1999 differ from the federal
statutory rate for the following reasons:
(1) non tax-deductible amortization of goodwill; and
(2) revisions to our projected pre-tax results for fiscal 2000.
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<PAGE> 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
The above reasons coupled with our seasonally strong third quarter have resulted
in an unusually large tax expense for the quarter ended September 30, 2000. Our
revised projected effective tax rate for fiscal 2000 is approximately 16.0%. The
aggregate effect of the change in the effective tax rate for the year, combined
with pre-tax earnings for the third quarter, resulted in income tax expense of
approximately $14.0 million in the quarter ended September 30, 2000.
Net Income. For the reasons set forth above, we had a net loss of $7.7
million for the quarter ended September 30, 2000 compared to a net income of
$3.8 million for the quarter ended September 25, 1999.
EBITDA. For the reasons set forth above, we had an EBITDA of $22.5
million, or 9.9% of net sales, for the quarter ended September 30, 2000 compared
to $21.3 million, or 12.3% of net sales, for the quarter ended September 25,
1999. Excluding (i) charges of $3.1 million, in the aggregate, related to two
former customers mentioned in Note 4 of "Notes to Condensed Consolidated
Financial Statements" contained elsewhere herein; (ii) an increase of $1.8
million to further reserve for amounts that may ultimately prove uncollectible
from Heilig-Meyers; and (iii) an operating loss of $0.4 million related to
Gallery Corp, our EBITDA would have been $27.9 million, or 12.2% of net sales,
for the quarter ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 25, 1999
Net Sales. Net sales for the nine months ended September 30, 2000
increased 19.0%, or $88.7 million, to $555.7 million in 2000 from $467.0 million
in 1999. The increase was due primarily to a 12.1%, or approximately $55.7
million, increase in bedding unit sales volume and a 6.8%, or approximately
$35.4 million, increase in bedding average unit selling price. The increase in
unit shipments is attributable to sales increases in the second and third
quarter 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. The fiscal year ending December
30, 2000 is a 53 week year and the extra week in this fiscal year is included in
the third quarter. Sales for the year-to-date period, after adjusting for the
extra week, would have increased approximately 16.0% on a comparable basis to
1999.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the nine months ended September 30, 2000 decreased 1.0 percentage point
to 56.3% in 2000 from 57.3% in 1999. Our gross margin improvement for the nine
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;
increased overtime; and inter-plant sales transfers, all of which occurred to
meet peak demand.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the nine months ended
September 30, 2000 increased 2.2 percentage points to 37.7% in 2000 from 35.5%
in 1999. This increase is primarily attributable to the following:
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<PAGE> 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
(1) a charge of $7.8 million (1.4% of net sales), in the
aggregate, to write-off transaction fees and to adjust the
receivable balances for two former customers to estimated net
realizable value;
(2) a charge of $1.8 million to further reserve for amounts that
may ultimately prove uncollectible from Heilig-Meyers;
(3) an increase in cooperative advertising and promotion costs
related to the Beautyrest(R) 2000 product line;
(4) increased legal expenses related to litigation; and
(5) increased 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 remained stable at approximately $5.3
million for the nine months ended September 30, 2000 and September 25, 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 stock options.
Amortization of Intangibles. Amortization of intangibles for the nine
months increased $0.5 million to $6.2 million for the nine months ended
September 30, 2000 from $5.7 million for the nine months ended September 25,
1999 due to amortization of goodwill related to our retail operations.
Interest Expense, Net. Interest expense, net increased approximately
$2.5 million to $26.6 million for the nine months ended September 30, 2000 from
$24.1 million for the nine months ended September 25, 1999 due primarily to
higher interest rates on our senior debt obligations; an increase in average
outstanding borrowings; and increased amortization of deferred financing costs.
Other Expense, Net. Other expense, net remained relatively stable at
$1.3 million for the nine months ended September 30, 2000 and September 25,
1999.
Income Tax Provision (Benefit). Our effective income tax rates of 13.5%
and 48.5% for the nine months ended September 30, 2000 and September 25, 1999,
respectively, differ from the federal statutory rate primarily for the following
reasons:
(1) non tax-deductible amortization of goodwill; and
(2) revisions to our projected pre-tax results for fiscal 2000.
16
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
As a result, during the nine months ended September 30, 2000, we recorded a
current income tax benefit of $1.3 million.
Net Income. For the reasons set forth above, we incurred a net loss of
$8.5 million for the nine months ended September 30, 2000 compared to a loss of
$3.6 million for the nine months ended September 25, 1999.
EBITDA. For the reasons set forth above, we had an EBITDA of $41.5
million, or 7.5% of net sales, for the nine months ended September 30, 2000
compared to $41.6 million, or 8.9% of net sales, for the nine months ended
September 25, 1999. Excluding (i) charges of $3.8 million relating to severance
recorded in the first quarter; (ii) charges of $7.8 million, in the aggregate,
to write-off transaction fees and to adjust the receivable balances of two
former customers recorded in the second and third quarters; (iii) an increase of
$1.8 million to further reserve for amounts that may ultimately prove
uncollectible from Heilig-Meyers; and (iv) an operating loss of $0.9 million
related to Gallery Corp, our EBITDA would have been $52.0 million, or 9.4% of
net sales, for the nine months ended September 30, 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 related to increases in
working capital, payments of principal and interest, capital expenditures,
severance and equity related repurchases.
Our operating activities used cash of $1.9 million in the first nine
months of 2000 compared to $5.6 million used in the first nine months of 1999.
As a result of our Beautyrest(R) 2000 sales growth, inventories increased $4.3
million and trade accounts receivable increased $42.9 million from December 25,
1999 levels. The increase in inventories was due to production demands in the
first nine months of 2000 to service our increased sales volume. In addition,
our trade accounts payable and accrued expenses increased a total of $27.4
million during the first nine months of 2000, primarily due to increased sales
volume, higher production levels and improved management of vendor payables.
Our capital expenditures totaled $10.2 million for the nine months
ended September 30, 2000. These capital expenditures consisted primarily of
capital expenditures for machinery to meet increased sales levels. We expect to
spend an aggregate of approximately $12.5 million to $13.0 million for capital
expenditures in 2000. If capital expenditures for 2000 exceed $12.5 million, we
will need to obtain a waiver from the lenders under our Senior Credit Facility.
Management believes that it will be able to obtain such waiver if capital
expenditures exceed $12.5 million for 2000.
At September 30, 2000, the amount under the Revolving Credit Facility
that was available to be drawn was $64.8 million, after giving effect to $15.0
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
September 30, 2000, we were in compliance with the financial covenants contained
in all of our credit facilities.
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<PAGE> 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
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 loss from operations (pre-tax) for the quarter ended September 30,
2000 and for the period from the acquisition date to September 30, 2000 of
Gallery totaled $0.6 million and $1.4 million, 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. While we believe that the
eventual recovery of our investment in this business is dependent upon the
ability of the operations to achieve improvements sufficient to generate
profitable operations and positive cash flows; there can be no assurance this
business will achieve such improvements, therefore the amount of any future
recovery cannot be estimated.
RECENT DEVELOPMENTS - CUSTOMERS
As previously disclosed, management has decided that a distribution
strategy of further investment into retail operations through acquisition of
certain customers is not in the best interests of the Company. We had been
pursuing an acquisition of a customer at an amount equal to the fair market
value of the business less obligations owed to us. Consistent with management's
decision, acquisition discussions were terminated. We believe that
collectability on the full amounts owed to us by this former customer is remote.
Therefore, in the third quarter ended September 30, 2000, we recorded an
additional $0.6 million charge to further adjust the receivable to our current
estimate of its net realizable value. The total amount recorded year-to-date to
write-off transaction fees incurred and to adjust the receivable (net of an
allowance for doubtful accounts) to our current estimate of its net realizable
value is approximately $3.5 million.
Additionally, during the third quarter ended September 30, 2000 a
customer, which at one time represented our direct entry into retail operations,
was liquidated. We have recorded an additional $2.5 million charge in the third
quarter to write-off the receivable and provide for lease termination fees
relating to certain lease obligations of the customer which were guaranteed by
the Company. The total year-to-date costs incurred by the Company relating to
the liquidation of this customer is approximately $4.3 million.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
On August 1, 2000, The Heilig-Meyers Company, our largest customer
(approximately 6.4% and 11.2% of net sales for the nine months ended September
30, 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 Heilig-Meyers 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".
On August 16, 2000, Heilig-Meyers and certain subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code. Following
the filing, Heilig-Meyers received a commitment from a group of lenders for $215
million in debtor-in-possession (DIP) financing to provide funding for its
post-petition trade and employee obligations, as well as their ongoing operating
needs during the restructuring process.
On September 12, 2000, Heilig-Meyers received approval from the
Bankruptcy Court of their new credit program and their plan for closing over 300
stores. Due to the Heilig-Meyers bankruptcy, we have recorded a charge of $1.8
million to reserve for amounts that may ultimately prove uncollectible. Based on
our experience with and credit review of Heilig-Meyers, we believe that we are
adequately reserved for pre-petition accounts receivable balances that may
ultimately prove uncollectible. There can be no assurance, however, that amounts
reserved will be adequate, nor can there be any assurance as to future sales
levels with respect to Heilig-Meyers.
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 $2.7 million in distributions payable to
Simmons Holdings.
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.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
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 balance sheet 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.
On December 3, 1999, the staff of the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 summarizes some of the
staff's interpretations of the application of generally accepted accounting
principles to revenue recognition. SAB 101 was originally required to be adopted
no later than the first quarter of the fiscal year beginning after December 15,
1999. However, SAB 101A extended the implementation date for certain registrants
with fiscal years that begin between December 16, 1999, and March 15, 2000, to
report a change in accounting principle no later than their second quarter of
the fiscal year beginning after December 15, 1999. SAB 101B extended the
implementation date until the fourth quarter of the fiscal year beginning after
December 15, 1999. Management believes that 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.
During May 2000, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF No. 00-14
addresses the classification of various sales incentives and will be effective
for the fourth quarter of 2000. Management has determined that the adoption of
EITF Issue No. 00-14 will have no effect on our financial position. Management
is in the process of determining the potential effect on its statement of
earnings presentation and upon adoption, if necessary, previously issued
financial statements may need to be revised to conform to the new presentation.
During July 2000, the EITF issued EITF Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF 00-10 addresses the income statement
classification for shipping and handling fees and costs by companies that record
revenue based on the gross amount billed to customers. Management has determined
that adoption of EITF Issue No. 00-10 will have no effect on our current
classification and disclosure.
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
20
<PAGE> 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
--------------------------------------------------------------------------------
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 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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<PAGE> 22
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 nine
months ended September 30, 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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<PAGE> 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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 Collection(R), 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 defenses 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 the action was lifted.
In October 1999, Serta amended its complaint to join 14 U.S.
licensee/shareholders as plaintiffs and to add a claim for false advertising
under the Lanham Act as well as seek damages and injunctive relief in connection
with that claim. We again have denied the material allegations of the amended
complaint and asserted additional affirmative defenses and an additional
counterclaim seeking a declaratory judgment for unenforceability of the
patent-in-suit due to fraud on the PTO. Serta moved to dismiss this counterclaim
and we have filed a response. The court has not yet ruled on the motion. The
parties have entered into court supervised non-binding mediation in an attempt
to reach a settlement of all of the matters relating to this lawsuit. This
mediation process is ongoing and may not result in a settlement. While we deny
that Serta is entitled to any relief and intend to defend the action vigorously,
settlement amounts 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.
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Lease Agreement between CONCOURSE I LTD., as Landlord,
and the Company, as Tenant, dated April 20, 2000.
10.1.2 First Amendment to lease between CONCOURSE I, LTD. as
Landlord, and the Company, as Tenant, dated July 20,
2000.
27.0 Financial Data Schedule
99.0 Reconciliation of Operating Income to Adjusted EBITDA
(b) Reports on Form 8-K
None.
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<PAGE> 25
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: November 8, 2000
25
