-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6tVKz8g0T4yjnoKmiR9x1LvpcVJgKaQ++skwoYz/Hg7ORSZFMF3Ol6IHFm58am3 Gg14RlzB9sm4icDAsq4JOQ== 0000950144-04-010663.txt : 20041108 0000950144-04-010663.hdr.sgml : 20041108 20041108172755 ACCESSION NUMBER: 0000950144-04-010663 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031227 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMMONS BEDDING CO CENTRAL INDEX KEY: 0001014022 STANDARD INDUSTRIAL CLASSIFICATION: WOOD HOUSEHOLD FURNITURE, (NO UPHOLSTERED) [2511] IRS NUMBER: 133875743 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-76723 FILM NUMBER: 041126813 BUSINESS ADDRESS: STREET 1: ONE CONCOURSE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 7705127700 MAIL ADDRESS: STREET 1: ONE CONCOURSE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30328 FORMER COMPANY: FORMER CONFORMED NAME: SIMMONS CO /GA/ DATE OF NAME CHANGE: 19960510 10-K/A 1 g90934e10vkza.txt SIMMONS BEDDING COMPANY ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 27, 2003 COMMISSION FILE NUMBER 333-76723 SIMMONS BEDDING COMPANY (formerly known as Simmons Company) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 13-3875743 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) One Concourse Parkway, Suite 800 Atlanta, Georgia 30328 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 512-7700 ------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None ------------------ NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED -------------------------------- ---------------------------- Not applicable Not applicable ------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: [X] No: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Act). Yes: [ ] No: [X] There were 100 shares of the registrant's common stock outstanding on March 23, 2004. ================================================================================ Explanatory Note: This Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 27, 2003 is being filed to update the Form 10-K for comments received from the Securities and Exchange Commission related to our Form S-4 filings. Effective July 14, 2004, our indirect parent, THL Bedding Holding Company, changed its name to Simmons Company and we changed our name from Simmons Company to Simmons Bedding Company. As used within this report, the terms "Company," "we," "our," and "us" refers to Simmons Bedding Company, a Delaware corporation, and its subsidiaries. PART I ITEM 1. BUSINESS. OVERVIEW Founded in 1870, Simmons Bedding Company is a leading manufacturer and distributor of branded bedding products in the United States and a world leader in Pocketed Coil(R) innerspring technology. We sell a broad range of mattresses and foundations under our well-recognized brand names, including Simmons(R), Beautyrest(R), BackCare(R) and Deep Sleep(R). In 2002, we added to our product line-up with the introduction of BackCare Kids(R) mattresses, LivingRight(TM) adjustable foundations, and a broader assortment of products to serve the premium bedding segments. Sales of conventional bedding, which include fully-assembled mattresses and foundations, account for substantially all of our sales. We manufacture a full range of mattresses and foundations, with particular emphasis on products targeted to sell at retail price points above $799 per queen set. Additionally, we focus on selling queen and larger size mattresses. For the year ended December 27, 2003, we derived approximately 57% of our sales from these higher-end retail price points and approximately 83% of our sales from these larger size mattresses. We believe these product categories offer faster growth and higher gross margins than other bedding segments. Primarily as a result of these factors, our AUSP for the year ended December 27, 2003 was approximately 50% above the industry average as reported by ISPA. We manufacture and supply conventional bedding to approximately 3,400 retail customers, representing over 11,000 outlets, throughout the nation and in Puerto Rico. Our customers include furniture stores, specialty sleep shops, department stores and rental stores. We support our customers with significant local and national brand advertising and promotional spending, as well as extensive customer support services. We operate 17 strategically located manufacturing facilities across the United States and in Puerto Rico through our wholly owned subsidiaries, The Simmons Manufacturing Co., LLC and Simmons Caribbean Bedding, Inc. We are currently constructing two additional manufacturing facilities. We also distribute branded products on a contract sales basis directly to institutional users of bedding products, such as the hospitality industry and certain agencies of the U.S. government, through our wholly owned subsidiary, Simmons Contract Sales, LLC. In addition, we license our trademarks, patents and other intellectual property to various domestic and foreign manufacturers principally through our wholly owned subsidiary, Dreamwell, Ltd. Unlike many of our competitors that operate as associations of independent licensees, we have national in-house manufacturing capabilities. We believe that there are a number of important advantages to operating nationally, including the ability to service multi-state accounts, maintain more consistent quality of products and leverage research and development activities. Our just-in-time manufacturing capability enables us to manufacture and ship approximately 76% of our products to our retail customers within five business days of receiving their order, and to minimize our working capital requirements. We have proven research and development capabilities. Guided by our Better Sleep Through Science(R) philosophy, we apply extensive research to design, develop, manufacture and market innovative sleep products to provide consumers with a better night's sleep. Over our 134-year history, our innovations have included our patented "no flip" mattress, the first mass-produced innerspring mattress, the Pocketed Coil(R) innerspring, the "Murphy Bed" and the Hide-a-Bed(R) sofa. 1 We also operate 17 retail outlet stores located throughout the United States through our wholly owned subsidiary, World of Sleep Outlets, LLC, and over 100 retail mattress stores operating under the Mattress Gallery and Sleep Country USA names in California, Oregon and Washington. RECENT HISTORY OF THE COMPANY In November 2003, THL Bedding Company acquired Simmons Holdings, Inc. for approximately $1.115 billion. Concurrently with the closing of this transaction, each of THL Bedding Company and Simmons Company merged with and into Simmons Holdings with Simmons Holdings continuing as the surviving corporation. Simmons Holdings was renamed Simmons Company and later renamed Simmons Bedding Company. We refer to the acquisition and mergers, together with the related acquisitions of voting securities of THL Bedding Holding Company, as the "Acquisition." As a result of the Acquisition, Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL") currently hold approximately 76% of the voting stock of THL Bedding Holding Company. In connection with the stock purchase and the mergers, Fenway acquired 9.0% of voting stock of THL Holding and the Company's management and directors acquired 15.2% of the voting stock of THL Holding, after giving effect to restricted stock issued to management under THL Holding's equity incentive plan. Concurrently with the closing of the transactions described above, we entered into the following financing transactions, which we refer to, together with the Acquisition, as the "Transactions": - our new senior secured credit facilities, consisting of a $405.0 million term loan facility and a $75.0 million revolving credit facility (of which approximately $3.3 million was drawn on the closing date and approximately $10.5 million was used to support standby letters of credit) (collectively, the "new senior secured credit facility"); - a new $140.0 million senior unsecured term loan facility (the "new senior unsecured facility"); - the repayment of all outstanding amounts under Simmons Company's existing senior credit facility and the termination of all commitments under that facility; - the consummation of a tender offer and consent solicitation initiated by THL Bedding Company on November 18, 2003 for the $150.0 million aggregate principal amount outstanding of Simmons Company's 10.25% Senior Subordinated Notes due 2009. Holders of $144.9 million aggregate principal amount of the existing Simmons notes had tendered their notes in connection with the tender offer; and - the repayment of all outstanding indebtedness of Simmons Holdings, Inc. including $22.9 million of 17.5% Junior Subordinated Payment-In-Kind Notes due October 29, 2011 and $4.7 million of debt owed to former stockholders of Simmons Holdings, Inc. 2 INDUSTRY We compete in the U.S. wholesale bedding industry, which generated sales of approximately $5.0 billion in 2003, according to ISPA. While there are approximately 700 bedding manufacturers in the United States, four companies, Simmons, Sealy, Serta and Spring Air accounted for approximately 59% of the bedding industry's wholesale revenues for 2003, according to Furniture/Today, an industry publication. The remainder of the domestic conventional bedding market primarily consists of hundreds of smaller independent local and regional manufacturers. We are one of only two bedding industry companies that have national, in house manufacturing capabilities. We believe that there are advantages to operating nationally, including the ability to better service multi-state accounts, maintain more consistent quality of products and better leverage research and development activities. The U.S. bedding industry is characterized by growing unit demand, rising AUSPs and stability in various economic environments. Annual growth of total bedding industry sales has averaged approximately 5.9% over the last twenty years. During this period, there has been just one year in which industry revenues declined (0.3% in 2001). This stability and resistance to economic downturns is due largely to replacement purchases, which account for approximately 80% of bedding industry sales. In addition, high shipping costs and the short lead times demanded by mattress retailers have limited Asian imports to less than 3% of the U.S. market according to the International Trade Association. We believe that current and projected demographic trends are favorable for the bedding industry and, in particular, for the premium segment of the market on which we focus. According to ISPA, 20% of the 21.5 million mattress units sold in the U.S. in 2002 were sold at retail price points greater than $1,000, up 32% from the year before. The factors contributing to growth in the premium segments include: - the greater relative profitability that higher-end products provide to our retail customers; - the rapid growth in the 45-64 year old segment of the population, a group that tends to have more discretionary income and purchases a disproportionate share of bedding products relative to the general population; - the growing number and size of bedrooms in homes in the last twenty years; and - the increasing consumer awareness of the health benefits of sleep. COMPETITION While there are approximately 700 bedding manufacturers in the United States, four companies, Simmons, Sealy, Serta and Spring Air, account for more than 60% of the industry's wholesale revenues. We believe that we principally compete against these three competitors on the basis of brand recognition, product selection, quality and customer service programs, including cooperative advertising, sales force training and marketing assistance. We believe we compare favorably to our primary competitors in each of these areas. In addition, only Simmons and Sealy have national, company-operated manufacturing and distribution capabilities. The rest of the U.S. conventional bedding market consists of several smaller national manufacturers, with the remainder being independent local and regional manufacturers. These local and regional manufacturers generally focus on the sale of lower price point products. While we primarily manufacture differentiated bedding products targeted for mid- to upper-end price points, we also offer a full line of bedding products to our retailer base in order for these retailers to maintain their competitive positioning. 3 PRODUCTS We provide our retail customers with a full range of mattress products that are targeted to cover a breadth of marketplace price points ($199 to $8,999 per queen set) and offer consumers better sleep quality benefits related to common causes of poor sleep. Our focus on the sleep quality benefits of our products differs from the majority of the industry in our employment of differentiated product constructions designed to address specific consumer sleep needs and marketing programs that promote these better sleep benefits, instead of the traditional comfort and price feature selling. Our mattress products are built from foam and/or one of two spring unit construction techniques: Pocketed Coil(R) (Marshall Coil) springs or open coil constructions. The Beautyrest(R) line of products utilizes our patented Pocketed Coil(R) and Pocketed Cable Coil(TM) technology spring construction. Pocketed Coil(R) spring technology involves springs whose rows are joined at the center third of the coils. This patented way of attaching rows of coils allows for each coil to depress independently of the adjacent coils, resulting in better conformability to the sleeping body and the reduction of motion transferred across the bed from one partner to the other. In addition, we recently developed the patent pending Pocketed Cable Coil(TM) technology, which utilizes stranded wire for each coil to provide significantly more durability and enhanced motion separation benefits. Our open coil products differ from traditional open coil mattresses in the design of our coil. Our BackCare(R) products offer a unique gradient-zoned support, featuring five distinct comfort and support zones that mirror the natural s-shape of the spine, providing additional firmness in the lower back and thigh for better support. We also use other open coil units in our Deep Sleep(R) line targeted at the under $500 queen price category. The coil units used in these products are also unique to our products. In 2000, we introduced the first full line of mattresses that consumers never need to flip. This patented design offers enhanced sleep benefits and product durability, along with the consumer convenience of never having to flip their mattresses. Every mattress we manufacture features this innovative "no flip" design. Beautyrest(R), our flagship premium product, has been our primary brand since we introduced it in 1925 and is expected to continue generating the majority of our sales. In October 2003, we introduced the new Beautyrest(R) 2004 line, which continues to offer the Pocketed Coil(R) technology and also offers new features, including the new Pocketed Cable Coil(TM) technology. We began shipping this line in December 2003. Mattresses featuring the Pocketed Cable Coil(TM) technology target retail price points at or above $1,299 per queen set. Beautyrest(R) is sold primarily through furniture stores, mattress specialty stores and department stores. All Beautyrest(R) retail floor samples display "Corner Streamer" labels that allow consumers to choose the benefit package most appealing to them, to compare mattress features with that of competitive products, and to compare the motion separation benefit to other Beautyrest(R) models. Beautyrest(R) World Class(TM) Exceptionale(TM), Latitudes(TM), Dreamwell(R) and Joseph Abboud(R) products are the luxury price point extensions of the Beautyrest(R) line. Unlike other mattress brands, which generally build their luxury line by adding foam, fiber and non-sleep-related accessories to their mainstream product, the Beautyrest(R) luxury products primarily feature our exclusive Pocketed Coil(R)-on-Pocketed Coil(R) construction. This unique construction offers a different comfort level from the mainstream price point Beautyrest(R) models and the combined benefits of comfort and reduced motion transfer. BackCare(R), our second flagship brand, was introduced in 1995 and redesigned in late 2002 with advanced "gradient support" benefits and with our patented "no flip" design. BackCare(R) gradient support, with varying levels of firmness for different zones of the sleeping body, features a zoned coil unit, titanium re-enforced lumbar support and new zoned foams that work together to offer support that mirrors the natural s-shape of the human spine. BackCare Advanced(TM) offers the BackCare(R) gradient support in a series of unique constructions featuring foam core constructions in conjunction with contour memory foam and contour natural foam. It also features an allergy care fiber which is an environmentally-secure way of helping to reduce indoor allergens in the mattress that can cause allergic reactions, including asthma. 4 BackCare Kids(R) was introduced in 2002 specifically for the unique sleep needs of children. BackCare Kids(R) offers three benefits, an allergy care fiber to help reduce allergens in the bed that can cause allergic reactions, a Moisture Ban(TM) liquid repellant, and a RiteHeight(TM) option for bunk beds, trundle beds and day beds that are designed for a lower height mattress. Deep Sleep(R) was introduced in 2001 and redesigned in 2002. The Deep Sleep(R) product line is targeted at the traditional under $500 queen price points. This product line offers comfort, durability and value, utilizing a unique product construction in comparison to competitive open coil units, offering benefits not available from traditional open coil mattresses. Olympic(R) Queen, the first new size in mattresses distributed on a national basis since we began distributing king and queen sizes nationally in 1958, was introduced in 2001. The Olympic(R) Queen offers consumers 10% more sleeping surface than a traditional queen, without requiring the replacement of the traditional queen frame with a wider frame. This patent-pending product, which is available in our Beautyrest(R), BackCare(R) and Deep Sleep(R) lines, is targeted at queen size mattress owners who would prefer a wider mattress, but are unwilling to purchase a larger bed because of their existing queen bed frame or the size of their bedroom. We offer specially designed Egyptian cotton Olympic(R) Queen sheets for our Olympic(R) Queen mattresses which are sold by our retailers and through our internet website, www.simmons.com. LivingRight(TM) adjustable foundations were introduced in late 2002 as part of the BackCare(R) and BackCare Advanced (TM) product lines and are now a feature available in the Beautyrest(R) 2004 line. This product line began rolling out at retail stores in the first quarter of 2003. LivingRight(TM) foundations broaden the traditionally older consumer profile for adjustable beds to the broader market of all adults, reflecting the trend towards using the bed as more than just a place to sleep (reading in bed, working on the computer, watching television, gathering with the family, etc.). The unique LivingRight(TM) design incorporates the benefits of adjustability in a foundation that looks more like a standard foundation than traditional adjustable beds. In 2003, we also launched a number of products in the premium segments. We introduced the new sang(TM) product line, our entry into visco-elastic sleep systems, with retail price points ranging from $1,899 to $2,499 for queen sets. Through our Windsor Bedding subsidiary, we launched several high-end luxury mattress lines, currently under the names Columbia Fine Bedding(TM) and Slumberland(R), with retail price points ranging from $2,899 to $8,999 for queen sets. CUSTOMERS Our strong brand names and reputation for high quality products, innovation and service to our customers, together with the highly attractive retail margins associated with bedding products, have enabled us to establish a strong customer base throughout the United States and across all major distribution channels, including furniture stores, specialty sleep shops, department stores and rental stores. We manufacture and supply conventional bedding to over 11,000 outlets, representing approximately 3,400 retail customers. We also distribute branded products on a contract sales basis directly to institutional users of bedding products such as the hospitality industry and certain agencies of the U.S. government. Major commercial accounts include Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") La Quinta Inns, Inc., and Best Western International, Inc. In 1999, Starwood selected our Beautyrest(R) mattress as the product for their Heavenly Bed(R) program, a luxury hotel room program targeted at their preferred customer club members. Our ten largest customers accounted for 29.8% of our product shipments for the year ended December 27, 2003. No one customer represented more than 4.2% of product shipments for the year ended December 27, 2003. 5 SALES, MARKETING AND ADVERTISING Our products are sold by approximately 220 local field sales representatives, backed by sales management at each of our manufacturing facilities, as well as national account representatives that give direction and support for sales to national accounts. This selling infrastructure provides retailers with coordinated national marketing campaigns, as well as local support tailored to the competitive environments of each individual market. Additionally, we use 35 independent sales representatives, principally in the area of contract sales. Our sales support focuses on two areas: - cooperative promotional advertising and other retail support programs designed to complement individual retailer's marketing programs; and - national consumer communications designed to establish and build brand awareness among consumers. We develop advertising and retail sales incentive programs specifically for individual retailers. Point-of-sale materials, including mattresses and foundation displays that we design and supply, highlight the differentiating features and benefits of our products. In addition, we offer training for retail sales personnel through an internally developed sales representative training program. We believe that our sales training and consumer education programs are the most effective in the industry. We have designed these programs, which are delivered on-site at our retailers' facilities, our manufacturing facilities or our research and education center, Simmons Institute of Technology and Education ("SITE"), to teach retail floor salespeople product knowledge and sales skills. We seek to improve our retailers' unit sales, and increase their sales of higher-end bedding. We also help establish individual incentive programs for our customers and their sales personnel. Our sales force is trained extensively in advertising, merchandising and salesmanship, all of which increase the value of the marketing support they provide to retailers. We believe that our focus on better sleep and on the training of our sales representatives and our customers' retail salespeople differentiates us from our large competitors. SUPPLIERS We purchase substantially all of our conventional bedding raw materials centrally in order to maximize economies of scale and volume discounts. The major raw materials that we purchase are wire, spring components, lumber, foam, insulator pads, innersprings and fabrics and other roll goods consisting of foam, fiber and non-wovens. We obtain a large percentage of our required raw materials from a small number of suppliers and for the year ended December 27, 2003, we bought approximately 77% of our raw material needs from ten suppliers. We believe that supplier concentration is common in the bedding industry. We have long-term supply agreements with several suppliers, including L&P and National Standard Company. L&P supplies the majority of several components, including certain spring components, insulator pads, wire, fiber, quilt backing and flange material, to the bedding industry. For the year ended December 27, 2003, we purchased approximately one-third of our raw materials from L&P. To ensure a long-term and adequate supply of various components, we have entered into agreements with L&P, generally expiring in the year 2010, for the supply of grid tops and open coil innersprings. Among other things, these agreements generally require us to purchase a majority of our requirements of several components from L&P. National Standard Company, a new supplier, provides stranded wire used to manufacture our Pocketed Cable Coil(TM) products. With the exception of L&P and National Standard Company, we believe that we could replace our other suppliers, if or when the need arises, within 90 days as we have already identified and use alternative sources. 6 SEASONALITY/OTHER For the past several years there has not been significant seasonality in our wholesale bedding business. Our retail bedding business, which accounted for $97.9 million, or 12.1%, of net sales for the year ended December 27, 2003 has historically experienced, and we expect will continue to experience, seasonal and quarterly fluctuations in net sales and operating income. As is the case with many bedding retailers, our retail business is subject to seasonal influences, characterized by strong sales for the months of May through September, which impact our second and third quarter results. MANUFACTURING AND FACILITIES We currently operate 18 bedding manufacturing facilities in 16 states and Puerto Rico. We are in the process of closing our Columbus, Ohio plant and we anticipate opening a new plant in July 2004. We manufacture most conventional bedding to order and use "just-in-time" inventory techniques in our manufacturing processes to more efficiently serve our customers' needs and to minimize our inventory carrying costs. We generally schedule, produce and ship over 75% of our bedding orders within five business days of receipt of the order. This rapid delivery capability allows us to minimize our inventory of finished products and better satisfy customer demand for prompt shipments. We invest substantially in new product development, enhancement of existing products and improved operating processes, which we believe is crucial to maintaining our strong industry position. We keep abreast of bedding industry developments through sleep research conducted by industry groups and by our own marketing and engineering departments. We also participate in the Better Sleep Council, an industry association that promotes awareness of sleep issues, and ISPA. Our marketing and manufacturing departments work closely with the engineering staff to develop and test new products for marketability and durability. We also seek to reduce costs and improve productivity by continually developing more efficient manufacturing and distribution processes at SITE, our state-of-the-art 38,000 square foot research and education center in Atlanta, Georgia. As of December 27, 2003, we had 18 engineers and technicians employed full-time at SITE. These employees ensure that we maintain high quality products by conducting product and materials testing, designing manufacturing facilities and equipment and improving process engineering and development. We believe that our engineering staff gives us a competitive advantage over most of our competitors who do not have significant in-house engineering resources. WARRANTIES AND PRODUCT RETURNS Our conventional bedding products generally offer ten-year limited warranties against manufacturing defects. We believe that our warranty terms are generally consistent with those of our primary national competitors. The historical costs to us of honoring warranty claims have been within management's expectations. We have also experienced non-warranty returns for reasons generally related to order entry errors and shipping damage. We resell our non-warranty returned products primarily through as-is furniture dealers and our World of Sleep outlet stores. PATENTS AND TRADEMARKS We own many trademarks, including Simmons(R), Beautyrest(R), BackCare(R), Deep Sleep(R), Olympic(R) Queen and Pocketed Coil(R), most of which are registered in the United States and in many foreign countries. We protect portions of our manufacturing equipment and processes as trade secrets and through patents. We possess several patents on the equipment and processes used to manufacture our Pocketed Coil(R) innersprings. We do not consider our overall success to be dependent upon any particular intellectual property rights. We cannot assure that the degree of protection offered by the various patents will be sufficient, that patents will be issued in respect of pending patent applications, that it will be commercially reasonable or cost effective to enforce our patents, or that we will be able to protect our technological advantage upon the expiration of our 7 patents. If we were unable to maintain the proprietary nature of our intellectual property, our financial condition or results of operations could be materially adversely affected. LICENSING During the late 1980's and early 1990's, we disposed of most of our foreign operations and secondary domestic lines of business via license arrangements. We now license internationally the Simmons(R) mark and many of our trademarks, processes and patents generally on an exclusive perpetual or long-term basis to third-party manufacturers which produce and distribute conventional bedding products within their designated territories. These licensing agreements allow us to reduce exposure to political and economic risk abroad by minimizing investments in those markets. We currently have 18 foreign licensees and 14 foreign sub-licensees that have rights to sell Simmons-branded products in nearly 100 countries. As of December 27, 2003, we had 11 domestic third-party licensees. Some of these licensees manufacture and distribute juvenile bedding, healthcare-related bedding and furniture and non-bedding upholstered furniture, primarily on perpetual, long-term or automatically renewable terms. Additionally, we have licensed the Simmons(R) mark and other trademarks, generally for limited terms, to manufacturers of occasional use airbeds, feather and down comforters, sheets and synthetic comforter sets, pillows, mattress pads, blankets, bed frames, futons, specialty sleep items and other products. In 2001, 2002 and 2003, our licensing agreements as a whole generated royalties and technology fees of $9.5 million, $9.0 million and $10.6 million, respectively. These royalty and technology fees are accounted for as a reduction in selling, general and administrative expenses in the accompanying consolidated statements of operations. EMPLOYEES As of December 27, 2003, we had approximately 3,200 full-time employees. Approximately 1,000 of these were represented by labor unions. Employees at eight of our eighteen manufacturing facilities were represented by various labor unions with separate collective bargaining agreements. Collective bargaining agreements typically are negotiated for two- to four-year terms. Most of our union contracts expire in 2004 or 2005. Employees of our new manufacturing plant under construction will not be represented by a labor union. The locations where our employees are covered by collective bargaining agreements and the contract expiration dates are as follows:
FACILITY LABOR UNION EXPIRATION DATE -------- ----------- --------------- Atlanta United Steel Workers of America October 2005 Columbus(1) United Steel Workers of America October 2004 Columbus(1) International Association of Machinists February 2004 Dallas United Steel Workers of America October 2004 Honolulu International Longshoremen and Warehousemen's Union January 2005 Kansas City United Steel Workers of America April 2004 Los Angeles United Steel Workers of America October 2005 Los Angeles International Brotherhood of Teamsters October 2006 Piscataway United Steel Workers of America October 2005 Piscataway International Association of Machinists November 2004 San Leandro United Furniture Workers April 2004
- -------------- (1) Plant scheduled to cease operations in April 2004. We consider overall relations with our workforce to be satisfactory. We have had no labor-related work stoppages in over twenty years. 8 REGULATORY MATTERS As a manufacturer of bedding and related products, we use and dispose of a number of substances, such as glue, lubricating oil, solvents, and other petroleum products, that may subject us to regulation under numerous federal and state statutes governing the environment. Among other statutes, we are subject to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state statutes and regulations. We have made and will continue to make capital and other expenditures to comply with environmental requirements. We also have incurred and will continue to incur costs related to certain remediation activities. Under various environmental laws, we may be held liable for the costs of remediating releases of hazardous substances at any properties currently or previously owned or operated by us or at any site to which we sent hazardous substances for disposal. We are currently addressing the clean-up of environmental contamination at and in the vicinity of our former facility in Jacksonville, Florida, and have submitted a final remediation plan for our former facility in Linden/Elizabeth, New Jersey. While the current estimate of such liabilities is not material to our operations, future liability for such matters is difficult to predict. We have a reserve based upon our best estimate to reflect our potential liability for environmental matters. Because of the uncertainties associated with environmental remediation, the costs incurred with respect to the potential liabilities could exceed our recorded reserves. Our conventional bedding and other product lines are subject to various federal and state laws and regulations relating to flammability, sanitation and other standards. We believe that we are in material compliance with all such laws and regulations. The state of California adopted new flame retardant regulations related to manufactured mattresses and foundations which will be effective January 1, 2005. These regulations could be preempted by the U.S. Consumer Product Safety Commission, which is also considering new rules related to open flame resistance standards. Other jurisdictions are also considering similar standards. These regulations, or any new regulations adopted nationally or elsewhere, may adversely affect our manufacturing processes and material costs. We have developed product solutions that are intended to enable us to meet the regulations. FORWARD LOOKING STATEMENTS "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. When used in this Annual Report on Form 10-K/A, the words "believes," "anticipates," "expects," "intends," "projects" and similar expressions are used to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future financial and operating results, including expected benefits from our Better Sleep Through Science(R) philosophy. Any forward-looking statements contained in this report represent our management's current expectations, based on present information and current assumptions, and are thus prospective and subject to risks and uncertainties which could cause actual results to differ materially from those expressed in such forward-looking statements. Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to: - the level of competition in the bedding industry; - legal and regulatory requirements; - the success of new products; - our relationships with our major suppliers; - fluctuations in costs of raw materials; - our relationship with significant customers and licensees; - our labor relations; - departure of key personnel; - encroachments on our intellectual property; - product liability claims; - the timing, cost and success of opening new manufacturing facilities; - our level of indebtedness; - interest rate risks; - future acquisitions; - an increase in return rates; and - other risks and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission ("SEC"), including the Form 10-K for 2002 and the Form 10-Qs for the first, second and third quarters of 2003. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. Except as may be required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. 9 ITEM 2. PROPERTIES. Our corporate offices are located in approximately 49,000 square feet of leased office space at One Concourse Parkway, Atlanta, Georgia 30328. The following table sets forth selected information regarding manufacturing and other facilities we operated as of December 27, 2003:
DATE YEAR OF LEASE SQUARE LOCATION OCCUPIED EXPIRATION FOOTAGE - -------- -------- ---------- ------- Manufacturing facilities: Mableton, Georgia (Atlanta)............................... 1992 2007 148,300 Charlotte, North Carolina................................. 1993 2010 174,960 Grove City, Ohio (Columbus) (1)........................... 1987 2004 190,000 Coppell, Texas (Dallas)................................... 1998 2008 140,981 Aurora, Colorado (Denver)................................. 1998 2008 129,000 Fredericksburg, Virginia.................................. 1994 2009 128,500 Honolulu, Hawaii.......................................... 1993 2008 63,280 Jacksonville, Florida(2) ................................. 1973 2004 205,729 Janesville, Wisconsin..................................... 1982 Owned 290,190 Shawnee Mission, Kansas (Kansas City)..................... 1997 Owned 130,000 Compton, California (Los Angeles)......................... 1974 2005 222,000 Tolleson, Arizona (Phoenix)............................... 1997 2007 103,408 Piscataway, New Jersey.................................... 1988 2004 264,908 Salt Lake City, Utah...................................... 1998 2008 77,500 San Leandro, California................................... 1992 2007 250,600 Sumner, Washington (Seattle).............................. 2003 2014 235,000 Agawam, Massachusetts (Springfield)....................... 1993 2006 125,000 Trujillo Alto, Puerto Rico................................ 1998 Owned 50,000 --------- Subtotal................................................ 2,929,356 Other facilities in Atlanta, Georgia: Corporate Headquarters.................................... 2000 2011 49,045 SITE (Norcross, Georgia).................................. 1995 2005 38,000 SITE Showroom (Norcross, Georgia)......................... 2002 2005 4,534 Gwinnett Storage.......................................... 2002 2005 6,660
- ----------- (1) Plant scheduled to cease operations in April 2004. Current lease expires in July 2004. One new plant opened in March 2004 and a second plant is scheduled to open in July 2004. (2) Plant ceased operations in December 2003. Lease expired in January 2004. Management believes that our facilities, taken as a whole, have adequate productive capacity and sufficient manufacturing equipment to conduct business at levels exceeding current demand. In addition, as of December 27, 2003, we operated 17 retail outlet stores through our World of Sleep Outlets, LLC subsidiary and 56 retail mattress stores in the aggregate and an office/warehouse through our Gallery Corp. subsidiary, and 47 retail mattress stores and two additional office/warehouses through our SC Holdings, Inc. subsidiary. 10 ITEM 3. LEGAL PROCEEDINGS. From time to time, we have been involved in various legal proceedings. We believe that all current litigation is routine in nature and incidental to the conduct of our business, and that none of this litigation, if determined adversely to us, would have a material adverse effect on our financial condition or results of our operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is no established public trading market for any class of common equity of the Company. As of December 27, 2003, there was one holder of record of the Company's common shares. No dividends have been paid on any class of common equity of the Company during the last three fiscal years. Any payment of future dividends and the amounts thereof will be dependent upon the Company's earnings, fiscal requirements and other factors deemed relevant by the Company's Board of Directors. The ability of the Company to pay dividends on its common stock is restricted by the terms of the Senior Credit Facility, Senior Unsecured Term Loan and the Indenture governing the New Notes. RECENT SALES OF UNREGISTERED SECURITIES We have not issued nor sold securities within the past three years pursuant to offerings that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), except on December 19, 2003 as part of the Transactions, we issued $200.0 million in principal amount of 7.875% senior subordinated notes due 2014 to Goldman, Sachs & Co., Deutsche Bank Securities Inc., and UBS Investment Bank for $ 194.5 million. The proceeds of the transaction set forth above were used to repay all outstanding amounts under Simmons Bedding Company's Senior Credit Facility and the termination of all commitments under that facility, the consummation of a tender offer and consent solicitation initiated by THL Bedding Company on November 18, 2003 for the $150.0 million aggregate principal amount outstanding of Simmons Company's 10.25% Senior Subordinated Notes due 2009, the repayment of all outstanding indebtedness of Simmons Holdings, Inc. including $22.9 million of 17.5% Junior Subordinated Payment-In-Kind Notes due October 29, 2011 and $4.7 million of debt owed to former stockholders of Simmons Holdings, Inc. The transaction set forth above was undertaken in reliance upon exemption from the registration requirements of the Securities Act afforded by Section 4(2), Rule 144A under the Securities Act and/or Regulation D and Regulation S promulgated thereunder, as sales not involving a public offering. ITEM 6. SELECTED FINANCIAL DATA. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA Set forth below is selected historical consolidated financial and other operating data for Simmons Bedding Company. We derived our historical Statement of Operations and Balance Sheet data for 1999, 2000, 2001, 2002 and 2003 from our consolidated financial statements. The Company's capital structure changed significantly as a result of the December 19, 2003 acquisition and the concurrent and subsequent refinancing of debt. Due to required purchase accounting adjustments relating to the Transactions the consolidated financial and other data for the period subsequent to the acquisition (the "Successor" period) is not comparable to such data for the periods prior to the acquisition (the "Predecessor" periods). The accompanying selected historical consolidated financial and other operating data contain all adjustments that, in the opinion of management, are necessary to present fairly the financial position of Simmons for the periods presented. All adjustments in the periods presented herein are normal and recurring in 11 nature unless otherwise disclosed. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes and other financial information appearing elsewhere herein.
PREDECESSOR --------------------------------------------------------------------- | SUCCESSOR FOR THE FOR THE FOR THE FOR THE | ---------------- YEAR YEAR YEAR YEAR PERIOD FROM | PERIOD FROM ENDED ENDED ENDED ENDED DEC. 29, 2002 | DEC. 20, 2003 DEC. 25, DEC. 30, DEC. 29, DEC. 28, THROUGH DEC. 19, | THROUGH DEC. 27, 1999 2000 2001 2002 2003 | 2003 ---------- ---------- ---------- ---------- ---------------- | ---------------- (52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) | (DOLLARS IN THOUSANDS) | | STATEMENT OF OPERATIONS | DATA: | Net sales................. $550,062 $699,741 $655,209 $708,595 $ 797,616 | $ 8,717 Cost of products sold..... 348,920 414,102 379,131 369,617 410,081 | 7,596 -------- -------- -------- -------- --------- | ---------- Gross profit............ 201,142 285,639 276,078 338,978 387,535 | 1,121 Operating expenses: | Selling, general and | administrative | expenses(1)............. 168,205 259,795 241,800 284,164 373,040 | 4,442 Amortization of | intangibles............. 7,628 10,530 11,414 1,246 306 | 311 Licensing fees............ (7,717) (8,437) (9,501) (9,002) (10,361) | (276) Other(2).................. 7,169 7,117 10,698 20,285 22,399 | -- -------- -------- -------- -------- --------- | ---------- Operating income (loss). 25,857 16,634 21,667 42,285 2,151 | (3,356) Interest expense, net(3).. 38,220 39,989 39,450 32,000 45,092 | 4,661 Income (loss) before | income taxes and | minority interest.... (12,363) (23,355) (17,783) 10,285 (42,941) | (8,017) Income tax expense | (benefit)............... (1,673) (4,813) (7,676) 12,005 (8,845) | (827) Minority interest in | loss.................... -- (421) (470) (1,109) -- | -- -------- -------- -------- -------- --------- | ---------- Net income (loss)....... $(10,690) $(18,121) $ (9,637) $ (611) $ (34,096) | $ (7,190) ======== ======== ======== ======== ========= | ========== | BALANCE SHEET DATA: | Working capital(4)........ $ 55,253 $ 37,338 $ 26,320 $ 10,326 | $ 26,908 Cash and cash | equivalents............. 4,533 5,765 3,264 7,108 | 3,670 Total assets.............. 407,049 469,378 432,175 411,031 | 1,183,119 Total debt................ 347,751 365,060 340,583 290,782 | 770,253 Total common stockholder's | equity (deficit)........ (30,318) (33,567) (61,321) (81,336) | 280,277 OTHER DATA: | EBITDA(5)............... $ 44,014 $ 42,452 $ 58,369 $ 82,922 $ 24,407 | $ (2,696) Variable stock | compensation expense... -- 574 14,847 15,561 68,415 | -- Transaction related | expenditures including, | cost of products | sold................... -- -- -- -- 22,399 | 1,727 Plant opening, closing | charges................ -- -- -- -- 4,137 | 286 Management fees......... 1,501 2,102 2,764 2,353 2,844 | 49 Capital expenditures.... 9,041 15,556 5,729 7,961 8,791 | --
- --------------- (1) Includes predecessor variable stock compensation expense related to director, consultant and employee regular and superincentive stock options of $0, $0.6 million, $14.8 million, $15.6 million and $68.4 million for the years ended 1999, 2000, 2001, 2002 and the period from December 29, 2002 through December 19, 2003, respectively. (2) Includes ESOP expense of $7.2 million, $7.1 million and $2.8 million for the years ended 1999, 2000 and 2001, respectively; goodwill impairment charges of $7.9 million and $20.3 million for the years ended 2001 and 2002, respectively; and $21.5 million of transaction expenses related to THL's acquisition of Simmons Company for Predecessor '03. (3) Includes for the period December 29, 2002 through December 19, 2003 tender premium of $10.8 million for Repurchased Notes and $8.9 million of unamortized debt issuance costs expensed related to debt repaid in connection with the Acquisition. (4) Defined as current assets (excluding cash and assets held for sale), less current liabilities (excluding current maturities of long-term debt and liabilities held for sale). 12 (5) EBITDA is a non-GAAP financial measure that is defined as net income before interest expense, income taxes, depreciation and amortization. We use EBITDA as a supplemental tool to measure our operating performance and, after applying various adjustments, as a basis for determining the following: - the allocation of our resources to our different business segments; - the return on investment of acquisitions; - the compensation of our management; - the vesting of our restricted stock; - the valuation of our Company for impairment purposes; and - our compliance with our debt covenants. We rely on EBITDA as a supplemental tool for measuring our operating performance because we are and have historically had a highly-leveraged capital structure which results in significant interest expense and minimal cash tax expense. We believe EBITDA provides useful information to the holders of our notes and security analysts by assisting them in making informed investment decisions as we have historically been valued and sold based upon multiples of EBITDA. EBITDA differs from Adjusted EBITDA, which is defined by our senior credit facility (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources"). EBITDA has important limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. For example, EBITDA does not reflect: - our cash expenditures, or future requirements, for capital expenditures or contractual commitments; - changes in, or cash requirements for, our working capital needs; - the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; - tax payments that represent a reduction in cash available to us; and - any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future. Because of these and other limitations, we rely primarily on our results under GAAP and use EBITDA only supplementally. The following table sets forth the reconciliation of our net income for the periods provided to EBITDA:
PREDECESSOR | SUCCESSOR ----------------------------------------------------------------------------- | ------------- PERIOD FROM | PERIOD FROM FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR DEC. 29, 2002 | DEC. 20, 2003 ENDED ENDED ENDED ENDED THROUGH | THROUGH DEC. 25, 1999 DEC. 30, 2000 DEC. 29, 2001 DEC. 28, 2002 DEC. 19, 2003 | DEC. 27, 2003 ------------- ------------- ------------- ------------- ------------- | ------------- | Net income (loss).... $(10,690) $(18,121) $ (9,637) $ (611) $(34,096) | $ (7,190) Depreciation and | amortization....... 17,959 24,800 35,711 39,335 22,059 | 656 Income taxes......... (1,673) (4,813) (7,676) 12,005 (8,845) | (827) Interest expense, | net................ 38,220 39,989 39,450 32,000 45,092 | 4,661 Interest income...... 198 597 521 193 197 | 4 -------- -------- -------- -------- -------- | --------- EBITDA............. $ 44,014 $ 42,452 $ 58,369 $ 82,922 $ 24,407 | $ (2,696) ======== ======== ======== ======== ======== | =========
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading manufacturer and distributor of branded bedding products in the United States. We sell a broad range of mattresses and foundations under our well recognized brand names, including Simmons(R), Beautyrest(R), our flagship product line introduced in 1925, and BackCare(R). Our operations are managed and reported in two segments. For the year ended December 27, 2003, we derived over 90% of our sales from our wholesale bedding segment, which consists primarily of the manufacture, sale and distribution of premium branded bedding products. Our wholesale bedding segment sells to a diverse nationwide base of approximately 3,400 retail customers representing over 11,000 outlets, including furniture stores, specialty sleep shops, department stores, and rental stores. Our wholesale bedding segment also sells mattresses to our retail bedding segment, which as of December 27, 2003 operated over 100 specialty sleep stores in California, Oregon and Washington that sell to consumers principally premium branded bedding products. Highlights for the year 2003 included the following: - Our wholesale bedding segment sales growth rate of 12.5% was almost double that of the industry as reported by ISPA. Our growth rate was attributable to focusing on selling premium products targeted to sell at retail price points above $799 per queen set and on selling queen and larger size mattresses. In 2003, we derived approximately 57% of our sales from mattresses with retail price points of $799 and above (39% from above $1,000) and approximately 83% of our sales from queen and larger size mattresses. - We continue to focus on product innovation, most notably the rollout of the BackCare(R) 2003 product line, which increased BackCare(R) unit sales and AUSP by 5.1% and 36.6%, respectively, for the year ended December 27, 2003. Additionally, we introduced the Beautyrest(R) 2004 product line, featuring our patent pending Pocketed Cable Coil(TM) technology, in October 2003. - Our wholesale bedding segment made strides toward improving our manufacturing network by commencing construction on two new bedding manufacturing facilities in Hazleton, Pennsylvania and Waycross, Georgia and closing our manufacturing facility in Jacksonville, Florida. The Hazleton facility commenced operations in March 2004 and our Waycross facility commenced operations in August of 2004. - The Acquisition was accounted for using the purchase method of accounting. As a result, the Acquisition affected our results of operations in certain significant respects. The purchase price of $1.1 billion was allocated to the tangible and intangible assets acquired and assumed liabilities based upon their respective fair values as of the date of the Acquisition. The allocation of the purchase price of the assets acquired in the Acquisition, will result in a significant increase in our amortization expense. In addition, due to the increased borrowings to finance the Acquisition, our interest expense increased significantly following the Acquisition. The following provides the details of these highlights and insights into our financial statements, including critical accounting estimates used in preparing the financial statements, a discussion of our results of operations and our liquidity and capital resources. 14 Critical Accounting Policies In preparing the consolidated financial statements in conformity with GAAP, our management must make decisions that impact the reported amounts and the related disclosures. Those decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowance for doubtful accounts, impairment of long-lived assets, intangible assets, warranties, cooperative advertising and rebate programs, variable stock compensation, income taxes, litigation and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our management believes the critical accounting policies described below are the most important to the fair presentation of our financial condition and results. The following policies require management's more significant judgments and estimates in the preparation of our consolidated financial statements. Allowance for doubtful accounts. Our management must make estimates of the uncollectibility of our accounts receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Actual losses for uncollectible accounts have generally been consistent with management's estimates. However, deteriorating financial conditions of certain key customers or a significant slow down in the economy could have a material 15 negative impact on our ability to collect on accounts, in which case additional allowances may be required. This could result in a material charge to earnings. Our accounts receivable balance was $65.9 million and $67.4 million, net of allowance for doubtful accounts of $5.0 million and $5.2 million, respectively, as of December 27, 2003 and December 28, 2002, respectively. Impairment of long-lived assets. We assess all our long-lived assets for impairment whenever events or circumstances indicate its carrying value may not be recoverable. Management assesses whether there has been an impairment by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of the asset. The factors considered by management in this assessment include operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. If an impairment is deemed to exist, management records an impairment charge equal to the excess of the carrying value over the fair value of the impaired assets. This could result in a material charge to earnings. Intangible assets. We test goodwill for impairment on an annual basis by comparing the fair value of our reporting units to their carrying values. Fair value is determined by the assessment of future discounted cash flows. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. As part of the adoption of SFAS 142, we performed initial valuations during the first quarter of 2002 to determine if any impairment of goodwill existed and determined that no impairment of goodwill existed. In accordance with SFAS 142, we tested goodwill again at December 28, 2002 for impairment by comparing the fair value of our reporting units to their carrying values. As a result, our retail segment recognized a goodwill impairment of $20.3 million in 2002. Management determined that no other impairment of goodwill existed as of December 27, 2003. We evaluate trademarks, which are considered indefinite-lived intangible assets, for impairment at least annually or whenever events or circumstances indicates their carrying value might be impaired. In performing this assessment, management considers operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. The carrying value of trademarks are considered impaired when its carrying value exceeds its fair market value. In such an event, an impairment loss is recognized equal to the amount of that excess. Fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. The determination of fair value involves numerous assumptions by management, including expectations on possible variations in the amounts or timing of cash flow, the risk-free interest rate and other factors considered in managements projected future operating results. We review the classification of trademarks as indefinite-lived intangible assets every reporting period. In connection with the Acquisition, we identified and valued certain definite and indefinite-lived intangible assets based upon a preliminary valuation. We are in the process of finalizing the valuation. The final valuation could result in certain intangible assets preliminarily identified as indefinite-lived being classified as definite-lived and a different allocation of the purchase price within the identifiable intangible asset classification. We anticipate finalizing the valuation in the second quarter of 2004. We do not expect the final valuation to have a material impact on previously reported results. Warranty accrual. Our management must make estimates of potential future product returns related to current period product revenue for our wholesale segment. Management analyzes historical returns when evaluating the adequacy of the warranty accrual. Significant management judgments and estimates must be made and used in connection with establishing the warranty accrual in any accounting period. Our warranty policy provides a ten-year non-prorated warranty service period on all first quality products currently manufactured, except for certain products for the hospitality industry which have varying non-prorated warranty periods ranging from five to ten years. Our policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded. As of December 27, 2003 and December 28, 2002, we had a warranty accrual of $3.8 million and $3.4 million, respectively. Cooperative advertising and rebate programs. We enter into agreements with our customers to provide funds for advertising and promotion of our products. We also enter into volume and other rebate programs with certain customers whereby funds may be rebated to the customer. When sales are made to these customers, we record accrued liabilities pursuant to these agreements. Management regularly assesses these liabilities based on forecasted and actual sales and claims and management's knowledge of customer purchasing habits to determine whether all the cooperative advertising earned will be used by the customer, whether the cooperative advertising costs meet the requirement for classification as selling, general and administrative expense versus a reduction of sales, and whether the customer will meet the requirements to receive rebated funds. Costs of these programs totaled $99.8 million, $86.4 million and $75.9 million for the fiscal years of 2003, 2002 and 2001, respectively. Variable stock compensation expense. Prior to the Acquisition, we recorded variable stock compensation expense, related to director and employee regular stock options, utilizing the intrinsic value method as prescribed by Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations. Management estimated the employee service period over which the compensation was awarded, generally four to five years. Additionally, because the vesting of the plan options was dependent upon achieving an annual Adjusted EBITDA target or as otherwise established by the compensation committee of the board of directors, management estimated the ultimate number of shares that would vest. We recorded additional adjustments to variable stock compensation expense for changes in 16 the intrinsic value of vested regular options in a manner similar to a stock appreciation right because the option holder could compel the Company to settle the award by transferring cash or other assets rather than our common stock. We determined the fair market value of the Predecessor common stock, including option shares, on a quarterly basis based upon a quarterly valuation performed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. Estimates were used in determining the fair market value of our common stock. In connection with the Acquisition, the stock option plans were terminated and certain members of our management deferred $19.8 million of their proceeds from the Acquisition into a deferred compensation plan of Simmons. The proceeds were deemed invested in shares of Class A common stock of Simmons. These shares were convertible into cash or common stock based upon the outcome of certain events such as a change of control or initial public offering. These shares had a put option that gave the holder the right to cash settlement under certain circumstances outside the control of Simmons and were marked to market based upon a quarterly valuation of the common stock of Simmons performed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc. The changes in the market value of the liability were recorded as variable stock compensation expense. The valuation of the shares was based upon our intrinsic value, which was estimated based upon our historical and forecasted operating results, market conditions and historical comparable transactions. The deferred compensation plan was terminated on June 3, 2004. We recorded variable stock compensation expense of $0, $68.4 million, $15.6 million and $14.8 million for the period from December 20, 2003 through December 27, 2003, the period from December 29, 2002 to December 19, 2003, and for fiscal years 2002 and 2001, respectively. We had a liability of $0 and $26.8 million for variable stock compensation expense as of December 27, 2003 and December 28, 2002, respectively. Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the effective date of enactment. A valuation allowance is established, when necessary, to reduce deferred tax assets to amounts expected to be realized. At December 27, 2003, we had net operating loss carryforward benefits for federal income tax purposes of $94.1 million. These carryforward benefits included $14.6 million which were generated by Sleep Country and are subject to limitations imposed by the Internal Revenue Code. We must generate approximately $143.0 million of taxable income to realize our deferred tax asset, net of valuation allowances. The net operating loss carryforwards expire on various dates through 2022. Our management must make estimates regarding the future realization of these net operating loss benefits. Realization of the net operating loss carryforward benefits is dependent upon future profitable operations and reversals of existing temporary differences. Although realization is not assured, we believe it is more likely than not that most of the net recorded benefits will be realized through the reduction of future taxable income. However, due to the uncertainty regarding the realization of Sleep Country's net tax benefits as of December 27, 2003, we recorded a valuation allowance of $10.2 million against Sleep Country's net deferred tax assets, which consist of net operating loss carryforwards. Litigation and contingent liabilities. From time to time, we are party to or a target of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters, which are handled and defended in the ordinary course of business. We accrue a liability for these matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. We believe the amounts reserved are adequate for these pending matters; however, results of operations could be negatively affected by significant litigation adverse to us. 17 RESULTS OF OPERATIONS GAAP does not permit combining the results of our Predecessor period (December 29, 2002 through December 19, 2003) with our Successor period (December 20, 2003 through December 27, 2003) in our consolidated financial statements. Accordingly, the consolidated statements of operations included elsewhere in this prospectus do not present results for the twelve months ended December 27, 2003. However, in order to provide investors with useful information and to facilitate understanding of our 2003 results in the context of 2002 and 2001 financial information presented, the following table presents historical financial information for the Predecessor period and the Successor period and on a pro forma basis for the year ended December 27, 2003 as if the Transactions had occurred on December 29, 2002.
PREDECESSOR SUCCESSOR --------------------------------------------- ------------- PERIOD FROM PERIOD FROM PRO FORMA FOR THE YEAR FOR THE YEAR DEC. 29, 2002 DEC. 20, 2003 FOR THE YEAR ENDED ENDED THROUGH THROUGH ENDED DEC. 29, 2001 DEC. 28, 2002 DEC. 19, 2003 DEC. 27, 2003 DEC. 27, 2003 ------------- ------------- ------------- ------------- ------------- Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold..... 57.9% 52.2% 51.4% 87.1% 51.3% ----- ----- ----- ------ ------ Gross profit............ 42.1% 47.8% 48.6% 12.9% 48.7% Selling, general and administrative expenses................ 36.9% 40.1% 46.8% 51.0% 39.2% ESOP expense.............. 0.4% 0.0% 0.0% 0.0% 0.0% Goodwill impairment....... 1.2% 2.9% 0.0% 0.0% 0.0% Amortization of intangibles............. 1.7% 0.2% 0.0% 3.6% 1.7% Transaction expenses...... 0.0% 0.0% 2.8% 0.0% 0.1% Plant closure charges..... 0.0% 0.0% 0.0% 0.0% 0.0% Licensing fees............ (1.4)% (1.3)% (1.3)% (3.2)% (1.3)% ----- ----- ----- ------ ------ Operating income........ 3.3% 5.9% 0.3% (38.5)% 9.0% Interest expense, net..... 6.0% 4.5% 5.7% 53.5% 5.4% ----- ----- ----- ------ ------ Income (loss) before income taxes and minority interest.... (2.7)% 1.4% (5.4)% (92.0)% 3.6% Income taxes (benefit).... (1.1)% 1.7% (1.1)% (9.5)% 1.4% ----- ----- ----- ------ ------ Income (loss) before minority interest.... (1.6)% (0.3)% (4.3)% (82.5)% 2.2% Minority interest in loss.................... 0.1% 0.2% 0.0% 0.0% 0.0% ----- ----- ----- ------ ------ Net income (loss)......... (1.5)% (0.1)% (4.3)% (82.5)% 2.2% ===== ===== ===== ====== ======
The pro forma information for the year ended December 27, 2003 includes the following adjustments to operating results to reflect the Transactions as though it had occurred on December 29, 2002: - adjustment to cost of products sold of $(3.7) million, or 0.5% of net sales, to (i) reduce depreciation expense by $(2.9) million as a result of the extension of the remaining average useful lives, partially offset by the increases in the bases of property, plant and equipment; (ii) reduce by $(1.7) million inventory recorded at fair market value as a result of the Acquisition and sold during the eight day period ended December 27, 2003; and (iii) increase amortization of favorable leases by $0.9 million due to the step-up to fair market value of leases; - adjustment to selling, general and administrative expense of $(61.1) million, or 7.6% of net sales, to (i) reduce depreciation expense by $(3.2) million as a result of the extension of the remaining average useful lives, partially offset by the increases in the bases of property, plant and equipment; (ii) reduce management fees by $(1.4) million to reflect the change in our equity-sponsor management agreement resulting from the Acquisition; (iii) reduce variable stock compensation by $(68.4) million to reflect the elimination of our stock option plans and deferred compensation plan; and (iv) a $11.4 million increase in the variable stock compensation expense resulting from the estimated increase in the value of the deemed A common stock held in the deferred compensation plan of Simmons Company; - adjustment to amortization of intangibles of $4.4 million, or 0.5% of net sales, to reflect the additional amortization as a result of increases to the bases of our intangible assets; - adjustment to interest expense, net of $(6.5) million, or 0.8% of net sales, to reflect the additional interest expense associated with the new debt, net of the interest expense associated with the old debt retired and the elimination of one-time financing charges resulting from the Transactions; and - adjustment to income tax expense of $20.8 million based upon our pro forma effective tax rate of 29% which resulted from the elimination of non-deductible expenses associated with the Transactions. These pro forma financial adjustments do not purport to represent what our results of operations or financial condition would actually have been had the Transactions occurred on December 29, 2002 or to project our results of operations or financial condition for any future period or date. PRO FORMA YEAR ENDED DECEMBER 27, 2003 COMPARED TO YEAR ENDED DECEMBER 28, 2002 The following pro forma data for the year ended December 27, 2003 ("pro forma year ended December 27, 2003") are based on the historical financial statements for the Predecessor period of 2003 and Successor period of 2003, presented on a pro forma basis giving effect to the Acquisition as if it had occurred on December 29, 2002 as described above under "Results of Operations." For the Predecessor period of 2003, our net sales were $797.6 million and cost of products sold was $410.1 million. Our selling, general and administrative expenses were $373.0 million. Amortization of intangibles was $0.3 million. Transaction expenses were $22.4 million. Our licensing fees were $10.4 million. Interest expense, net was $45.1 million and the income tax benefit was $8.8 million. For the Successor period of 2003, our net sales were $8.7 million and cost of products sold was $7.6 million. Our selling, general and administrative expenses were $4.4 million. Amortization of intangibles was $0.3 million. Our licensing fees were $0.3 million. Interest expense, net was $4.7 million and the income tax benefit was $0.8 million. Net sales. Net sales for the pro forma year ended December 27, 2003 increased $97.7 million, or 13.8%, to $806.3 million from $708.6 million for the year ended December 28, 2002. Wholesale bedding segment sales increased $82.1 million, or 12.5%, to $741.0 million for the pro forma year ended December 27, 2003 from $659.0 million for fiscal year 2002. For the pro forma year ended December 27, 2003 and fiscal year 2002, our wholesale bedding net sales reflect a reduction of $49.5 million and $52.4 million, respectively, for cash consideration paid to our customers for certain promotional programs and volume rebates in accordance with EITF 01-9. The wholesale bedding segment sales increase was primarily due to an increase in both unit shipments and AUSP of 5.6% compared to 2002. Our AUSP benefited from a shift in sales mix toward our higher priced Beautyrest(R) and BackCare(R) products. Unit volume growth resulted from additional floor placements at new and existing customers and an improved retail sales environment in the second half year. Our pro forma year ended December 27, 2003 wholesale bedding sales, exclusive of EITF 01-9 sales reductions, which is the methodology used by ISPA in calculating industry sales, were up 11.4% over the prior year. In comparison, ISPA reported that for 2003 total U.S. bedding manufacturers' sales were up 5.8% over the prior year, comprised of an increase in unit shipments and AUSP of 1.8% and 3.9%, respectively. According to Furniture/Today, our 2003 industry market share is 15.7%. Our retail segment sales for the pro forma year ended December 27, 2003 increased $26.1 million, or 36.4%, to $97.9 million from $71.8 million for fiscal year 2002. On a comparable store basis, sales for our retail stores increased 14.9% for the pro forma year ended December 27, 2003 versus 2002. The retail segment sales increase was due principally to (i) the acquisition of 26 retail stores in Southern California from Mattress Discounters Corporation ("Mattress Discounters") in December 2002; (ii) an increase in advertising expenditures which led to higher sales; and (iii) an improving retail sales environment. 18 Cost of Products Sold. Cost of products sold, as a percentage of net sales, for the pro forma year ended December 27, 2003 decreased 0.9 percentage points to 51.3% from 52.2% in fiscal year 2002, resulting in a gross margin increase to 48.7% for the pro forma year ended December 27, 2003 from 47.8% for 2002. Our wholesale segment gross margin increased 0.4 percentage points to 46.4% for the pro forma year ended December 27, 2003 from 46.0% for 2002. Our gross margin increased due to a reduction in depreciation expense of $1.9 million, or 0.3% of wholesale segment net sales, due to the remaining useful lives of our property, plant and equipment being extended from an average of three years to seven years as a result of the valuation of the property, plant and equipment in connection with the Acquisition. Additionally, our wholesale segment gross margin increased 1.3 percentage points due to better absorption of our fixed manufacturing costs as a result of our unit volume growth. Offsetting these improvements were cost increases of (i) 1.0 percentage point due to supplier price increases for certain raw material components without a corresponding price increase in our Beautyrest(R) product line in 2003; and (ii) 0.3 percentage points due to higher labor costs resulting from increased production demands resulting from our unit volume growth. Our retail segment gross margin decreased 0.7 percentage points to 50.3% for the pro forma year ended December 27, 2003 from 51.0% for 2002. The decrease was due to the discounting of inventory acquired from Mattress Discounters in December 2003 and the discounting of inventory in late 2003 that was being replaced with vendors' new product lines. Selling, General and Administrative Expenses. For the pro forma year ended December 27, 2003, selling, general and administrative expenses, as a percentage of net sales, decreased 0.9 percentage points to 39.2% from 40.1% in fiscal year 2002. Our wholesale segment selling, general and administrative expenses increased 0.2 percentage points to 34.1% of wholesale segment net sales for the pro forma year ended December 27, 2003 from 34.3% for fiscal year 2002. Variable stock compensation expense decreased $4.1 million due to the termination of the Predecessor stock option plans. Our pro forma year ended December 27, 2003 include the reduction of depreciation expense by $2.9 million, or 0.4% of wholesale segment net sales, due to the remaining useful lives of our property, plant and equipment being extended from an average of three years to seven years as a result of the valuation of the property, plant and equipment in connection with the Acquisition. Additionally, our selling, general and administrative expenses for the pro forma year ended December 27, 2003 reflect the $1.4 million, or 0.2% of wholesale segment net sales, reduction in management fees due to the cancellation of the Fenway management agreement and the entering into the new THL Managers V, LLC management agreement in connection with the Acquisition. Offsetting these improvements in our selling, general and administrative expenses, our promotional expenditures increased $20.5 million, or 1.6 percentage points, due to (i) more expenditures meeting the criteria of a selling expense in accordance with EITF 01-9 because of our focus on increasing customer compliance with our co-op advertising guidelines; and (ii) a shift in our sales mix toward customers and products that receive more advertising and selling support subsidies. Our retail segment selling, general and administrative expenses decreased 8.8 percentage points to 47.6% of retail segment net sales for the pro forma year ended December 27, 2003 from 56.4% for fiscal year 2002. This decrease was attributable to our increase in retail sales resulting in greater leverage of our fixed retail selling, general and administrative expenses. Amortization of Intangibles. Amortization of intangibles decreased $16.5 million, or 76.9%, to $5.0 million for the pro forma year ended December 27, 2003 from $21.5 million in fiscal year 2002. The pro forma year ended December 27, 2003 amortization is less than fiscal year 2002 due to our retail segment recognizing a $20.3 million non-cash goodwill impairment charge in the fourth quarter of 2002. Interest Expense, Net. Interest expense, net, increased $11.3 million, or 35.3%, to $43.3 million for the pro forma year ended December 27, 2003, from $32.0 million in fiscal year 2002 due to an increase in our average outstanding borrowings for the pro forma year ended December 27, 2003 resulting from the Acquisition. Our interest paid in pro forma 2003 was $53.6 million, a 114.6% increase from $24.9 million paid in 2002, due principally to payments of (i) $10.8 million in tender fees as previously noted; (ii) Junior. Subordinated PIK note interest of $13.7 million; and (iii) $3.5 million in bridge loan commitment fees. Income Taxes. Our combined federal, state and foreign effective income tax expense rate of 32.2% for the pro forma year ended December 27, 2003 differs from the federal statutory rate of 35.0% primarily from a reduction of the prior year valuation allowance on net operating losses utilized as a result of Sleep Country's income for the pro forma year ended December 27, 2003. Our combined federal, state and foreign effective income tax rate of 116.7% for fiscal year 2002 was greater than the federal statutory rate due principally to a 100% valuation allowance for Sleep Country's loss in 2002. Net Income (Loss). For the reasons set forth above, our net income was $28.0 million for the pro forma year ended December 27, 2003 compared to net loss of $0.6 million for the year ended December 28, 2002. 19 YEAR ENDED DECEMBER 28, 2002 COMPARED TO YEAR ENDED DECEMBER 29, 2001 Net Sales. Net sales for the year ended December 28, 2002 increased $53.4 million, or 8.1%, to $708.6 million in 2002 from $655.2 million in 2001. Our sales increase is primarily attributable to an increase in wholesale bedding segment sales, partially offset by a decrease in retail segment sales. Wholesale bedding segment sales increased $57.1 million, or 9.5%, to $659.0 million in fiscal year 2002 from $601.8 million in fiscal year 2001. The wholesale bedding segment sales increase was primarily due to (i) a 10.7% increase in bedding AUSP resulting from a shift in sales mix toward higher priced products which increased sales by $68.5 million in the aggregate; (ii) an increase in customers added over the last year and (iii) the adoption of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products, at the beginning of fiscal year 2002, which resulted in the reclassification of certain payments to customers, such as co-operative advertising expenditures, promotional money expenditures, volume rebates and amortization of supply agreements, from selling, general and administrative expenses and cost of products sold to a reduction of revenue. Payments treated as a sales reduction were $26.6 million less in 2002 than in 2001. Our adoption of a more stringent proof of advertising policy late in 2001 resulted in less co-operative advertising expenditures being classified as a reduction of revenue in fiscal year 2002. The amounts reclassified from selling, general and administrative expenses and cost of products sold totaled $49.7 million and $0.7 million, respectively, in fiscal year 2002 versus $76.3 million and $0.8 million, respectively, in fiscal year 2001. The increase in 2002 net sales was partially offset by a 5.7% decrease in bedding unit sales volume largely due to the loss of high volume, low margin business resulting from customer bankruptcies in the August 2000 to July 2001 period and a general economic slowdown. The aggregate sales decline in 2002 for customers which filed for bankruptcy and ceased business in 2001 totaled approximately $18 million. Wholesale bedding segment sales, exclusive of the aforementioned EITF 01-9 reclassifications, of $709.4 million in 2002 increased $30.5 million, or 4.5%, from $678.9 million in 2001. This methodology for calculating sales is comparable to that used by ISPA in calculating market share. ISPA estimated that 2002 industry sales were up 3.8% over the prior year, comprised of an increase in unit shipments and AUSP of 0.7% and 3.1%, respectively. Retail segment sales decreased $5.6 million, or 7.3%, to $71.8 million in fiscal year 2002 from $77.4 million in fiscal year 2001. On a comparable store basis, sales for our retail stores decreased 8.5% in fiscal year 2002 versus 2001. The retail segment sales decline was due principally to the general economic slowdown and a reduction in advertising expenditures. Cost of Products Sold. As a percentage of net sales, cost of products sold in fiscal year 2002 decreased 5.7 percentage points to 52.2% from 57.9% in fiscal year 2001. Our 2002 gross margin improvement to 47.8% reflects expansion of both wholesale bedding segment and retail segment gross margins. Our 2002 wholesale bedding segment gross margin improvement of 6.4 percentage points to 46.0% reflects (i) the above mentioned lower EITF 01-9 sales reduction in fiscal year 2002 as compared to fiscal year 2001; (ii) the above mentioned 10.7% increase in AUSP; (iii) a 5.5 percentage point decrease in material costs due in part to our "Zero Waste" cost reduction initiative which began in fiscal year 2001 and continued in fiscal year 2002; and (iv) a 0.7 percentage point decrease in labor costs due to management of factory headcount and labor hours due to a reduction in sales volume. The average factory worker headcount for fiscal year 2002 was 6.8% less than fiscal year 2001. Exclusive of the EITF 01-9 reclassifications mentioned above, our wholesale bedding gross margin improved 3.4 percentage points in fiscal year 2002 to 49.8%. Our 2002 retail segment gross margin improvement of 2.3 percentage points to 51.0% resulted principally from a shift in sales mix toward products that have higher margins. 20 Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses for fiscal year 2002 increased 3.2 percentage points to 40.1% from 36.9% in fiscal year 2001. The 2002 increase was attributable to additional wholesale bedding segment selling, general, and administrative expenses, partially offset by a decrease in our retail segment selling, general and administrative expenses. Our wholesale bedding segment selling, general and administrative expenses, as a percentage of net sales, increased 4.2 percentage points to 37.0% in fiscal year 2002. The 2002 increase was principally attributable to the above mentioned adoption of EITF 01-9 resulting in $49.7 million and $76.3 million in fiscal year 2002 and fiscal year 2001, respectively, of costs historically characterized as selling, general and administrative expenses being characterized as a reduction of revenue. In fiscal year 2002, selling, general and administrative expenses, inclusive of the expenditures characterized as a reduction of revenue due to the adoption of EITF 01-9, increased 1.0 percentage points to 39.3% from 38.3% in fiscal year 2001. This increase was primarily attributable to a 0.8 percentage points increase in co-operative advertising expenditures due to a shift in our sales mix toward products that have higher subsidies and selling expenses. Our retail segment selling, general and administrative expenses, as a percentage of net sales, increased 1.7 percentage points to 56.4% in fiscal year 2002 due principally to a decrease in retail sales, partially offset by a reduction in advertising expenses. ESOP Expense. In fiscal year 2001, we allocated the remaining ESOP shares to plan participants. Therefore, beginning with the first quarter of 2002, we no longer incurred an expense associated with the ESOP plan. Amortization of Intangibles. Amortization of intangibles increased $2.2 million to $21.5 million in fiscal year 2002 from $19.3 million in fiscal year 2001. This increase was principally due to our retail segment recognizing a non-cash goodwill impairment charge in the fourth quarter of 2002 of $20.3 million related to our Sleep Country subsidiary. A review of Sleep Country's goodwill for impairment was necessary due to the continued weakness in the retail economy and the failure of Sleep Country to reach the sales and profit levels included in its original impairment test as of January 1, 2002. Exclusive of Sleep Country's goodwill impairment charge, amortization of intangibles decreased in fiscal year 2002 due to (i) our retail segment recognizing a non-cash impairment charge in the fourth quarter of 2001 of $7.9 million to write down the goodwill of our wholly-owned subsidiary Gallery Corp. to market value with no similar impairment charge being required in fiscal year 2002; (ii) the adoption of SFAS No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, at the beginning of our 2002 fiscal year; and (iii) a $1.8 million decrease in amortization of patents due to the expiration of certain patents. As a result of the adoption of SFAS 142 at the beginning of 2002, we discontinued the amortization of goodwill and performed a transitional test of goodwill impairment, which resulted in no impairment charge. Had this accounting pronouncement been adopted at the beginning of 2001, amortization of intangibles, exclusive of impairment charges, would have been reduced by $8.3 million to $3.1 million in 2001. Interest Expense, Net. Interest expense, net decreased $7.5 million, or 18.9%, to $32.0 million in fiscal year 2002 from $39.5 million in 2001 due primarily to (i) decreased average outstanding borrowings; (ii) lower Prime and LIBOR base rates in 2002; and (iii) lower interest rate margins on our then existing senior credit facility obligations. Our interest paid in 2002 was $24.9 million, a 14.7% decrease from $29.2 million paid in 2001. Income Tax Expense. Our effective income tax rate of 116.7% for fiscal year 2002 differed from the federal statutory rate primarily due to the change in the valuation allowance against Sleep Country's net deferred tax asset, state income taxes and non-deductible interest expense. Our effective income tax benefit 21 rate of 43.2% for fiscal year 2001 differed from the federal statutory rate primarily due to the net change in deferred tax valuation allowances, and the benefit of state net operating losses and foreign tax credits, partially offset by the amortization and impairment of goodwill not being tax deductible. Minority Interest in Loss. Minority interest in Sleep Country's loss increased $0.6 million to $1.1 million in fiscal year 2002 from a loss of $0.5 million in fiscal year 2001. Net Loss. For the reasons set forth above, we had net loss of $0.1 million in fiscal year 2002 compared to a net loss of $9.7 million in fiscal year 2001. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of cash to fund liquidity needs are (i) cash provided by operating activities and (ii) borrowings available under our senior credit facility. Our primary use of funds consists of payments of principal and interest for our debt, capital expenditures, acquisitions, and funding for working capital increases. Barring any unexpected significant external or internal developments, we expect current cash balances on hand, cash provided by operating activities and borrowings available under our senior credit facility to be sufficient to meet our short-term and long-term liquidity needs. Our senior credit facility is comprised of a $405.0 million term loan facility, the "Tranche B Term Loan," which will mature in 2011, and a $75.0 million Revolving Loan Facility (of which approximately $61.2 million was available for borrowings as December 27, 2003 after giving effect to $3.3 million of borrowings and $10.5 million that was reserved for standby letters of credit), which will mature in 2009. We are permitted to incur up to an additional $100.0 million of senior secured debt at the option of participating lenders, so long as no default or event of default under the senior secured credit facility has occurred or would occur after giving effect to that incurrence and certain other conditions are satisfied. The senior credit facility is guaranteed by THL-SC Bedding Company and by all our domestic subsidiaries. Our and the guarantors' obligations are secured by all or substantially all of our and the guarantors' assets, including a pledge of our stock, a pledge of stock of all our domestic subsidiaries and our pledge of 65% of stock of our foreign subsidiaries. We also have a Senior Unsecured Term Loan Facility of $140.0 million, which will mature in June 2012. The senior unsecured term loan facility is guaranteed by THL-SC Bedding Company and all our domestic subsidiaries. The senior credit facility and the senior unsecured term loan bear interest at our choice of the Eurodollar Rate or Base Rate (both as defined), plus the following applicable interest rate margins as follows:
EURODOLLAR BASE RATE RATE ---------- ----- Revolving Loan Facility..................................... 2.50% 1.50% Tranche B Term Loan......................................... 2.75% 1.75% Senior Unsecured Term Loan.................................. 3.75% 2.75%
The weighted average interest rates per annum in effect as of December 27, 2003 for the Revolving Loan Facility, Tranche B Term Loan and Senior Unsecured Term Loan were 3.69%, 3.94% and 4.94%, respectively. Under the Tranche B Term Loan, quarterly amortization payments of approximately $1.0 million are required during the first seven years, with the balance of the facility to be repaid quarterly during the eighth year. There are no scheduled amortization payments prior to the maturity date of the Senior Unsecured Term Loan. Our senior credit facility requires us to meet a minimum interest coverage ratio and a maximum leverage ratio, and includes a maximum capital expenditures limitation. In addition, the senior credit facility contains certain restrictive covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in those agreements. The senior credit facility also contains certain customary events of defaults, subject to cure periods as appropriate. We are required to make prepayments of the loans outstanding under the senior credit facility under certain circumstances, including with 100% of the net cash proceeds of certain asset sales and casualty or condemnation events to the extent such proceeds are not reinvested in Simmons' business within a specified period of time and with 100% of the proceeds of certain types of debt incurred by it. Additionally, depending on our leverage ratio, we may be required to prepay its senior secured loans with up to 50% of its excess cash flow from each fiscal year and with up to 50% of the net cash proceeds of certain equity issuances. We are also required to make prepayments of the loans outstanding under its senior unsecured term loan in the event of a change of control at 101% of the unpaid principal amount thereof. Furthermore, Simmons Bedding may be required to make an offer to repurchase its senior unsecured loans with proceeds of certain asset sales, and any such offer required to be made within the first three years after the closing date of the senior unsecured credit facility must be accompanied by payment of a call premium, calculated on a sliding scale. We are not required to use any proceeds it receives from an equity offering to repay loans outstanding under its senior unsecured term loan facility. Our long-term obligations contain various financial tests and covenants. We were in compliance with those covenants as of the year ended December 27, 2003. The most restrictive covenants relate to ratios of Adjusted EBITDA to interest coverage (interest coverage ratio), total debt to Adjusted EBITDA (total leverage ratio), and maximum capital expenditures all as defined in the senior credit facility. The minimum interest coverage and maximum leverage ratios are computed based on our results for the last twelve months ended. More specifically, the senior credit facility's covenants require: - a minimum interest coverage ratio, with compliance levels ranging from an interest coverage of no less than 2.25:1.00 from March 31, 2004 through December 31, 2004; 2.30:1.00 from March 31, 2005 through December 31, 2005; 2.40:1.00 from March 31, 2006 to December 31, 2006; 2.55:1.00 from March 31, 2007 through December 31, 2007; 2.75:1.00 from March 31, 2008 through December 31, 2008; and 3.0:1.00 as of March 31, 2009 and each fiscal quarter ending thereafter. - a maximum total leverage ratio, with compliance levels ranging from total leverage of no greater than 6.85:1.00 from March 31, 2004 through December 31, 2004; 6.50:1.00 from March 31, 2005 through December 31, 2005; 6.00:1.00 as of March 31, 2006 and June 30, 2006; 5.75:1.00 as of September 30, 2006 and December 31, 2006; 5.00:1.00 from March 31, 2007 through December 31, 2007; 4.50:1.00 from March 31, 2008 through December 31, 2008; and 4.00:1.00 as of March 31, 2009 and each fiscal quarter ending thereafter. - a maximum capital expenditure limitation of $20.0 million per fiscal year, with the ability to rollforward to future years unused amounts from the previous fiscal year, and also subject to adjustments for certain acquisitions and other events. We expect to meet such covenants in 2004. Adjusted EBITDA (as defined in the senior credit facility) differs from the term "EBITDA" as it is commonly used. In addition to adjusting net income to exclude interest expense, income taxes, and depreciation and amortization, adjusted EBITDA (as defined in the senior credit facility) also adjusts net income by excluding items or expenses not typically excluded in the calculation of "EBITDA" such as management fees; ESOP expenses, the aggregate amount of the fees, costs and cash expenses paid by Simmons in connection with the consummation of the Acquisition (including, without limitation, bonus and option payments); other non-cash items reducing Consolidated Net Income (including, without limitation, non-cash purchase accounting adjustments and debt extinguishment costs); the cure amount, if any, received by Simmons in respect of that period; any extraordinary, unusual or non-recurring gains or losses or charges or credits; and any reasonable expenses or charges related to any issuance of securities, investments permitted, permitted acquisitions, recapitalizations, asset sales permitted or indebtedness permitted to be incurred, less other non-cash items increasing consolidated net income, all of the foregoing as determined on a consolidated basis for Simmons in conformity with GAAP. Adjusted EBITDA is presented herein because it is a material component of the covenants contained within the aforementioned credit agreements. Non-compliance with those covenants could result in the requirement to immediately repay all amounts outstanding under those agreements which could have a material adverse effect on our results of operations, financial position and cash flow. While the determination of "unusual and nonrecurring losses" is subject to interpretation and requires judgment, we believe the items listed below are in accordance with the senior credit facility. Adjusted EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Our senior unsecured term loan facility does not contain any financial maintenance covenants, but does contain affirmative covenants similar to those contained in our senior credit facility. Additionally, the senior unsecured 22 term loan contains negative covenants similar to those contained in the senior credit facility, except that certain negative covenants, including limitations on indebtedness, asset sales and restricted junior payments are substantially similar to those contained in the indenture for the 7.875% Senior Subordinated Notes. The use of interest rate risk management instruments is required under the terms of the senior credit facility. We are required to maintain protection against fluctuations in interest rates, and may do so through utilizing Eurodollar Rate loans having twelve-month interest periods or through one or more interest rate agreements, such as collars and swaps. In order to address interest rate risk, we have developed and implemented a policy to utilize extended Eurodollar contracts to minimize the impact of near term Eurodollar rate increases. On January 26, 2004, we elected to set the interest rate at the twelve-month Eurodollar Rate for approximately $325.0 million of the Tranche B Term Loan and the $140.0 million senior unsecured term loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for approximately 84% of our floating rate debt outstanding as of December 27, 2003. Additionally, to further address interest rate risk, we entered into an interest rate cap agreement on February 11, 2004 for a notional amount of $170.0 million which capped the Eurodollar Rate at 5.0% for the period of January 26, 2005 through January 26, 2006. On December 19, 2003, we completed a financing, which consisted of the sale of $200.0 million of 7.875% Senior Subordinated Notes due 2014 (the "Old Notes") pursuant to a private offering. The Old Notes bear interest at the rate of 7.875% per annum, which is payable semi-annually in cash in arrears on January 15 and July 15. The notes mature on January 15, 2014. The Old Notes are subordinated in right of payment to all our existing and future senior indebtedness. We plan to issue 7.875% Senior Subordinated Notes due 2014 (the "Registered Notes") in exchange for all Old Notes, pursuant to an exchange offer whereby holders of the Old Notes will receive Registered Notes which have been registered under the Securities Act of 1933 (the "Securities Act"), as amended, but are otherwise identical to the Old Notes. At any time prior to January 17, 2007, we may redeem up to 40% of the aggregate principal amount of the Registered Notes at a price of 107.875% in connection with an Equity Offering, as defined. With the exception of an Equity Offering, the Registered Notes are redeemable at our option beginning January 15, 2009 at prices decreasing from 103.938% of the principal amount thereof to par on January 15, 2012 and thereafter. We are not required to make mandatory redemption or sinking fund payments with respect to the Registered Notes. The indenture for the Registered Notes requires us and our subsidiaries to comply with certain restrictive covenants, including a restriction on dividends; and limitations on the incurrence of indebtedness, certain payments and distributions, and sales of the our assets and stock. The Registered Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by THL-SC Bedding Company and all of our active domestic subsidiaries. Future principal debt payments are expected to be paid out of cash flows from operations, borrowings on our new revolving credit facility, and future refinancing of our debt. Historically we have not been obligated to pay federal income taxes as a result of net operating loss carryforwards; however, we expect to be obligated to pay federal income taxes beginning in 2005. Our operating activities provided cash of $56.5 million for the year ended December 27, 2003, compared to $75.6 million for the year ended December 28, 2002. The following items principally account 23 for the cash provided from operations for each of the periods: (i) operating income, exclusive of transaction expenses, variable stock compensation and goodwill impairment, of $92.9 million for the year ended December 27, 2003 versus $80.6 million for the comparable prior year period; and (ii) an increase in working capital, exclusive of assets and liabilities held for sale, of $16.6 million versus a decrease of $16.0 million for the comparable prior year period. Capital expenditures totaled $8.8 million for the year ended December 27 2003. We expect to spend an aggregate of approximately $19 million for capital expenditures in fiscal year 2004. We believe that annual capital expenditure limitations in our senior credit facility will not significantly inhibit us from meeting our ongoing capital expenditure needs. We have identified a potential buyer for our Mattress Gallery subsidiary, which is considered an asset held for sale, and anticipate a closing by the end of our second quarter. We do not believe that such sale will have a significant impact on our liquidity. The following table sets forth our contractual obligations as of December 27, 2003 (dollars in thousands):
NEXT 2-3 4-5 AFTER CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS 5 YEARS - ----------------------- ---------- ------- -------- -------- -------- Long-term debt(1).................. $ 770,253 $ 9,512 $ 9,028 $ 8,926 $742,787 Interest payments on long-term debt(2).......................... 375,578 43,255 85,113 84,418 162,792 Capital lease obligations.......... 389 277 112 -- -- Operating leases - wholesale segment.......................... 57,179 14,504 22,447 11,750 8,478 Operating leases - retail segment.......................... 36,367 10,216 15,064 7,423 3,664 Component purchase commitments..... 21,600 12,800 8,800 -- -- ---------- ------- -------- -------- -------- Total contractual obligations.... $1,261,366 $90,564 $140,564 $112,517 $917,721 ========== ======= ======== ======== ======== Other commercial commitments: Standby letters of credit........ $ 10,515 $10,515 $ -- $ -- $ -- ========== ======= ======== ======== ========
- --------------- (1) Includes $5.3 million of 10.25% Series B Senior Subordinated Notes that will be redeemed in April 2004. (2) Anticipated interest payments based on current interest rates and amounts outstanding as of December 27, 2003. In addition, under the terms of the management agreement entered into in connection with the Acquisition, we are required to pay an affiliate of Thomas H. Lee Partners an aggregate fee of no less than $1.5 million a year. Under its terms, the management agreement will be terminated by THL upon the consummation of an equity offering and we will be required to pay THL a termination fee equal to the net present value of the fees payable to THL for a period of seven years from the date of termination. SEASONALITY/OTHER For the past several years, there has not been significant seasonality in our wholesale bedding business. Our retail bedding business, which accounted for $97.9 million, or 12.1%, of net sales for the year ended December 27, 2003, has historically experienced, and we expect will continue to experience, seasonal and quarterly fluctuations in net sales, operating income and Adjusted EBITDA. As is the case with many bedding retailers, our retail business is subject to seasonal influences, characterized by strong sales for the months of May through September, which impacts our second and third quarter results. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The following discussion about our risk-management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. See Item 1 "Business -- Forward-Looking Statements" for additional information. MARKET RISK The principal market risks to which we are exposed that may adversely affect our results of operations and financial position include changes in future commodity prices and interest rates. We seek to minimize or manage these market risks through normal operating and financing activities and through the use of interest rate cap agreements, where practicable. We do not trade or use instruments with the objective of earning financial gains on the interest rate fluctuations, nor do we use instruments where there are not underlying exposures. INTEREST RATE RISK We are exposed to market risk from changes in interest rates. In order to address this risk, the senior credit facility requires us to adopt interest rate protection measures on our variable rate indebtedness such that 50% of our consolidated funded indebtedness is either fixed or protected. We have developed and implemented a policy to utilize extended Eurodollar contracts to minimize the impact of near term Eurodollar rate increases. On January 26, 2004, we elected to set the interest rate at the twelve-month Eurodollar Rate for approximately $325.0 million of the Tranche B Term Loan and the $140.0 million senior unsecured term loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for approximately 86% of our floating rate debt outstanding as of June 26, 2004. Additionally, to further address interest rate risk, we entered into an interest rate cap agreement on February 11, 2004 for a notional amount of $170.0 million, which capped the Eurodollar Rate at 5.0% for the period of January 26, 2005 through January 26, 2006. All other factors remaining unchanged, a hypothetical 10% increase or decrease in interest rates for one year on our variable rate financial instruments would not have a material impact on earnings during 2004, but would result in an additional $2.4 million of interest expense in 2005. COMMODITY PRICE RISK The major raw materials that we purchase for production are wire, spring components, lumber, cotton, insulator pads, innerspring, fabrics and roll goods consisting of foam, fiber, ticking and non-wovens. The price and availability of these raw materials are subject to market conditions affecting supply and demand. In particular, many of our goods can be impacted by fluctuations in petrochemical prices and steel prices. We currently do not have a hedging program in place to manage fluctuations in commodity prices. 25 SIMMONS BEDDING COMPANY AND SUBSIDIARIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Simmons Bedding Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations and comprehensive loss, changes in stockholder's equity and cash flows present fairly, in all material respects, the financial position of Simmons Bedding Company ("Simmons Bedding") at December 27, 2003, and the results of its operations and its cash flows for the period from December 20, 2003 through December 27, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed on page 81 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP Atlanta, Georgia March 19, 2004, except as to Note S, for which the date is August 20, 2004 26 SIMMONS BEDDING COMPANY AND SUBSIDIARIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Simmons Bedding Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and comprehensive loss; changes in stockholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of Simmons Bedding Company ("Simmons Bedding") at December 28, 2002, and the results of its operations and its cash flows for the period from December 29, 2002 through December 19, 2003 and each of the two years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed on page 81 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopersLLP Atlanta, Georgia March 19, 2004, except as to Note S, for which the date is August 20, 2004 27 SIMMONS BEDDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR | PREDECESSOR ------------ | ------------------------------------------ PERIOD FROM | PERIOD FROM DECEMBER 20, | DECEMBER 29, 2003 THROUGH | 2002 THROUGH YEAR ENDED YEAR ENDED DECEMBER 27, | DECEMBER 19, DECEMBER 28, DECEMBER 29, 2003 | 2003 2002 2001 ------------ | ------------ ------------ ------------ | (IN THOUSANDS) | Net sales................................... $ 8,717 | $797,616 $708,595 $655,209 Cost of products sold....................... 7,596 | 410,081 369,617 379,131 ------- | -------- -------- -------- Gross margin........................... 1,121 | 387,535 338,978 276,078 ------- | -------- -------- -------- Operating expenses: | Selling, general and administrative | expenses............................... 4,442 | 373,040 284,164 241,800 ESOP expense.............................. -- | -- -- 2,816 Goodwill impairment....................... -- | -- 20,285 7,882 Amortization of intangible assets......... 311 | 306 1,246 11,414 Licensing fees............................ (276) | (10,361) (9,002) (9,501) Transaction expenses...................... -- | 22,399 -- -- ------- | -------- -------- -------- 4,477 | 385,384 296,693 254,411 ------- | -------- -------- -------- Operating income (loss)................ (3,356) | 2,151 42,285 21,667 Interest expense, net..................... 4,661 | 45,092 32,000 39,450 ------- | -------- -------- -------- Income (loss) before income taxes and | minority interest in loss............ (8,017) | (42,941) 10,285 (17,783) Income tax expense (benefit)................ (827) | (8,845) 12,005 (7,676) ------- | -------- -------- -------- Loss before minority interest in | loss................................. (7,190) | (34,096) (1,720) (10,107) Minority interest in loss................... -- | -- 1,109 470 ------- | -------- -------- -------- Net loss............................... (7,190) | (34,096) (611) (9,637) Other comprehensive income (loss): | Foreign currency translation adjustment... 17 | 207 (19) (61) ------- | -------- -------- -------- Comprehensive loss..................... $(7,173) | $(33,889) $ (630) $ (9,698) ======= | ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 28 SIMMONS BEDDING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 27, DECEMBER 28, 2003 2002 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 3,670 | $ 7,108 Accounts receivable, less allowances for doubtful | receivables, discounts and returns of $4,960 and | $5,286, respectively................................... 65,868 | 67,415 Inventories............................................... 31,355 | 23,472 Deferred income taxes..................................... 973 | 3,141 Other current assets...................................... 22,616 | 16,881 Assets held for sale...................................... 8,564 | 12,909 ---------- | -------- Total current assets................................... 133,046 | 130,926 ---------- | -------- Property, plant and equipment, net.......................... 53,228 | 41,312 Goodwill, net............................................... 792,230 | 180,779 Intangible assets, net...................................... 159,198 | 7,243 Deferred income taxes....................................... -- | 28,255 Other assets................................................ 45,417 | 22,516 ---------- | -------- $1,183,119 | $411,031 ========== | ======== | LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) | Current liabilities: | Current maturities of long-term debt...................... $ 9,512 | $ 22,125 Accounts payable.......................................... 39,956 | 43,429 Accrued liabilities....................................... 53,948 | 57,278 Liabilities held for sale................................. 2,064 | 5,139 ---------- | -------- Total current liabilities.............................. 105,480 | 127,971 ---------- | -------- Non-current liabilities: | Long-term debt............................................ 760,741 | 268,657 Accrued stock compensation................................ -- | 26,778 Deferred income taxes..................................... 23,719 | -- Other..................................................... 12,902 | 7,743 ---------- | -------- Total liabilities...................................... 902,842 | 431,149 ---------- | -------- Redemption obligation -- ESOP............................... -- | 61,218 Commitments and contingencies (Notes M and Q) | Stockholder's equity (deficit): | Predecessor common stock A, $.01 par value; 40,000,000 | shares authorized; 23,752,324 issued and outstanding... -- | 242 Predecessor common stock B, $.01 par value; 400,000 shares | authorized; 379,119 issued and outstanding............. -- | 4 Successor common stock, $.01 par value; 3,000 shares | authorized; 100 issued and outstanding................. 1 | -- Additional paid-in-capital................................ 287,449 | -- Accumulated deficit....................................... (7,190) | (71,635) Accumulated other comprehensive income (loss)............. 17 | (144) Common stock held in treasury, at cost.................... -- | (9,803) ---------- | -------- Total stockholder's equity (deficit)................... 280,277 | (81,336) ---------- | -------- $1,183,119 | $411,031 ========== | ========
The accompanying notes are an integral part of these consolidated financial statements. 29 SIMMONS BEDDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
CLASS A CLASS B ------------------- ---------------- ADDITIONAL COMMON COMMON COMMON COMMON COMMON COMMON PAID-IN ACCUMULATED SHARES STOCK SHARES STOCK SHARES STOCK CAPITAL DEFICIT ------ ------ ---------- ------ ------- ------ ---------- ----------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PREDECESSOR DECEMBER 30, 2000................. 23,752,324 $242 379,119 $ 4 $ 14,460 $ (41,569) Net loss........................ -- -- -- -- -- (9,637) Other comprehensive income: Change in foreign currency translation................. -- -- -- -- -- -- --------- Comprehensive loss.............. -- -- (9,637) Fair value of SC Holdings, Inc. warrants issued to Affiliate..................... -- -- -- -- 300 -- Excess of ESOP expense at fair market value over cost........ -- -- -- -- 1,743 -- Increase in redemption obligation -- ESOP based on fair market value............. -- -- -- -- (16,503) (2,679) Common stock repurchased........ -- -- -- -- -- -- ---------- ---- ------- ----- --------- --------- DECEMBER 29, 2001................. 23,752,324 242 379,119 4 -- (53,885) Net loss........................ -- -- -- -- -- (611) Other comprehensive loss: Change in foreign currency translation................. -- -- -- -- -- -- --------- Comprehensive loss.............. -- -- -- -- -- (611) Increase in redemption obligation -- ESOP based on fair market value............. -- -- -- -- -- (17,139) Common stock repurchased........ -- -- -- -- -- -- ---------- ---- ------- ----- --------- --------- DECEMBER 28, 2002................. 23,752,324 242 379,119 4 -- (71,635) Net loss........................ -- -- -- -- -- (34,096) Other comprehensive income: Change in foreign currency translation................. -- -- -- -- -- -- --------- Comprehensive income (loss)..... -- -- -- -- -- (34,096) Contribution of debt to an affiliate of SC Holdings, Inc. -- -- -- -- 7,916 -- Acquisition of SC Holdings, Inc. minority interest............. -- -- -- -- (25) -- Increase in redemption obligation -- ESOP based on fair market value............. -- -- -- -- (7,891) (26,772) Common stock repurchased........ -- -- -- -- -- -- ---------- ---- ------- ----- --------- --------- DECEMBER 19, 2003................. 23,752,324 $242 379,119 $ 4 $ -- $(132,503) === ===== ========== ==== ======= ===== ========= ========= - ----------------------------------------------------------------------------------------------------------------------- SUCCESSOR DECEMBER 20, 2003 (reflects the new basis of 100 common shares in connection with the Acquisition).................... 100 $ 1 $ 387,837 $ -- Deemed dividend to reflect carryover basis............... -- -- (100,388) -- Net loss........................ -- -- -- (7,190) Other comprehensive income: Change in foreign currency translation................. -- -- -- -- --------- Comprehensive income (loss)..... -- -- -- (7,190) --- ----- --------- --------- DECEMBER 27, 2003................. 100 $ 1 $ 287,449 $ (7,190) === ===== ========= =========
30
ACCUMULATED COMMON OTHER STOCK TOTAL COMPREHENSIVE HELD IN STOCKHOLDERS' LOSS TREASURY EQUITY (DEFICIT) ------------- -------- ---------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PREDECESSOR DECEMBER 30, 2000................. $ (64) $ (6,640) $ (33,567) Net loss........................ -- -- (9,637) Other comprehensive income: Change in foreign currency translation................. (61) -- (61) ----- -------- --------- Comprehensive loss.............. (61) -- (9,698) Fair value of SC Holdings, Inc. warrants issued to Affiliate..................... -- -- 300 Excess of ESOP expense at fair market value over cost........ -- -- 1,743 Increase in redemption obligation -- ESOP based on fair market value............. -- -- (19,182) Common stock repurchased........ -- (917) (917) ----- -------- --------- DECEMBER 29, 2001................. (125) (7,557) (61,321) Net loss........................ -- -- (611) Other comprehensive loss: Change in foreign currency translation................. (19) -- (19) ----- -------- --------- Comprehensive loss.............. (19) -- (630) Increase in redemption obligation -- ESOP based on fair market value............. -- -- (17,139) Common stock repurchased........ -- (2,246) (2,246) ----- -------- --------- DECEMBER 28, 2002................. (144) (9,803) (81,336) Net loss........................ -- -- (34,096) Other comprehensive income: Change in foreign currency translation................. 207 -- 207 ----- -------- --------- Comprehensive income (loss)..... 207 -- (33,889) Contribution of debt to an affiliate of SC Holdings, Inc. -- -- 7,916 Acquisition of SC Holdings, Inc. minority interest............. -- -- (25) Increase in redemption obligation -- ESOP based on fair market value............. -- -- (34,663) Common stock repurchased........ -- (7,383) (7,383) ----- -------- --------- DECEMBER 19, 2003................. $ 63 $(17,186) $(149,380) ===== ======== ========= - ------------------------------------------------------------------------------------------------ SUCCESSOR DECEMBER 20, 2003 (reflects the new basis of 100 common shares in connection with the Acquisition).................... $ -- $ 387,838 Deemed dividend to reflect carryover basis............... -- (100,388) Net loss........................ -- (7,190) Other comprehensive income: Change in foreign currency translation................. 17 17 ----- --------- Comprehensive income (loss)..... 17 (7,173) ----- --------- DECEMBER 27, 2003................. $ 17 $ 280,277 ===== =========
The accompanying notes are an integral part of these consolidated financial statements. 31 SIMMONS BEDDING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR PREDECESSOR ------------ ------------------------------------------ PERIOD FROM PERIOD FROM DECEMBER 20, DECEMBER 29, 2003 THROUGH 2002 THROUGH YEAR ENDED YEAR ENDED DECEMBER 27, DECEMBER 19, DECEMBER 28, DECEMBER 29, 2003 2003 2002 2001 ------------ ------------ ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net loss.................................................... $ (7,190) $(34,096) $ (611) $ (9,637) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................. 656 22,059 19,050 27,829 Variable stock compensation expense....................... -- 68,415 15,561 14,847 Goodwill impairment charge................................ -- -- 20,285 7,882 ESOP expense.............................................. -- -- -- 2,816 Provision for doubtful accounts........................... 42 3,799 3,082 6,006 Provision (benefit) for deferred income taxes............. (827) (9,087) 11,109 (9,228) Non-cash interest expense................................. 62 9,481 3,234 4,366 Gain on settlement of postretirement benefits............. -- -- -- (2,137) Minority interest in loss................................. -- -- (1,109) (470) Other, net................................................ -- (249) (409) 879 Net changes in operating assets and liabilities: Accounts receivable....................................... 1,448 (4,165) (3,110) 8,335 Inventories............................................... 2,310 (4,718) 1,359 1,114 Other current assets...................................... (661) (5,164) (6,731) 1,082 Accounts payable.......................................... 354 (3,750) 10,813 (10,349) Accrued liabilities....................................... 2,136 1,547 14,986 967 Settlement of retiree health care obligation.............. -- -- -- (2,250) Other, net................................................ (1,823) 15,957 (11,904) (6,141) -------- -------- -------- -------- Cash provided by (used in) operating activities............. (3,493) 60,029 75,605 35,911 -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment................ -- (8,791) (7,961) (5,729) Purchase and development of intangible assets............. -- (1,720) (3,932) (2,924) Proceeds from disposals of property, plant and equipment............................................... -- 38 472 444 Payments to the sellers for the Acquisition............... (697,883) -- -- -- Payments to option holders................................ (73,545) -- -- -- Payments of Acquisition costs............................. (44,452) -- -- -- -------- -------- -------- -------- Net cash used in investing activities....................... (815,880) (10,473) (11,421) (8,209) -------- -------- -------- -------- Cash flows from financing activities: Repurchase of SC Holdings, Inc. minority interest and payment of SC Holdings, Inc. debt....................... -- (18,653) -- -- Payments of Predecessor Senior Credit Facility, net....... (51,656) (24,356) (53,061) (28,796) Payments of other long-term borrowings.................... -- (4,936) (5,567) (3,471) Proceeds from long-term debt -- Affiliate, net............ -- -- 1,123 3,756 Repurchase of common stock................................ -- (7,383) (2,246) (917) Payments of Predecessor debt at Acquisition............... (171,599) -- -- -- Proceeds of Successor debt................................ 748,275 -- -- -- Proceeds from issuance of Successor common stock.......... 327,553 -- -- -- Payments of financing costs............................... (31,090) -- (570) (714) -------- -------- -------- -------- Net cash received from (used in) financing activities....... 821,483 (55,328) (60,321) (30,142) -------- -------- -------- -------- Net effect of exchange rate changes on cash................. 17 207 (19) (61) Increase (decrease) in cash and cash equivalents............ 2,127 (5,565) 3,844 (2,501) Cash and cash equivalents, beginning of period.............. 1,543 7,108 3,264 5,765 -------- -------- -------- -------- Cash and cash equivalents, end of period.................... $ 3,670 $ 1,543 $ 7,108 $ 3,264 ======== ======== ======== ======== Supplemental cash flow information: Cash paid for interest.................................... $ 4,136 $ 21,345 $ 24,952 $ 29,234 ======== ======== ======== ======== Cash paid for Jr. subordinated PIK note interest.......... $ 13,744 $ -- $ -- $ -- ======== ======== ======== ======== Cash paid for bridge loan commitment fee.................. $ 3,500 $ -- $ -- $ -- ======== ======== ======== ======== Cash paid for senior subordinated notes tender premium.... $ 10,826 $ -- $ -- $ -- ======== ======== ======== ======== Cash paid for income taxes................................ $ -- $ 1,489 $ 426 $ 1,647 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 32 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- THE COMPANY Effective July 14, 2004, the Company's indirect parent, THL Bedding Holding Company, changed its name to Simmons Company and the Company changed its name to Simmons Bedding Company. Simmons Bedding Company ("Simmons" or "the Company") is one of the largest bedding manufacturers in the United States of America. The Company operates in two business segments, (1) wholesale bedding and (2) retail bedding. The wholesale bedding segment consists of (i) the manufacture, sale and distribution of premium branded bedding products; (ii) the licensing of intellectual property to other manufacturers; and (iii) the sale of product returns, off-quality product and excess inventory through retail outlet stores. The retail bedding segment operates specialty sleep stores in California, Oregon and Washington that sell to consumers principally premium-branded bedding products. The Company manufactures mattresses, foundations and sleep accessories through its wholly-owned subsidiaries, The Simmons Manufacturing Co., LLC and Simmons Caribbean Bedding, Inc. Simmons and its subsidiaries sell to a diverse nationwide base of approximately 3,400 retail customers, representing over 11,000 outlets, including furniture stores, specialty sleep shops, department stores and rental stores. Simmons also distributes branded bedding products on a contract sales basis directly to institutional users, such as the hospitality industry and certain agencies of the U.S. government, through the Company's wholly-owned subsidiary, Simmons Contract Sales, LLC. The Company licenses its trademarks, patents and other intellectual property to various domestic and foreign manufacturers principally through its wholly-owned subsidiary, Dreamwell, Ltd. Additionally, the Company operated at December 27, 2003 seventeen retail outlet stores located throughout the United States of America through the Company's wholly-owned subsidiary, World of Sleep Outlets, LLC; 56 retail mattress stores operating as Mattress Gallery located in Southern California through the Company's wholly-owned subsidiary, Gallery Corp. (of which 26 stores were added in December 2002 by assuming the leases and acquiring certain inventory from Mattress Discounters Corporation, which was in bankruptcy, for approximately $1.7 million); and 47 retail mattress stores operating as Mattress Gallery and Sleep Country USA located in Oregon and Washington through the Company's subsidiary, SC Holdings, Inc. ("Sleep Country"). On February 28, 2003, the Company, through an agreement and plan of merger, acquired the stock of Sleep Country from an affiliate of Fenway Partners ("Fenway") for approximately $18.4 million, plus additional contingent consideration based upon future performance. Because the Company and Sleep Country were controlled by affiliates of Fenway at the time of the acquisition, the Company is required to account for the acquisition as a transfer of assets within a group under common control. Under this accounting methodology, the Company and Sleep Country are treated as if they had been combined in a manner similar to the pooling of interests method for accounting and financial reporting purposes for the periods in which both entities were controlled by Fenway (from March 1, 2000). THE ACQUISITION In December 2003, THL Bedding Company, an affiliate of Thomas H. Lee Partners, L.P., acquired the Company for approximately $1.115 billion, including related acquisition costs (the "Acquisition"). Concurrently with the closing of this transaction on December 19, 2003, each of THL Bedding Company and the former Simmons Company merged with and into the Company with the Company continuing as the surviving corporation. The Company, formerly known as Simmons Holdings, Inc., was renamed Simmons Company. Thomas H. Lee Partners, L.P. is a leading private equity firm focused on identifying and acquiring substantial ownership stakes in mid- to large-cap growth companies. The purchase price for the Company was impacted by the following factors: - The Company's leading U.S. market position in the bedding industry, particularly in the premium segment; - The Company's portfolio of brands; - The Company's ability to innovate and introduce new products; - The Company's superior manufacturing platform; - The Company's historical and projected earnings; and - The Company's management team and corporate culture. The financing for the Acquisition (including the refinancing of outstanding debt) was provided by (i) borrowings under a new $480.0 million Senior Secured Credit Facility, consisting of a $405 million term 33 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loan facility and a $75.0 million revolving credit facility, which refinanced the Company's existing senior and subordinated loans, (ii) borrowings under a new $140.0 million senior unsecured term loan facility; (iii) issuance of $200.0 million senior subordinated notes; and (iv) $387.8 million of capital provided by Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL"), affiliates of Fenway and management of the Company. As a result of the Acquisition, THL acquired approximately 75.8% of the voting stock of THL Bedding Holding Company ("THL Holding"), the Company's indirect parent. In connection with the stock purchase and the mergers, Fenway acquired 9.0% of voting stock of THL Holding and the Company's management and directors acquired 15.2% of the voting stock of THL Holding, after giving effect to restricted stock issued to management under THL Holding's equity incentive plan. In connection with the Transactions, certain members of the Company's management deferred $19.8 million of their proceeds from the Acquisition into a deferred compensation plan of THL Holding. The deferred proceeds were deemed invested in Class A common stock of THL Holding ("Deemed Shares"). The Deemed Shares convert into cash or common stock of THL Holding based upon the outcome of certain events such as a change of control or initial public offering, or they will convert into common stock of THL Holding after ten years. The Deemed Shares have a put option that gives the holder the right for cash settlement under certain circumstances outside THL Holding's control. Accordingly, the deferred compensation plan has been recorded as a liability on THL Holding and is marked to market based upon a quarterly valuation of the common stock of THL Holding by Houlihan Lokey Howark & Zukin Financial Advisors, Inc., an independent valuation firm. The changes in the market value of the liability will be recorded as variable stock compensation expense of the Company. THL Holding is unable to repurchase Deemed Shares without receiving dividends from the Company. The Company's New Senior Credit Facility, Senior Unsecured Term Loan Facility, and indenture for the New Notes restrict the payment of dividends by the Company to THL Holding for the purchase of Deemed Shares. The Acquisition was accounted for as a purchase as prescribed by Statement of Financial Accounting Standards No. 141, Business Combinations, in accordance with Emerging Issues Task Force ("EITF") No. 88-16, Basis in Leveraged Buyout Transactions. This guidance requires the continuing residual interest retained by the continuing management investors, as a result of the Transactions, be reflected at its predecessor basis. In accordance with EITF Issue No. 90-12, Allocating Basis to Individual Assets and Liabilities for Transactions within the Scope of Issue No. 88-16, a step-up of assets and liabilities to fair value has been recorded in purchase accounting for the remaining interest in the Company acquired by THL and Fenway. The amount of carryover basis determined has been reflected as a deemed dividend of $100.5 million in the consolidated balance sheet. The purchase price allocation has not been finalized. A tentative allocation has been made using preliminary estimates of the values of the intangibles. Management is reviewing the category and classification of the intangible assets identified as definite and indefinite-lived as a result of the Acquisition. The valuation is expected to be completed in the second quarter of 2004. The Company does not expect the final valuation to have a material impact on previously reported operating results. Following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the date of the Acquisition:
(IN THOUSANDS) - ---------------------- Current assets.............................................. $ 137,296 Property, plant and equipment............................... 54,446 Goodwill.................................................... 792,230 Other assets................................................ 50,385 Intangibles................................................. 159,511 ---------- Total assets acquired....................................... 1,193,868 ---------- Current liabilities......................................... (91,765) Acquisition costs........................................... (24,939) Non-current liabilities..................................... (62,295) ---------- Total liabilities assumed................................... (178,999) ---------- Deemed dividend............................................. 100,388 ---------- Purchase price.............................................. $1,115,257 ==========
There were no pre-acquisition contingencies related to the Acquisition. Since the Acquisition was accounted for as a stock purchase, the respective tax basis of the assets and liabilities were not changed. As a result of the factors discussed above, the Company recognized $792.2 million of goodwill which was assigned to the wholesale and retail segments in the amounts of $773.1 million and $16.7 million, respectively. The following condensed pro forma disclosure for net sales and net income are based on the consolidated financial statements included elsewhere herein, adjusted to give effect to (i) the Acquisition; and (ii) the issuance of new debt (collectively the "Transactions"). These pro forma disclosures assume that the Transactions were consummated as of December 30, 2001 and December 29, 2002 and do not purport to be indicative of the results that would actually have been obtained if the Transactions had occurred on the date indicated or of the results that may be obtained in the future. 34 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED | PREDECESSOR PRO FORMA (IN THOUSANDS): 2003 | 2002 - ------------------------- -------- | ----------- | Net sales............................................. $806,333 | $708,595 Net income (loss)..................................... $ 21,060 | $ (6,562)
For purposes of identification and description, Simmons Bedding Company is referred to as the "Predecessor" for the period prior to the Acquisition, the "Successor" for the period subsequent to the Acquisition, and the "Company" for both periods. For purposes of financial reporting, the period from December 29, 2002 through December 19, 2003 is referred to as "Predecessor '03" and the period from December 20, 2003 through December 27, 2003 is referred to as "Successor '03." The 2003 period including both Predecessor '03 and Successor '03 is referred to as "Combined '03." THE RECAPITALIZATION On July 16, 1998, the Company entered into a recapitalization agreement with its subsidiary, the former Simmons Company, and REM Acquisition, Inc., a transitory Delaware merger corporation ("REM"), sponsored by Fenway. Pursuant to the agreement, on October 29, 1998, REM merged with and into the Company (the "Recapitalization"), with the Company being the surviving corporation. As a result of the Recapitalization, Simmons Holdings, LLC, an entity controlled by funds affiliated with Fenway, acquired 75.1% of the outstanding voting shares of the Company, and management, the ESOP and Investcorp retained approximately 5.9%, 13.7% and 5.3%, respectively, of the outstanding shares of the Company. The Company accounted for the Recapitalization as a leveraged recapitalization, whereby the historical bases of the assets and liabilities of the Company were maintained through December 19, 2003. NOTE B -- PRINCIPAL ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 35 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES AND RECLASSIFICATIONS The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). Such financial statements include estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the amounts of revenues and expenses. Actual results could differ from those estimates. Certain amounts in the 2002 and 2001 financial statements and related footnotes have been reclassified to conform with the current presentation. FISCAL YEAR The Company operates on a 52/53 week fiscal year ending on the last Saturday in December. US GAAP does not permit the combining of Successor '03 and Predecessor '03. The Successor '03 is eight days and the Predecessor '03 is 11 months and 19 days. Fiscal years 2002 and 2001 comprised 52 weeks. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The cost of inventories includes raw materials, direct labor and manufacturing overhead costs. The Company provides inventory reserves for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. SUPPLY AGREEMENTS The Company's wholesale segment from time to time enters into long-term supply agreements with its customers. Any initial cash outlay by the Company is capitalized and amortized as a reduction to revenue over the life of the contract and is ratably recoverable upon contract termination. Such capitalized amounts are included in other assets in the Company's consolidated balance sheets. Amortization expense related to these contracts was $0.2 million, $8.4 million, $4.6 million and $4.2 million in Successor '03, Predecessor '03, 2002 and 2001, respectively. PROPERTY, PLANT AND EQUIPMENT The Acquisition resulted in a new basis of the value of the Company's property, plant and equipment. Accordingly, property, plant and equipment were adjusted to their estimated fair value and estimated useful lives were adjusted. Depreciation expense is determined principally using the straight-line method over the estimated useful lives for financial reporting and accelerated methods for income tax purposes. Expenditures that substantially increase asset values or extend useful lives are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Useful lives are generally as follows: Buildings and improvements.................................. 22 - 45 years Leasehold improvements...................................... 2 - 12 years Machinery and equipment..................................... 2 - 15 years Computers and software...................................... 2 - 7 years
36 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTANGIBLE ASSETS Definite-lived intangible assets are amortized using the straight-line method, which the Company believes is most appropriate, over their estimated period of benefit, ranging from one to eleven years. Indefinite-lived intangible assets, such as goodwill, brands, trademarks and other indefinite-lived intangible assets that may be recognized upon completion of the Company's valuation of its intangible assets, are not amortized. The Company has tentatively identified and valued certain definite and indefinite-lived intangible assets based upon a preliminary valuation. The Company is in the process of finalizing the valuation. The final valuation could result in certain intangible assets preliminarily identified as indefinite-lived being classified as definite-lived and a different allocation of the purchase price within the identifiable intangible asset classification. The Company does not expect the final valuation to have a material impact on previously reported results. The Company evaluates indefinite-lived intangible assets, such as trademarks and brand names, for impairment at least annually or whenever events or circumstances indicate their carrying value might be impaired. In performing this assessment, management considers operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. The carrying value of an indefinite-lived intangible asset is considered impaired when its carrying value exceeds its fair market value. In such an event, an impairment loss is recognized equal to the amount of that excess. Fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. The determination of fair value involves numerous assumptions by management, including expectations on possible variations in the amounts or timing of cash flow, the risk-free interest rate, and other factors considered in management's projected future operating results. The Company reviews the useful lives of indefinite-lived intangible assets every reporting period. The Company tests goodwill for impairment on an annual basis by comparing the fair value of the Company's reporting units to their carrying values. Fair value is determined by the assessment of future discounted cash flows. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews all of its long-lived assets for impairment whenever events or circumstances indicate their carrying value may not be recoverable. Management reviews whether there has been an impairment by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of the asset. The factors considered by management in this assessment include operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. If an impairment is deemed to exist, management would record an impairment charge equal to the excess of the carrying value over the fair value of the impaired assets. As discussed in Note H to the consolidated financial statements, the Company recognized impairment charges related to its retail segment in 2002 and 2001 of $20.3 million and $7.9 million, respectively. DEBT ISSUANCE COSTS The Company capitalizes costs associated with the issuance of debt and amortizes the cost as additional interest expense over the lives of the debt using the effective interest rate method. Amortization expense of $0.1 million, $9.5 million (of which $7.1 million represented the remaining unamortized debt issuance costs related to debt repaid in connection with the Acquisition), $4.3 million and $2.5 million for Successor '03, Predecessor '03, 2002 and 2001, respectively, is included as a non-cash component of interest expense in the accompanying Consolidated Statements of Operations. Due to the adoption of SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"), $0.5 million of extraordinary expense, net of tax, related to accelerated debt payments in 2001 has been reclassified to interest expense ($0.9 million) with the related tax benefit ($0.4 million) reclassified to income tax benefit in the accompanying Consolidated Statements of Operations. REVENUE RECOGNITION The Company's wholesale segment recognizes revenue, net of estimated returns, when title and risk of ownership passes, which is generally upon delivery of shipments. An insignificant portion of the Company's wholesale segment revenue is derived from inventory held on consignment with certain customers. The Company recognizes revenue on inventory held on consignment when the title and risk of ownership have transferred to the customer, which is when the inventory held on consignment is used. The Company accrues for estimated costs of warranties, co-op advertising costs, promotional monies and cash discounts at the time the corresponding sales are recognized. Sales are presented net of cash discounts, rebates, returns and certain consideration provided to customers such as co-operative advertising costs, promotional monies and amortization of supply agreements. The Company uses historical trend information regarding returns to reduce sales for estimated future returns. The Company provides an allowance for bad debts for estimated uncollectible accounts receivable, which is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. 37 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's retail segment recognizes revenue when title and risk of ownership passes, which is generally upon delivery of the products to customers. The Company's retail segment allows customers to exchange products within 60 days of purchase. Historically, those returns have not been material and, accordingly, no reserves for retail sales returns have been included in the accompanying Consolidated Statements of Operations. PRODUCT DELIVERY COSTS Product delivery costs for our wholesale segment are billed to the Company's customers and are included as a component of net sales. The Company's wholesale segment incurred $0.4 million, $35.9 million, $31.4 million, and $30.9 million in shipping and handling costs associated with the delivery of finished mattress products to its customers in Successor '03, Predecessor '03, 2002 and 2001, respectively. These costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. EMPLOYEE STOCK OWNERSHIP PLAN Prior to 2002, the Company recognized ESOP expense as an amount equal to the fair market value of the shares committed to be released to participants' accounts. As of December 29, 2001, all the plan shares had been committed to be released to participants' accounts. The unearned compensation balance was previously amortized using the shares allocated method (i.e., at cost). The difference in the fair market value and the cost of the shares, if any, was recorded as an adjustment to additional paid-in capital. Because of the Company's obligation to repurchase shares from the ESOP under certain circumstances for their then current fair value, the Company has classified the redemption value of such shares in the accompanying consolidated balance sheets as redemption obligation -- ESOP as of December 28, 2002, respectively. In connection with the Acquisition, the Company repurchased 3,382,739.58 shares of the Company held by the ESOP for $95.9 million which satisfied the redemption obligation. STOCK OPTION PLANS The Company applied the intrinsic value-based method of accounting prescribed by Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB No. 25), to account for its previous employee stock option plans. Under this method, compensation expense was recorded over the service period based upon the intrinsic value of the options as they were earned by the employees. SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company adopted the disclosure-only provisions and continued to apply the intrinsic value-based method of accounting as described above. The accounting for awards of stock-based compensation where an employee can compel the entity to settle the award by transferring cash or other assets to employees rather than by issuing equity instruments is substantially the same under SFAS 123 and APB 25. Accordingly, SFAS 123 pro-forma disclosures are not presented. FOREIGN CURRENCY Subsidiaries located outside the United States of America generally use the local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to accumulated other comprehensive income (loss), a separate component of stockholder's deficit. 38 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRODUCT DEVELOPMENT COSTS Costs associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to approximately $0.1 million, $3.0 million, $2.4 million and $1.8 million for Successor '03, Predecessor '03, 2002 and 2001, respectively. REBATES The Company's wholesale segment provides volume rebates to certain customers for the achievement of various purchase volume levels. The Company recognizes a liability for the rebate at the point of revenue recognition for the underlying revenue transactions that result in progress by the customer towards earning the rebate. Measurement of the liability is based on the estimated number of customers that will ultimately earn and claim the rebates or refunds under the offer. Rebates were $0.1 million, $15.7 million, $10.4 million and $10.6 million in Successor '03, Predecessor '03, 2002 and 2001, respectively, and are included as a reduction of sales in the accompanying Consolidated Statements of Operations. ADVERTISING COSTS The Company's wholesale segment records the cost of advertising, including co-op advertising, as an expense or a reduction of net sales when incurred or no later than when the advertisement appears or the event is run. Advertising costs were $0.6 million, $98.5 million, $85.2 million and $72.5 million for Successor '03, Predecessor '03, 2002 and 2001, respectively, and are included as either a reduction of net sales or a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. The Company's retail segment records advertising costs, including promotional materials, and media production costs to expense as incurred. Costs for placement of advertisements and airtime are charged to expense once broadcast. Retail segment advertising expense, net of co-operative advertising receipts, aggregated $0.1 million, $3.1 million, $3.6 million and $4.4 million for Successor '03, Predecessor '03, 2002 and 2001, respectively. Co-operative advertising receipts are recognized when vendor product is purchased. Co-operative advertising receipts were not material, $2.9 million, $2.6 million and $1.9 million for Successor '03, Predecessor '03, 2002 and 2001, respectively. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce deferred tax assets to amounts expected to be realized. WARRANTIES The Company's wholesale segment warranty policy provides a 10-year non-prorated warranty service period on all first quality products, except for certain products for the hospitality industry which have varying non-prorated warranty periods generally ranging from five to ten years. The Company's policy is to accrue the estimated cost of warranty coverage at the time the sale is recorded. 39 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents a reconciliation of the Company's warranty liability at December 27, 2003 for Successor '03, Predecessor '03, 2002 and 2001 (amounts in thousands):
DECEMBER 28, DECEMBER 29, SUCCESSOR '03 PREDECESSOR '03 2002 2001 ------------- --------------- ------------ ------------ Balance at beginning of period.............................. $ 3,680 $ 3,434 $ 3,162 $ 2,651 Additional warranties issued................................ 16 3,850 3,009 4,461 Warranty settlements........................................ (27) (3,580) (2,984) (4,653) Revisions of estimate....................................... 134 (24) 247 703 ------- ------- ------- ------- Balance at end of period.................................... $ 3,803 $ 3,680 $ 3,434 $ 3,162 ======= ======= ======= =======
ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations are expensed or capitalized when it is probable that a liability exists and the amount or range of amounts can be reasonably estimated. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that the costs will be incurred and can be reasonably estimated. DERIVATIVE INSTRUMENTS Effective January 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). This statement, as amended, standardized 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. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of the hedging relationship. The cumulative effect upon prior years of adopting SFAS 133 was not material. SIGNIFICANT CONCENTRATIONS OF RISK Cash and cash equivalents are maintained with several major financial institutions in the U.S., Puerto Rico and Canada. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand. Additionally, the Company monitors the financial condition of such institutions and considers the risk of loss remote. The Company's wholesale bedding segment manufactures and markets sleep products, including mattresses and foundations to retail establishments primarily in the U.S. The wholesale bedding segment performs periodic credit evaluations of its customers' financial condition and generally does not, in most cases, require collateral. Shipments to the wholesale bedding segment's five largest customers aggregated approximately 19%, 17% and 17% of total wholesale shipments for each of 2003, 2002 and 2001, respectively, and no single customer accounted for over 10% of the wholesale bedding segment's net sales. Purchases of raw materials from one vendor represented approximately 21%, 21% and 20% of the wholesale bedding segment cost of products sold for 2003, 2002 and 2001, respectively. The wholesale bedding segment also primarily utilizes two third-party logistics providers which, in the aggregate, accounted for 74%, 66% and 63% of outbound wholesale shipments in 2003, 2002 and 2001, respectively. ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), principally to provide guidance on the identification of entities for which control is 40 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 was effective for the Company's first quarter 2003 with transitional disclosure required with these financial statements. The Company does not have any variable interest entities. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 113 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The amendments set forth by SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The guidance is to be applied prospectively. The adoption of this Statement did not have a significant impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new guidance requires that those instruments be classified as liabilities in statements of financial position. The adoption of this Statement did not have a significant impact on the Company's consolidated financial statements. In December 2003, The FASB issued SFAS No. 132 (Revised), Employers' Disclosure about Pensions and Other Postretirement Benefits ("SFAS 132R"). A revision of the pronouncement originally issued in 1998, SFAS 132R expands employers' disclosure requirements for pension and postretirement benefits to enhance information about plan assets, obligations, benefit payments, contributions, and net benefit cost. SFAS 132R does not change the accounting requirements for pensions and other postretirement benefits. This statement is effective for fiscal years ending after December 15, 2003, with interim-period disclosure requirements effective for interim periods beginning after December 15, 2003. The adoption of this Statement did not have a significant impact on the Company's consolidated financial statements. NOTE C -- SEGMENT INFORMATION Operating segments are generally organized internally by whether the products are sold to a reseller or to an end consumer. The Company operates in two business segments, (1) wholesale bedding and (2) retail bedding. The wholesale bedding segment consists of (i) the manufacture, sale and distribution of premium branded bedding products; (ii) the licensing of intellectual property to companies that manufacture and sell products which complement the bedding products manufactured by the Company; and (iii) the sale of product returns, off-quality product and excess inventory through retail outlet stores. The retail bedding segment operates specialty sleep stores in California, Oregon and Washington, that sell to consumers principally premium branded bedding products. The Company is currently pursuing the sale of one of its retail bedding subsidiaries, Mattress Gallery, and has classified the assets and liabilities for Mattress Gallery as held for sale in the accompanying balance sheets. The Company has not reflected the results of operations for Mattress Gallery as discontinued operations since the Company believes it will have an ongoing interest in the cash flows of the operations through a long-term supply agreement (see Note D to the consolidated financial statements for further explanation). The Company evaluates performance and allocates resources based on net sales and Adjusted EBITDA. Adjusted EBITDA differs from the term "EBITDA" as it is commonly used. In addition to adjusting net income to exclude interest expense, income taxes, depreciation and amortization, Adjusted EBITDA also adjusts net income by excluding items or expenses not typically excluded in the calculation of "EBITDA" such as management fees, variable stock compensation expense, and other unusual or non-recurring items as defined by the Company's new Senior Credit Facility. Management believes the aforementioned approach is the most informative representation of how management evaluates performance. Adjusted EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. The following table summarizes segment information as of and for the Successor '03, Predecessor '03, December 28, 2002 and December 29, 2001: 41 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUCCESSOR 2003 ------------------------------------------------ WHOLESALE BEDDING RETAIL ELIMINATIONS TOTALS ---------- ------- ------------ ---------- (IN THOUSANDS) Net sales to external customers........ $ 6,509 $ 2,208 $ -- $ 8,717 Intersegment net sales................. 346 -- (346) -- Adjusted EBITDA........................ (826) (85) 307 (604) Segment assets......................... 1,142,939 38,638 1,542 1,183,119 Depreciation and amortization expense.............................. 638 18 -- 656 Expenditures for long-lived assets..... -- -- -- -- Reconciliation of EBITDA and Adjusted EBITDA to net income (loss): Net income (loss).................... $ (6,824) $ (673) $ 307 $ (7,190) Depreciation and amortization........ 638 18 -- 656 Income taxes......................... (827) -- -- (827) Interest expense, net................ 4,657 4 -- 4,661 Interest income...................... 4 -- -- 4 ---------- ------- ------ ---------- EBITDA............................... (2,352) (651) 307 (2,696) Transaction related expenditures, including cost of products sold.... 1,161 566 -- 1,727 Plant opening, closing charges....... 286 -- -- 286 Management fees...................... 49 -- -- 49 Other expense........................ 30 -- -- 30 ---------- ------- ------ ---------- Adjusted EBITDA...................... $ (826) $ (85) $ 307 $ (604) ========== ======= ====== ==========
PREDECESSOR 2003 ------------------------------------------------ WHOLESALE BEDDING RETAIL ELIMINATIONS TOTALS ---------- ------- ------------ ---------- (IN THOUSANDS) Net sales to external customers........ $ 701,935 $95,681 $ -- $ 797,616 Intersegment net sales................. 32,228 -- (32,228) -- Adjusted EBITDA........................ 120,583 5,135 (818) 124,900 Depreciation and amortization expense.............................. 21,464 595 -- 22,059 Expenditures for long-lived assets..... 7,130 1,661 -- 8,791 Reconciliation of EBITDA and Adjusted EBITDA to net income (loss): Net income (loss).................... $ (35,169) $ 1,891 $ (818) $ (34,096) Depreciation and amortization........ 21,464 595 -- 22,059 Income taxes......................... (8,845) -- -- (8,845) Interest expense, net................ 44,408 684 -- 45,092 Interest income...................... 197 -- -- 197 ---------- ------- ------ ---------- EBITDA............................... 22,055 3,170 (818) 24,407 Variable stock compensation expense.. 68,415 -- -- 68,415 Transaction related expenditures, including cost of products sold.... 22,190 209 -- 22,399 Plant opening, closing charges....... 4,137 -- -- 4,137 Litigation and insurance............. 1,894 -- -- 1,894 Non-recurring retail segment charges. -- 432 -- 432 Management fees...................... 1,513 1,331 -- 2,844 Other expense........................ 379 (7) -- 372 ---------- ------- ------ ---------- Adjusted EBITDA...................... $ 120,583 $ 5,135 $ (818) $ 124,900 ========== ======= ====== ==========
DECEMBER 28, 2002 ------------------------------------------------ WHOLESALE BEDDING RETAIL ELIMINATIONS TOTALS ---------- -------- ------------ ---------- (IN THOUSANDS) Net sales to external customers........ $636,826 $ 71,769 $ -- $ 708,595 Intersegment net sales................. 22,131 -- (22,131) -- Adjusted EBITDA........................ 104,347 (460) (990) 102,897 Segment assets......................... 405,298 39,733 (34,000) 411,031 Depreciation and amortization expense.............................. 18,147 1,371 (468) 19,050 Goodwill impairment.................... -- 20,285 -- 20,285 Expenditures for long-lived assets..... 6,323 1,638 -- 7,961 Reconciliation of EBITDA and Adjusted EBITDA to net income (loss): Net income (loss).................... $ 26,901 $(26,990) $ (522) $ (611) Depreciation and amortization........ 18,147 21,656 (468) 39,335 Income taxes......................... 12,005 -- -- 12,005 Interest expense, net................ 29,558 2,442 -- 32,000 Interest income...................... 193 -- -- 193 -------- -------- ------ ---------- EBITDA............................... 86,804 (2,892) (990) 82,922 Variable stock compensation expense.. 15,561 -- -- 15,561 Litigation and insurance............. 1,304 -- -- 1,304 Non-recurring retail segment charges. -- 148 -- 148 Management fees...................... 69 2,284 -- 2,353 Other expense........................ 609 -- -- 609 -------- -------- ------ ---------- Adjusted EBITDA...................... $104,347 $ (460) $ (990) $ 102,897 ======== ======== ====== ==========
DECEMBER 29, 2001 ------------------------------------------------ WHOLESALE BEDDING RETAIL ELIMINATIONS TOTALS ---------- -------- ------------ ---------- (IN THOUSANDS) Net sales to external customers........ $577,793 $ 77,416 $ -- $ 655,209 Intersegment net sales................. 24,301 -- (24,301) -- Adjusted EBITDA........................ 86,422 (534) 350 86,238 Segment assets......................... 402,666 58,712 (29,203) 432,175 Depreciation and amortization expense.............................. 22,823 4,578 428 27,829 Goodwill impairment.................... -- 7,882 -- 7,882 Expenditures for long-lived assets..... 4,957 772 -- 5,729 Reconciliation of EBITDA and Adjusted EBITDA to net income (loss): Net income (loss).................... $ 9,175 $(18,734) $ (78) $ (9,637) Depreciation and amortization........ 22,823 12,460 428 35,711 Income taxes......................... (7,676) -- -- (7,676) Interest expense, net................ 36,525 2,925 -- 39,450 Interest income...................... 521 -- -- 521 -------- -------- ------ ---------- EBITDA............................... 61,368 (3,349) 350 58,369 Variable stock compensation expense.. 14,847 -- -- 14,847 Bad debt expense..................... 4,391 -- -- 4,391 Litigation and insurance............. (409) -- -- (409) Non-recurring operational and retail segment charges.................... 2,107 2,211 -- 4,318 Management fees...................... 2,160 604 -- 2,764 Other expense........................ 1,958 -- -- 1,958 -------- -------- ------ ---------- Adjusted EBITDA...................... $ 86,422 $ (534) $ 350 $ 86,238 ======== ======== ====== ==========
42 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the "Eliminations" column of each period presented above, the segment assets consists primarily of investments in subsidiaries, receivables and payables and gross wholesale bedding profit in ending retail 43 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) inventory. The segment Adjusted EBITDA has been adjusted to eliminate the wholesale bedding profit in ending retail inventory. NOTE D -- ASSETS/LIABILITIES HELD FOR SALE In April 2003, the Company initiated a sales process of its retail operations. Following the Acquisition, the Board of Directors decided to continue a sales process for the Gallery Corp. ("Mattress Gallery") retail operations in California and to continue to operate the Company's Sleep Country Oregon and Washington retail operations. The Company has identified a potential buyer of Mattress Gallery and anticipates a closing in the second quarter of 2004. In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has reflected assets and liabilities for Mattress Gallery as held for sale in the consolidated balance sheets. The Company has not reflected the results of operations for its Mattress Gallery as discontinued operations since the Company believes it will have an ongoing interest in the cash flows of the operations through a long-term supply agreement. Mattress Gallery had net sales and adjusted EBITDA of $0.9 million and $0.1 million, respectively, for the Successor '03 period and net sales and adjusted EBITDA of $40.0 million and $1.0 million, respectively for the Predecessor '03 period. The components of the assets and liabilities held for sale as of December 27, 2003 are as follows (amounts in thousands): ASSETS HELD FOR SALE Accounts receivable, net.................................... $1,522 Inventories................................................. 4,996 Other current assets........................................ 221 Property, plant and equipment, net.......................... 1,057 Other assets................................................ 768 ------ Total assets held for sale................................ $8,564 ======
LIABILITIES HELD FOR SALE Accounts payable............................................ $ 503 Other current liabilities................................... 1,207 Other long-term liabilities................................. 354 ------ Total liabilities held for sale........................... $2,064 ======
The carrying amounts of the major classes of assets and liabilities of Mattress Gallery were adjusted to reflect their estimated disposal value in connection with the purchase price allocation related to the transactions. NOTE E -- EMPLOYEE STOCK OWNERSHIP PLAN Prior to the Acquisition, the Company was structured so that many employees of the Company had a beneficial ownership interest in the stock of the Company through their participation in the ESOP. Through 2002, the Company made annual contributions to the ESOP in an amount up to 25% of eligible participant compensation, subject to certain limitations and conditions. The ESOP used all such contributions to repay the ESOP loan. As a result, there were no cash costs associated with the contributions to the ESOP. Following 2002, no further Company contributions were made to the ESOP. ESOP assets are held in trust by State Street Bank and Trust Company, the ESOP trustee. Prior to repayment of the ESOP loan in full in 2002, the ESOP shares were held in a suspense account and were released to the ESOP participants' accounts based on debt service. In 2001, 988,124 shares were released to participants' accounts for the 2000 ESOP allocation. In 2002, 298,006 shares were released to participants' 44 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accounts for the 2001 ESOP allocation. At December 28, 2002, all shares of the Company's common stock in the ESOP were allocated, resulting in no further scheduled allocation of shares to participants. Under the provisions of the ESOP, the Company was obligated to repurchase participant shares distributed under the terms of the ESOP, as long as the shares were not publicly traded or the shares were subject to trading limitations. The Company regularly repurchased shares from the ESOP to provide liquidity for cash distributions. Prior to the Acquisition, the Company repurchased approximately 26,065 shares and 29,345 shares from the ESOP in 2003 and 2002, respectively, at an average price of $17.8891 and $15.2038 per share, respectively. The ESOP held 3,414,300 shares as of December 28, 2002. In connection with the Acquisition, the Company repurchased 3,382,740 shares of the Company held by the ESOP for $95.9 million which satisfied the redemption obligation. Although the ESOP no longer has a beneficial ownership of the stock of the Company, the plan remains in existence. Approximately 35% of the Company's full-time employees are participants in the ESOP. NOTE F -- INVENTORIES Inventories consisted of the following as of December 27, 2003 and December 28, 2002 (amounts in thousands):
2003 | 2002 --------- | ----------- | Raw materials............................................... $13,005 | $11,198 Work-in-progress............................................ 1,099 | 1,240 Finished goods.............................................. 12,476 | 8,611 Inventory held at retail stores............................. 4,775 | 2,423 ------- | ------- $31,355 | $23,472 ======= | =======
NOTE G -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following as of December 27, 2003 and December 28, 2002 (amounts in thousands):
2003 | 2002 --------- | ----------- | Land, buildings and improvements............................ $13,885 | $11,883 Leasehold improvements...................................... 4,322 | 9,926 Machinery and equipment..................................... 31,383 | 75,500 Construction in progress.................................... 3,799 | 957 ------- | ------- 53,389 | 98,266 Less accumulated depreciation............................... (161) | (56,954) ------- | ------- $53,228 | $41,312 ======= | =======
Depreciation expense for the Successor '03, Predecessor '03, 2002 and 2001 was $0.3 million, $21.8 million, $13.7 million and $12.2 million, respectively. 45 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets consisted of the following as of December 27, 2003 and December 28, 2002 (dollar amounts in thousands):
2003 2002 WEIGHTED ----------------------------- ----------------------------- AVERAGE GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- -------------- ------------ -------------- ------------ Definite-lived intangible assets: Patents................... 10 $29,994 $ (66) $17,647 $(17,049) Customer contracts........ 11 20,078 (40) -- -- Licenses.................. 6 15,370 (56) 398 (8) Contract sales............ 4 8,823 (48) -- -- Employment contracts...... 3 3,367 (25) -- -- Equipment leases.......... 1 660 (14) -- -- Software.................. 2 2,249 (25) -- -- Non-complete agreements... 2 2,838 (32) 1,100 (568) ------- ----- ------- -------- $83,379 $(306) $19,145 $(17,625) ======= ===== ======= ======== Indefinite-lived intangible assets: Brands.................... $43,505 $ -- Trademarks................ 29,573 5,723 Supplier lists............ 2,567 -- Domain names.............. 480 -- ------- ------- $76,125 $ 5,723 ======= =======
On December 30, 2001 (the first day of fiscal year 2002), the Company adopted SFAS 142 and ceased to amortize goodwill. Additionally, during 2002 the Company acquired $5.7 million trademarks which the Company determined to be indefinite-lived. As required by SFAS 142, the Company reassessed the expected useful lives of existing intangible assets. This reassessment resulted in no changes to the expected useful lives of the Company's patents and licenses. As a result of the Acquisition, the Company recorded additions of $150.8 million in intangible assets based upon preliminary valuations. In conjunction with the Acquisition, the Company conducted a preliminary review of its identifiable intangibles, and initially determined that $76.1 million as detailed above meet the definition of an indefinite-lived intangible in accordance with the criteria outlined in SFAS 142. The Company expects the final valuation to be completed in the second quarter of 2004. The final valuation could result in certain intangible assets preliminarily identified as indefinite-lived being reclassified as definite-lived, and a different allocation of the purchase price within the identifiable intangible asset classification. The Company expects supplier lists to be classified as definite-lived in the final valuation. The amortization expense for definite-lived intangible assets for the periods from December 20, 2003 through December 27, 2003 and from December 29, 2002 through December 19, 2003 was $0.3 million in 46 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) each period. The estimated amortization expense for definite-lived intangible assets for the next five years is as follows (amount in thousands): 2004........................................................ $13,895 2005........................................................ $13,194 2006........................................................ $10,714 2007........................................................ $ 9,592 2008........................................................ $ 7,386
As it relates to brands, trademarks and domain names, the Company expects both the renewal by the granting authorities and the cash flows generated from these intangible assets to continue indefinitely. As it relates to supplier list, the Company expects the substantial volume discounts and high level of quality from the select group of suppliers will continue indefinitely. Additionally for the indefinite lived intangibles, the Company will perform an annual valuation of the factors supporting the criteria for classification as indefinite lived. Also as required by SFAS 142, the Company reviews its definite lived intangible assets estimated useful lives on an annual basis. The following table presents the Company's Successor '03, Predecessor '03, 2002 and 2001 results on a basis comparable to the 2003 results, adjusted to exclude amortization expense (including any related tax effects) related to goodwill (amounts in thousands):
SUCCESSOR PREDECESSOR 2003 2003 2002 2001 --------- ----------- ----- ------- Reported net loss............................. $(7,190) $(34,096) $(611) $(9,637) Add back: tax effected goodwill amortization................................ -- -- -- 8,320 ------- -------- ----- ------- Adjusted net loss............................. $(7,190) $(34,096) $(611) $(1,317) ======= ======== ===== =======
In connection with the acquisition of substantially all of the retail store locations and other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC") by Mattress in 2000, the Company recorded $16.1 million of goodwill. This represented the excess of the purchase price over the fair value of assets acquired and was being amortized on a straight line basis over a twenty year period. Due to various Mattress Gallery operating factors, in the fourth quarter of 2001 the Company reviewed the carrying value of Mattress Gallery's goodwill in accordance with the Company's accounting policies and recorded an impairment charge of $7.9 million to write down the Mattress Gallery goodwill to its estimated market value. There were no goodwill additions for the year ended December 28, 2002. As part of the adoption of SFAS 142, the Company performed initial valuations during the first quarter 2002 to determine if any impairment of goodwill and indefinite-lived intangibles existed and determined that no impairment of goodwill and indefinite-lived intangible assets existed. In accordance with SFAS 142, goodwill was again tested at December 28, 2002 for impairment by comparing the fair value of the Company's reporting units to their carrying values. Fair values were determined by the assessment of future discounted cash flows. As noted in the following paragraph, based upon the impairment test performed, a goodwill impairment charge was recorded in 2002 for the Company's retail segment. This impairment test will be performed each year on the last day of the Company's fiscal year unless circumstances or events necessitate an evaluation at an interim date. Additionally for the indefinite lived intangibles, the Company will perform an annual valuation of the factors supporting the criteria for classification as indefinite lived. Also as required by SFAS 142, the Company reviews its definite lived intangible assets estimated useful lives on an annual basis. In connection with the acquisition of 51 retail store locations and other stock of Sleep Country USA, Inc., Sleep Country of Oregon, Inc. and Sleep Train, Inc. by Sleep Country in 2000, the Company recorded $40.5 million of goodwill. The goodwill represented the excess of the purchase price over the fair value of 47 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets acquired and was being amortized on a straight line basis over a fifteen year period prior to the adoption of SFAS 142. In the fourth quarter of 2002, Sleep Country recognized a goodwill impairment of $20.3 million. The review of the goodwill for impairment was necessary due to the continued weakness in the retail economy and the failure of Sleep Country to reach the sales and profit levels included in its original impairment test as of January 1, 2002. NOTE I -- ACCRUED LIABILITIES Accrued liabilities consisted of the following as of December 27, 2003 and December 28, 2002 (amounts in thousands):
2003 | 2002 --------- | ----------- | Accrued wages and benefits.................................. $20,230 | $18,051 Accrued advertising and incentives.......................... 21,612 | 18,480 Accrued interest............................................ 1,238 | 6,213 Other accrued expenses...................................... 10,868 | 14,534 ------- | ------- $53,948 | $57,278 ======= | =======
NOTE J -- LONG-TERM DEBT Long-term debt consisted of the following at December 27, 2003 and December 28, 2002 (amounts in thousands):
2003 | 2002 --------- | ----------- | Senior Credit Facility: | New Revolving Loan........................................ $ 3,275 | $ -- Old Tranche A Term Loan................................... -- | 14,500 Old Tranche B Term Loan................................... -- | 42,505 Old Tranche C Term Loan................................... -- | 19,006 New Tranche B Term Loan................................... 405,000 | -- -------- | -------- Total Senior Credit Facility.............................. 408,275 | 76,011 Sleep Country Senior Credit Facility: | Term Loan................................................. -- | 16,500 Revolving Loan............................................ -- | 1,500 -------- | -------- Total Sleep Country Senior Credit Facility................ -- | 18,000 Sleep Country Debt to Affiliate............................. -- | 8,065 Senior Unsecured Term Loan.................................. 140,000 | -- Industrial Revenue Bonds, 7.00%, due 2017................... 9,700 | 9,700 Industrial Revenue Bonds, 3.33%, due 2016................... 4,000 | 4,200 Banco Santander Loan, 3.42%, due 2013....................... 2,116 | 2,329 7.875% Senior Subordinated Notes due 2014................... 200,000 | -- 10.25% Series B Senior Subordinated Notes due 2009.......... 5,284 | 150,000 Notes Payable to former Shareholders........................ -- | 5,474 17.5% Junior Subordinated Payment-in-Kind due 2011, net of | discount.................................................. -- | 16,488 Other, including capital lease obligations.................. 878 | 515 -------- | -------- 770,253 | 290,782 Less current portion........................................ (9,512) | (22,125) -------- | -------- $760,741 | $268,657 ======== | ========
In connection with the Acquisition on December 19, 2003, the Company entered into a new Senior Credit Facility (the "New Senior Credit Facility"), a Senior Unsecured Term Loan Facility and issued 7.875% Senior Subordinated Notes, the aggregate proceeds of which repaid the outstanding amounts under the old senior credit facility, notes payable to former shareholders, a junior subordinated payment-in-kind note and a portion of the Company's 10.25% Senior Subordinated Notes. The New Senior Credit Facility provides for a $75.0 million revolving credit facility. The revolving credit facility will expire on the earlier of (a) December 19, 2009 or (b) such other date as the revolving credit commitments thereunder shall terminate in accordance with the terms of the New Senior Credit Facility. The New Senior Credit Facility also provides for a $405.0 million Tranche B Term Loan facility. The Tranche B term loan has a final scheduled maturity date of December 19, 2011. As of December 27, 2003, the Company had availability to borrow $61.2 million under the Revolving Loan Facility after giving effect to $3.3 million of borrowings and $10.5 million that was reserved for the Company's reimbursement obligations with respect to outstanding letters of credit. The remaining availability under the Revolving Loan Facility may be utilized to meet the Company's current working capital 48 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) requirements, including issuance of stand-by and trade letters of credit. The Company also may utilize the remaining availability under the Revolving Loan Facility to fund distributions, acquisitions and capital expenditures. The Senior Unsecured Term Loan Facility which provides for a $140.0 million Senior Unsecured Term Loan. The Senior Unsecured Term loan has a final scheduled maturity date of June 17, 2012. The New Senior Credit Facility and the Senior Unsecured Term Loan bear interest at the Company's choice of Eurodollar Rate or Base Rate (both as defined), plus the following applicable interest rate margins as follows:
EURODOLLAR BASE RATE RATE ---------- ---- Revolving Loan Facility..................................... 2.50% 1.50% Tranche B Term Loan......................................... 2.75% 1.75% Senior Unsecured Term Loan.................................. 3.75% 2.75%
The weighted average interest rates per annum in effect as of December 27, 2003 for the Revolving Loan Facility, Tranche B Term Loan and Senior Unsecured Term Loan were 3.69%, 3.94% and 4.94%, respectively. The use of interest rate risk management instruments, such as collars and swaps, is required under the terms of the New Senior Credit Facility. The Company is required to maintain protection against fluctuations in interest rates, and may do so through utilizing Eurodollar Rate loans having twelve-month interest periods or through one or more interest rate agreements. In order to address interest rate risk, the Company has developed and implemented a policy to utilize extended Eurodollar contracts to minimize the impact of near term Eurodollar rate increases. On January 26, 2004, the Company elected to set its interest rate at the twelve-month Eurodollar Rate for approximately $325.0 million of the Tranche B Term Loan and the $140 million Senior Unsecured Term Loan, which fixed the Eurodollar Rate at 1.375% through January 26, 2005 for approximately 84% of floating rate debt outstanding as of December 27, 2003. Additionally, to further address interest rate risk, the Company entered into an interest rate cap agreement on February 11, 2004 for a notional amount of $170.0 million which capped the Eurodollar Rate at 5.0% for the period of January 26, 2005 through January 26, 2006. On December 19, 2003, the Company completed a financing, which consisted of the sale of $200.0 million of 7.875% Senior Subordinated Notes due 2014 (the "New Notes") pursuant to a private offering. The New Notes bear interest at the rate of 7.875% per annum, which is payable semi-annually in cash in arrears on January 15 and July 15. The Notes mature on January 15, 2014. The New Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Company plans to issue 7.875% Senior Subordinated Notes due 2014 (the "Exchange Notes") in exchange for all New Notes, pursuant to an exchange offer whereby holders of the New Notes will receive Exchange Notes which have been registered under the Securities Act of 1933, as amended, but are otherwise identical to the New Notes. At any time prior to January 17, 2007, the Company may redeem up to 40% of the aggregate principal amount of the New Notes at a price of 107.875% in connection with an Equity Offering, as defined. With the exception of an Equity Offering, the New Notes are redeemable at the option of the Company beginning January 15, 2009 at prices decreasing from 103.938% of the principal amount thereof to par on January 15, 2012 and thereafter. The Company is not required to make mandatory redemption or sinking fund payments with respect to the New Notes. 49 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The indenture for the New Notes requires the Company and its subsidiaries to comply with certain restrictive covenants, including a restriction on dividends; and limitations on the incurrence of indebtedness, certain payments and distributions, and sales of the Company's assets and stock. The 10.25% Series B Senior Subordinated Notes ("Old Notes") bear interest at the rate of 10.25% per annum, which is payable semi-annually in cash in arrears on March 15 and September 15. On November 18, 2003, the Company initiated a tender offer for the Old Notes and a consent solicitation to remove substantially all restrictive covenants in the indenture governing the Old Notes. As a result of the tender offer, $144.9 million principal amount of Old Notes were tendered at a premium of $10.4 million. On March 10, 2004, the Company gave notice to tender on April 12, 2004 the remaining $5.1 million of Old Notes outstanding at 105.125% of the principal amount thereof for a total payment of $5.3 million. The Old Notes are subordinated in right of payment to all existing and future senior indebtedness of the Company. As a result of the Transactions, the Company marked the Old Notes to fair market value as of the date of the Transactions. The New Notes and Old Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of the Company's active domestic subsidiaries. All of the subsidiary guarantors are 100% owned by the Company. The following Supplemental Consolidating Condensed Financial Statements provide additional guarantor/non-guarantor information. 50 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS FOR THE PERIOD FROM DECEMBER 20, 2003 THROUGH DECEMBER 27, 2003 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ---------------------- SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------------ ------------ ------------ ------------ Net sales........................... $(1,363) $9,946 $134 $ -- $ 8,717 Cost of goods sold.................. 26 7,472 98 -- 7,596 ------- ------ ---- ----- ------- Gross margin................... (1,389) 2,474 36 -- 1,121 ------- ------ ---- ----- ------- Operating expenses: Selling, general and administrative expenses........ 2,262 2,090 90 -- 4,442 Amortization of intangible assets......................... 305 6 -- -- 311 Intercompany fees................. 126 (134) 8 -- -- Licensing fees.................... -- (276) -- -- (276) ------- ------ ---- ----- ------- 2,693 1,686 98 -- 4,477 ------- ------ ---- ----- ------- Operating income (loss)........ (4,082) 788 (62) -- (3,356) Interest expense, net............... 4,537 123 1 -- 4,661 Income from subsidiaries............ (246) -- -- 246 -- ------- ------ ---- ----- ------- Income (loss) before income taxes........................ (8,373) 665 (63) (246) (8,017) Income tax expense (benefit)........ (1,183) 355 1 -- (827) ------- ------ ---- ----- ------- Net income (loss).............. $(7,190) $ 310 $(64) $(246) $(7,190) ======= ====== ==== ===== =======
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS FOR THE PERIOD FROM DECEMBER 29, 2002 THROUGH DECEMBER 19, 2003 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ Net sales......................... $ (46,100) $832,212 $11,504 $ -- $797,616 Cost of goods sold................ 1,116 400,774 8,191 -- 410,081 --------- -------- ------- -------- -------- Gross margin................. (47,216) 431,438 3,313 -- 387,535 --------- -------- ------- -------- -------- Operating expenses: Selling, general and administrative expenses...... 257,517 113,269 2,254 -- 373,040 Amortization of intangible assets....................... -- 306 -- -- 306 Transaction expenses............ 22,399 -- -- -- 22,399 Intercompany fees............... (255,065) 254,101 964 -- Licensing fees.................. (1,007) (8,649) (705) -- (10,361) --------- -------- ------- -------- -------- 23,844 359,027 2,513 -- 385,384 --------- -------- ------- -------- -------- Operating income (loss)...... (71,060) 72,411 800 -- 2,151 Interest expense, net............. 44,003 1,079 10 -- 45,092 Income from subsidiaries.......... (47,142) -- -- 47,142 -- --------- -------- ------- -------- -------- Income (loss) before income taxes...................... (67,921) 71,332 790 (47,142) (42,941) Income tax expense (benefit)...... (33,825) 24,734 246 -- (8,845) --------- -------- ------- -------- -------- Net income (loss)............ $ (34,096) $ 46,598 $ 544 $(47,142) $(34,096) ========= ======== ======= ======== ========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 29, 2002 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ Net sales......................... $ (48,065) $743,047 $13,613 $ -- $708,595 Cost of goods sold................ 492 360,019 9,106 -- 369,617 --------- -------- ------- -------- -------- Gross margin................. (48,557) 383,028 4,507 -- 338,978 --------- -------- ------- -------- -------- Operating expenses: Selling, general and administrative expenses...... 184,262 97,289 2,613 -- 284,164 Goodwill impairment............. -- 20,285 -- -- 20,285 Amortization of intangible assets....................... -- 981 265 -- 1,246 Intercompany fees............... (260,419) 259,321 1,098 -- -- Licensing fees.................. (874) (7,633) (495) -- (9,002) --------- -------- ------- -------- -------- (77,031) 370,243 3,481 -- 296,693 --------- -------- ------- -------- -------- Operating income............. 28,474 12,785 1,026 -- 42,285 Interest expense, net............. 29,142 2,827 31 -- 32,000 Income from subsidiaries.......... 1,024 -- -- (1,024) -- --------- -------- ------- -------- -------- Income before income taxes... (1,692) 9,958 995 1,024 10,285 Income tax expense (benefit)...... (1,081) 12,569 517 -- 12,005 --------- -------- ------- -------- -------- Income (loss) before minority interest................... (611) (2,611) 478 1,024 (1,720) --------- -------- ------- -------- -------- Minority interest in loss......... -- (1,109) -- -- (1,109) --------- -------- ------- -------- -------- Net income (loss)............ $ (611) $ (1,502) $ 478 $ 1,024 $ (611) ========= ======== ======= ======== ========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 2001 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ Net sales......................... $ 590,573 $ 53,385 $11,251 $ -- $655,209 Cost of goods sold................ 357,044 15,371 6,716 -- 379,131 --------- -------- ------- -------- -------- Gross margin................. 233,529 38,014 4,535 -- 276,078 --------- -------- ------- -------- -------- Operating expenses: Selling, general and administrative expenses...... 195,032 43,290 3,478 -- 241,800 ESOP expense.................... 2,816 -- -- -- 2,816 Goodwill impairment............. -- 7,882 -- -- 7,882 Amortization of intangible assets....................... 7,472 3,859 83 -- 11,414 Licensing fees.................. (9,075) -- (426) (9,501) --------- -------- ------- -------- -------- 196,245 55,031 3,135 -- 254,411 --------- -------- ------- -------- -------- Operating income............. 37,284 (17,017) 1,400 -- 21,667 Interest expense, net............. 36,407 2,925 118 -- 39,450 Income from subsidiaries.......... 18,686 -- -- (18,686) -- --------- -------- ------- -------- -------- Income before income taxes... (17,809) (19,942) 1,282 18,686 (17,783) Income tax expense (benefit)...... (8,172) -- 496 -- (7,676) --------- -------- ------- -------- -------- Income (loss) before minority interest................... (9,637) (19,942) 786 18,686 (10,107) --------- -------- ------- -------- -------- Minority interest in loss......... -- (470) -- -- (470) --------- -------- ------- -------- -------- Net income (loss)............ $ (9,637) $(19,472) $ 786 $ 18,686 $ (9,637) ========= ======== ======= ======== ========
51 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 27, 2003 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------- SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR CONSOLIDATED COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ---------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.... $ 615 $ 667 $ 2,388 $ -- $ 3,670 Accounts receivable.......... 784 62,934 2,150 -- 65,868 Inventories.................. -- 30,495 860 -- 31,355 Other........................ 9,898 20,795 1,460 -- 32,153 ---------- -------- ------- --------- ---------- Total current assets............ 11,297 114,891 6,858 -- 133,046 ---------- -------- ------- --------- ---------- Property, plant and equipment, net........................... 9,500 39,353 4,375 -- 53,228 Goodwill and other intangibles, net........................... 926,090 25,338 -- -- 951,428 Other assets.................... 22,722 22,695 -- -- 45,417 Net investment in and advances to subsidiaries............... 164,895 54,868 -- (219,763) -- ---------- -------- ------- --------- ---------- $1,134,504 $257,145 $11,233 $(219,763) $1,183,119 ========== ======== ======= ========= ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt............. $ 8,322 $ 958 $ 232 $ -- $ 9,512 Accounts payable and accrued liabilities................ 12,428 79,535 4,005 -- 95,968 ---------- -------- ------- --------- ---------- Total current liabilities.... 20,750 80,493 4,237 -- 105,480 ---------- -------- ------- --------- ---------- Long-term debt.................. 745,238 13,575 1,928 -- 760,741 Deferred income taxes........... 24,545 (1,222) 396 -- 23,719 Other long-term liabilities..... 9,532 2,955 415 -- 12,902 Net due to subsidiaries......... 54,162 -- 706 (54,868) -- ---------- -------- ------- --------- ---------- Total liabilities............ 854,227 95,801 7,682 (54,868) 902,842 ---------- -------- ------- --------- ---------- Stockholder's equity............ 280,277 161,344 3,551 (164,895) 280,277 ---------- -------- ------- --------- ---------- $1,134,504 $257,145 $11,233 $(219,763) $1,183,119 ========== ======== ======= ========= ==========
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETS AS OF DECEMBER 28, 2002 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ----------------------- SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR CONSOLIDATED COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL -------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents..... $ 2,316 $ 2,821 $ 1,971 $ -- $ 7,108 Accounts receivable........... 271 63,581 3,563 -- 67,415 Inventories................... -- 22,632 840 -- 23,472 Other......................... 8,028 23,679 1,224 -- 32,931 -------- -------- ------- --------- -------- Total current assets.............. 10,615 112,713 7,598 -- 130,926 -------- -------- ------- --------- -------- Property, plant and equipment, net............................. 10,435 27,637 3,240 -- 41,312 Goodwill and other intangibles, net............................. 165,519 22,503 -- -- 188,022 Other assets...................... 57,297 (6,553) 27 -- 50,771 Net investment in and advances to subsidiaries................. 58,608 115,474 1,211 (175,293) -- -------- -------- ------- --------- -------- $302,474 $271,774 $12,076 $(175,293) $411,031 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt.............. $ 2,774 $ 19,113 $ 238 $ -- $ 22,125 Accounts payable and accrued liabilities................. 43,608 59,551 2,687 -- 105,846 -------- -------- ------- --------- -------- Total current liabilities..... 46,382 78,664 2,925 -- 127,971 -------- -------- ------- --------- -------- Long-term debt.................... 245,201 21,296 2,160 -- 268,657 Other long-term liabilities....... 31,009 3,037 475 -- 34,521 -------- -------- ------- --------- -------- Total liabilities............. 322,592 102,997 5,560 431,149 -------- -------- ------- --------- -------- Redemption obligation -- ESOP..... 61,218 -- -- -- 61,218 -------- -------- ------- --------- -------- Stockholder's equity (deficit).... (81,336) 168,777 6,516 (175,293) (81,336) -------- -------- ------- --------- -------- $302,474 $271,774 $12,076 $(175,293) $411,031 ======== ======== ======= ========= ========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM DECEMBER 20, 2003 THROUGH DECEMBER 27, 2003 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities................ $ (4,624) $ 991 $ 140 $ -- $ (3,493) --------- -------- ------- -------- --------- Cash flows from investing activities: Payments to the sellers............. (697,883) -- -- -- (697,883) Payments to option holders.......... (73,545) -- -- -- (73,545) Payment of acquisition costs........ (44,452) -- -- -- (44,452) --------- -------- ------- -------- --------- Net cash used in investing activities....................... (815,880) -- -- -- (815,880) --------- -------- ------- -------- --------- Cash flows from financing activities: Borrowings on long-term obligations...................... 525,020 -- -- -- 525,020 Equity transactions................. 327,553 -- -- -- 327,553 Debt issuance costs................. (31,090) -- -- -- (31,090) --------- -------- ------- -------- --------- Net cash provided by financing activities.......................... 821,483 -- -- -- 821,483 --------- -------- ------- -------- --------- Net effect of exchange rate change.... -- -- 17 -- 17 Change in cash and cash equivalents... 979 991 157 -- 2,127 Cash and cash equivalents: Beginning of period.............. (364) (324) 2,231 -- 1,543 --------- -------- ------- -------- --------- End of period.................... $ 615 $ 667 $ 2,388 $ -- $ 3,670 ========= ======== ======= ======== =========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM DECEMBER 29, 2002 THROUGH DECEMBER 19, 2003 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ Net cash provided by operating activities.......................... $ 35,222 $ 21,493 $ 3,314 $ -- $ 60,029 --------- -------- ------- -------- --------- Cash flows from investing activities: Purchase of property, plant and equipment, net................... (4,657) (4,057) (39) -- (8,753) Purchase of intangible assets....... -- (1,720) -- (1,720) --------- -------- ------- -------- --------- Net cash used in investing activities....................... (4,657) (5,777) (39) -- (10,473) --------- -------- ------- -------- --------- Cash flows from financing activities: Repayment of long-term obligations...................... (28,846) (18,861) (238) -- (47,945) Equity transactions................. (4,399) -- (2,984) -- (7,383) --------- -------- ------- -------- --------- Net cash used in financing activities.......................... (33,245) (18,861) (3,222) -- (55,328) --------- -------- ------- -------- --------- Net effect of exchange rate change.... -- -- 207 207 Change in cash and cash equivalents... (2,680) (3,145) 260 -- (5,565) Cash and cash equivalents: Beginning of period.............. 2,316 2,821 1,971 -- 7,108 --------- -------- ------- -------- --------- End of period.................... $ (364) $ (324) $ 2,231 $ -- $ 1,543 ========= ======== ======= ======== =========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 28, 2002 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ----------------------- SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------- ------------ ------------ Net cash provided by operating activities........................... $ 38,935 $ 30,605 $ 6,065 $ -- $ 75,605 -------- -------- ------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment, net.................... (4,804) (3,061) (96) -- (7,961) Other, net........................... (3,460) -- -- -- (3,460) -------- -------- ------- -------- -------- Net cash used in investing activities........................ (8,264) (3,061) (96) -- (11,421) -------- -------- ------- -------- -------- Cash flows from financing activities: Repayment of long-term obligations... (49,302) (8,200) (1,126) -- (58,628) Proceeds from long-term debt......... 1,123 -- -- -- 1,123 Receipt from (distribution to) subsidiaries...................... 23,332 (19,911) (3,421) -- -- Repurchase of common stock........... (2,246) -- -- -- (2,246) Payments of financing costs.......... (570) -- -- -- (570) -------- -------- ------- -------- -------- Net cash used in financing activities........................... (27,663) (28,111) (4,547) -- (60,321) -------- -------- ------- -------- -------- Net effect of exchange rate change..... -- -- (19) -- (19) Change in cash and cash equivalents.... 3,008 (567) 1,403 -- 3,844 Cash and cash equivalents: Beginning of period............... (692) 3,388 568 -- 3,264 -------- -------- ------- -------- -------- End of period..................... $ 2,316 $ 2,821 $ 1,971 $ -- $ 7,108 ======== ======== ======= ======== ========
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 29, 2001 (IN THOUSANDS)
NEW ISSUER AND GUARANTORS ------------------------ SIMMONS NEW NEW NON- BEDDING GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ Net cash provided by (used in) operating activities................ $ 41,652 $ (3,664) $(2,077) $ -- $ 35,911 --------- -------- ------- -------- --------- Cash flows from investing activities: Purchase of property, plant and equipment, net................... (4,757) (532) 4 -- (5,285) Purchase of intangible assets....... (2,924) -- -- -- (2,924) --------- -------- ------- -------- --------- Net cash provided by (used in) investing activities............. (7,681) (532) 4 -- (8,209) --------- -------- ------- -------- --------- Cash flows from financing activities: Repayment of long-term obligations...................... (29,025) (3,242) -- -- (32,267) Proceeds from long-term debt........ 2,986 -- 770 -- 3,756 Receipt from (distribution to) subsidiaries..................... (8,123) 8,123 -- -- -- Repurchase of common stock.......... (917) -- -- -- (917) Payment of financing costs.......... (714) -- -- -- (714) --------- -------- ------- -------- --------- Net cash (used in) provided by financing activities................ (35,793) 4,881 770 (30,142) --------- -------- ------- -------- --------- Net effect of exchange rate change.... -- -- (61) -- (61) Change in cash and cash equivalents... (1,822) 685 (1,364) -- (2,501) Cash and cash equivalents: Beginning of period.............. 1,130 2,703 1,932 -- 5,765 --------- -------- ------- -------- --------- End of period.................... $ (692) $ 3,388 $ 568 $ -- $ 3,264 ========= ======== ======= ======== =========
52 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The PIK note relates to a loan from the previous majority owner. The PIK note had a stated interest rate of 17.5%, with detachable warrants. The warrants were valued in accordance with APB 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, recorded as discount on the PIK note and amortized as interest expense over the repayment term of the note. There were 1,653,703 warrants to purchase shares of the Company, exercisable over seven years, with an exercise price of $6.73 per warrant. The warrants were exercised and the PIK note, with accrued interest, was repaid in connection with the Acquisition. The New Senior Credit Facility requires the Company to maintain certain financial ratios including cash interest coverage and total leverage ratios. The New 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. As of December 27, 2003, the Company was in compliance with all of its financial covenants. Future maturities of long-term debt as of December 27, 2003 are as follows (amounts in thousands): 2004........................................................ $ 9,512 2005........................................................ 5,571 2006........................................................ 3,457 2007........................................................ 4,463 2008........................................................ 4,463 Thereafter.................................................. 742,787 -------- $770,253 ========
The fair value of the Company's long-term debt is estimated based on the current rates offered for debt of similar terms and maturities. All long-term debt approximates fair value as of December 27, 2003. NOTE K -- LICENSING The Company licenses internationally the Simmons(R) mark and many of its other trademarks, processes and patents generally on an exclusive long-term basis to third-party manufacturers which produce and distribute conventional bedding products within their designated territories. These licensing agreements allow the Company to reduce exposure to political and economic risks abroad by minimizing investments in those markets. The Company has eighteen foreign licensees and fourteen sub-licensees with operations in Argentina, Australia, Brazil, Canada, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, England, France, Hong Kong, Israel, Italy, Jamaica, Japan, Korea, Mexico, Morocco, New Zealand, Oman, Panama, Singapore, South Africa, Sweden, Taiwan, and Venezuela. These foreign licensees have rights to sell Simmons-branded products in approximately 100 countries. Additionally, the Company has eleven domestic third-party licensees. Some of these licensees manufacture and distribute juvenile furniture and bedding and healthcare-related furniture, primarily on long-term or automatically renewable terms. Additionally, the Company has licensed the Simmons(R) mark and other trademarks, generally for limited terms, to manufacturers of upholstered furniture, airbeds, feather and down comforters, sheets, synthetic comforter sets, pillows, mattress pads, blankets, bed frames, metal beds, futons and other related products. Licensing fees are recorded as earned, based upon the sales of licensed products by the Company's licensees. For Successor '03, Predecessor '03, 2002 and 2001 the Company's licensing agreements as a whole generated royalties and technology fees of approximately $0.2 million, $10.4 million, $9.0 million and $9.5 million, respectively. NOTE L -- LEASES AND OTHER COMMITMENTS The Company leases certain manufacturing facilities, retail locations and equipment under operating leases. The Company's commitments under capital leases are not material enough to necessitate separate disclosure. The Company's wholesale segment rent expense was $0.5 million, $18.7 million, $17.8 million and $16.2 million for Successor '03, Predecessor '03, 2002 and 2001, respectively. The Company's retail segment rent expense was $0.4 million, $15.0 million, $10.6 million and $9.9 million for Successor '03, Predecessor '03, 2002 and 2001, respectively. The following is a schedule of the future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 27, 2003 (amounts in thousands):
WHOLESALE RETAIL SEGMENT SEGMENT --------- ------- 2004........................................................ $14,504 $10,216 2005........................................................ 12,511 8,599 2006........................................................ 9,936 6,465 2007........................................................ 7,714 4,298 2008........................................................ 4,036 3,125 Thereafter.................................................. 8,478 3,664 ------- ------- $57,179 $36,367 ======= =======
The Company has the option to renew certain manufacturing facility leases, with the longest renewal period extending through 2023. Most of the operating leases provide for increased rent through increases in general price levels. 53 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's wholesale segment has various purchase commitments with certain suppliers in which the Company is committed to purchase approximately $55 million of raw materials from these vendors in 2004. If the Company does not reach the committed level of purchases, various additional payments could be required to be paid to these suppliers or certain sales volume rebates could be lost. NOTE M -- STOCK OPTION PLANS In 1996, the board of directors established a management stock incentive plan (the "1996 Plan"), which provided for the granting of non-qualified options for Class C common stock of the Company to members of management and certain key employees. The options outstanding under the 1996 Plan were granted at prices which were equal to or above the market value of the Class C stock on the date of grant. As a result of the Recapitalization, the vesting of the issued and outstanding stock options under the 1996 plan was accelerated. During 1999, the Company established the 1999 Stock Option Plan ("1999 Plan"), which provided for the granting of up to 4,902,878 options for shares of common stock to directors (including those who are not employees), all executive officers and other employees, consultants and advisors. Under the terms of the 1999 Plan, options could be either incentive or non-qualified. Generally, the options outstanding under the 1999 Plan were granted at prices which equate to or are above the market value of the common stock on the date of grant, expired after ten years, and vested ratably over a four or five year period based upon the achievement of an annual Adjusted EBITDA target, as defined in the 1999 Plan, or as otherwise established by the Compensation Committee of the board of directors. The incentive plan provided for issuance of regular options ("Regular Options") and superincentive options ("Superincentive Options"). Regular Options were subject to certain time and performance vesting restrictions and Superincentive Options vested only in connection with the consummation of a change of control or initial public offering of the Company and the attainment by stockholders affiliated with Fenway of certain internal rate of return objectives. In 2000, Sleep Country adopted the 2000 Stock Option Plan ("2000 Plan"). The 2000 Plan provided for the granting of 26,304 options for shares of Sleep Country common stock. Since inception of the 2000 Plan, 11,833 incentive based options were issued, net of cancellations, with specific performance targets. As of December 27, 2003, no performance targets had been met, and thus, none of the options had vested or became exercisable. Since the 2000 Plan inception, no compensation expense has been recorded for the 2000 Plan. In 2002, the Company established the 2002 Stock Option Plan ("2002 Plan"), which provided for the granting of up to 1,053,122 options for shares of common stock to directors (including those who are not employees), all executive officers and other employees, consultants and advisors. Under the terms of the 2002 Plan, options could be either incentive or non-qualified. Generally, the options outstanding under the 2002 Plan were granted at prices which were equal to the market value of the common stock on the date of grant, expired after ten years, and vested based upon conditions specified by the Company. This plan provided for the issuance of Regular Options and Superincentive Options. Regular Options were subject to certain time and performance vesting restrictions and Superincentive Options vested only in connection with the consummation of a change of control or initial public offering of the Company and the attainment by stockholders affiliated with Fenway of certain internal rate of return objectives. Under APB 25, because the vesting of the plan options was dependent upon achieving an annual Adjusted EBITDA target or as otherwise established by the Compensation Committee of the board of directors, the ultimate number of vested shares, and therefore the measurement date, was not currently determinable. Accordingly, pursuant to APB 25, the Company recorded estimated variable stock compensation expense as selling, general and administrative expense over the service period based upon the intrinsic value of the options as they were earned by the employees. 54 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additionally, the 2002, 1999 and 1996 Plans provided that the option holders could, under certain circumstances, require the Company to repurchase the shares underlying vested options. Therefore, pursuant to APB 25 and its interpretations, the Company recorded additional adjustments to variable stock compensation expense for changes in the intrinsic value of vested Regular Options under the 1996, 1999 and 2002 Plans in a manner similar to a stock appreciation right. The accounting for awards of stock-based compensation where an employee can compel the entity to settle the award by transferring cash or other assets to employees rather than by issuing equity instruments is substantially the same under SFAS 123 and APB 25. Accordingly, SFAS 123 pro-forma disclosures were not presented. As a result of the Acquisition, the vesting of the issued and outstanding Regular and Superincentive stock options under the 2002, 1999 and 1996 plans was accelerated. On December 19, 2003, the Company repurchased the vested options for $95.4 million which satisfied the accrued stock compensation liability of the Company. The Company recorded variable stock compensation expense of approximately $68.4 million, $15.6 million and $14.8 million during Predecessor '03, 2002 and 2001, respectively. Variable stock compensation expense is a component of selling, general and administrative expense in the accompanying statement of operations and comprehensive income. In conjunction with the Acquisition, all stock option plans were terminated. Activity for Regular and Superincentive Options (all non-qualified stock options) during 2003, 2002 and 2001 follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE ---------- -------- Shares outstanding at December 30, 2000..................... 5,904,296 $ 6.50 Granted..................................................... 503,878 $ 7.67 Forfeited................................................... (740,861) $ 6.73 Cancelled................................................... (148,371) $ 6.16 ---------- Shares outstanding at December 29, 2001..................... 5,518,942 $ 6.58 Granted..................................................... 410,750 $13.45 Forfeited................................................... (862,064) $ 6.78 Cancelled................................................... (219,404) $ 4.39 ---------- Shares outstanding at December 28, 2002..................... 4,848,224 $ 7.23 Granted..................................................... -- $ -- Forfeited................................................... (178,125) $ 7.08 Cancelled................................................... (166,875) $ 7.11 ---------- Shares outstanding at December 19, 2003..................... (4,503,224) $ 7.24 ==========
In connection with the Transactions, the shares outstanding at December 19, 2003 were cancelled. 55 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE N -- INCOME TAXES The components of the provision for income taxes are as follows (amounts in thousands):
SUCCESSOR | PREDECESSOR 2003 | 2003 2002 2001 --------- | ----------- ------- ------- | Current tax provision: | Federal.................................... $ -- | $ -- $ -- $ -- State...................................... -- | -- 250 -- Foreign.................................... -- | 241 475 496 ----- | ------- ------- ------- -- | 241 725 496 ----- | ------- ------- ------- Deferred tax provision: | Federal.................................... (762) | (8,037) 10,014 (7,728) State...................................... (65) | (1,055) 1,225 (444) Foreign.................................... -- | 6 41 -- ----- | ------- ------- ------- (827) | (9,086) 11,280 (8,172) ----- | ------- ------- ------- Income tax expense (benefit)................. $(827) | $(8,845) $12,005 $(7,676) ===== | ======= ======= =======
The reconciliation of the statutory federal income tax rate to the effective income tax rate for Successor '03, Predecessor '03, 2002 and 2001 provision for income taxes is as follows (amounts in thousands):
SUCCESSOR | PREDECESSOR 2003 | 2003 2002 2001 --------- | ----------- ------- ------- | Income taxes at federal statutory rate....... $(2,806) | $(15,029) $ 3,600 $(6,224) State income taxes, net of federal benefit... (67) | (705) 1,433 (229) General business tax credits................. -- | -- (1,500) -- Valuation allowance, net of reversals........ 159 | (1,033) 7,915 (1,681) Goodwill amortization........................ -- | -- -- 1,691 State net operating loss benefit............. -- | -- -- (655) Foreign tax credits.......................... -- | -- (137) (529) Non-deductible interest expense.............. 1,225 | 4,309 454 366 Foreign intercompany dividends............... 630 | 1,041 -- -- Non-deductible transaction costs............. -- | 6,742 -- -- Tax loss benefits not previously provided.... -- | (4,354) -- -- Other, net................................... 32 | 184 240 (415) ------- | -------- ------- ------- $ (827) | $ (8,845) $12,005 $(7,676) ======= | ======== ======= =======
56 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of the Company's net deferred income tax liability as of December 27, 2003 and net deferred income tax asset as of December 28, 2002 are as follows (amounts in thousands):
2003 | 2002 -------- | -------- | Current deferred income taxes: | Accounts receivable and inventory reserves................ $ 1,030 | $ 1,314 Accrued liabilities, not currently deductible............. 4,674 | 5,405 Prepaids and other assets, not currently taxable.......... (1,790) | (3,612) Inventory bases differences............................... (2,941) | 34 -------- | -------- Current deferred income tax assets..................... 973 | 3,141 Noncurrent deferred income taxes: | Property bases differences................................ (3,555) | 1,678 Intangibles bases differences............................. (52,290) | 5,980 Accrued stock option compensation, not currently | deductible............................................. -- | 10,314 Retirement accruals....................................... 1,578 | -- Net operating loss carryforwards.......................... 38,303 | 15,847 Income tax credit carryforwards........................... 2,183 | 2,204 Deferred interest expense................................. -- | 1,519 Other noncurrent accrued liabilities, not currently | deductible............................................. 31 | 2,077 Valuation allowance....................................... (9,969) | (11,364) -------- | -------- Noncurrent deferred income tax assets (liabilities).... (23,719) | 28,255 -------- | -------- Net deferred income tax asset (liability)................. $(22,746) | $ 31,396 ======== | ========
At December 27, 2003, the Company had net operating loss carryforwards for federal income tax purposes of approximately $94.1 million, including approximately $14.6 million of loss carryforwards generated by Sleep Country. The Sleep Country carryforward losses are subject to use limitations imposed by the Internal Revenue Code. The net operating loss carryforwards expire on various dates through 2022. As of December 27, 2003, the Company had approximately $1.7 million of general business tax credits and $1.8 million of foreign tax credits available to offset future payments of federal income taxes. These credits will expire in varying amounts between 2004 and 2022. Realization of net deferred tax assets is dependent upon future profitable operations and future reversals of existing temporary differences. Although realization is not assured, the Company believes it is more likely than not that most of the net recorded benefits will be realized through the reduction of future taxable income. However, due to the uncertainty regarding the realization of Sleep Country's net tax benefits for the years ended December 27, 2003 and December 28, 2002, the Company recorded valuation allowances of $10.0 million and $11.4 million, respectively, against Sleep Country's net deferred tax assets, which consist primarily of net operating loss carryforwards. Cumulative undistributed earnings of the Company's international subsidiaries totaled approximately $2.7 million at December 27, 2003. No United States income taxes have been provided on these earnings. Foreign tax credits are available to reduce all or a portion of the tax liability that would arise if these earnings were remitted; any residual tax due should not be material. 57 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE O -- RETIREMENT PLANS SIMMONS 401(K) PLAN The Company has a defined contribution 401(k) plan for substantially all employees other than employees subject to collective bargaining agreements. Employees with 12 weeks of employment who have reached age 18 are permitted to participate in the plan. Generally, employees covered by collective bargaining agreements are not permitted to participate in the plan, unless the collective bargaining agreement expressly provides for participation. Eligible participants may make salary deferral contributions up to 17% of eligible compensation, subject to applicable tax limitations. The Company makes employer non-elective contributions, currently 3% of an employee's eligible compensation, once an employee completes one year of service. All employer non-elective contributions are immediately vested and not subject to forfeiture. In 2002, the Company amended the plan to provide for an additional employer matching contribution of 50 cents on each employee dollar contributed up to 6% of the employee's pay (subject to current tax limitations). The additional matching contribution is provided to participants who complete 1,000 hours of service and are employed on the last day of each plan year. The additional matching contribution will vest 20% per year over five years. In Successor '03, Predecessor '03, 2002 and 2001, the Company made contributions to the plan of $0.1 million, $3.9 million, $3.0 million and $2.0 million, respectively, in the aggregate. SLEEP COUNTRY 401(K) PLAN AND PROFIT SHARING PLAN The Company sponsors a 401(k) savings plan and profit sharing plan for all full-time employees of Sleep Country with three months of service. Annually, the Company may contribute a discretionary match based on a percentage of the employee's 401(k) deferral. The Company's contributions to these plans for Combined '03, 2002 and 2001 were not material. OTHER PLANS Certain union employees participate in multi-employer pension plans sponsored by their respective unions. Amounts charged to pension cost, representing the Company's required contributions to these plans for Successor '03, Predecessor '03, 2002 and 2001 were not material, $2.1 million, $2.0 million and $2.1 million, respectively. The Company had accrued $3.0 million at December 27, 2003 and $2.5 million at December 28, 2002 for a supplemental executive retirement plan for a former executive. Such amounts are included in other non-current liabilities in the accompanying consolidated balance sheets. RETIREE HEALTH AND LIFE INSURANCE COVERAGE The Company accrues the cost of providing postretirement benefits, including medical and life insurance coverage, during the active service period of the employee. Such amounts are included in other non-current liabilities in the accompanying consolidated balance sheets. In 2000, the Company limited eligibility for retiree health care benefits to employees who had become or did become eligible (by reaching age 55 with 15 years of service) by December 31, 2001. The effect of this change was a decrease in the benefit obligation of approximately $1.1 million. In 2001, the Company made benefit payments of approximately $2.5 million to settle a portion of this obligation. As a result of the settlement, the Company recorded a gain of approximately $2.1 million during 2001 related to the reduction of the accumulated post-retirement benefit obligation. Approximately $0.5 million and $1.6 million of this gain is reflected in cost of products sold and selling, general and administrative expenses, respectively, in the accompanying 2001 Consolidated Statement of Operations. 58 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company currently allows former non-union employees who obtained age 55 and had 15 years of service as of December 31, 2001, and their spouses, to continue to receive health insurance coverage under our self-insured medical plan through age 65. The premiums for such coverage are paid by the former non-union employees. There is no current retiree health coverage for participants age 65 and over. This plan is unfunded. The Company also provides for the continuance of term life insurance under our group life insurance for a grandfathered group of former employees. The aggregate annual premiums for this coverage is not significant and are paid by the Company. This liability is unfunded. The Company had an accrued postretirement benefit obligation of $0.7 million and $0.5 million as of December 27, 2003 and December 28, 2002, respectively. In connection with the Acquisition, the accrued postretirement benefit obligation was adjusted to the difference between the projected benefit obligation and the fair value of the plan assets as of December 19, 2003. The Company had postretirement benefit income of $0.3 million for both Predecessor '03 and 2002. NOTE P -- CONTINGENCIES From time to time, the Company has been involved in various legal proceedings. The Company believes that all other litigation is routine in nature and incidental to the conduct of the Company's business, and that none of this other litigation, if determined adversely to the Company, would have a material adverse effect on the Company's financial condition or results of its operations. NOTE Q -- RELATED PARTY TRANSACTIONS In connection with the Transactions, the Company entered into a management agreement ("THL management agreement") with an affiliate of THL pursuant to which THL renders certain advisory and consulting services to the Company and each of its subsidiaries. In consideration of those services, the Company agreed to pay THL management fees equal to the greater of $1.5 million or an amount equal to 1.0% of the consolidated earnings before interest, taxes, depreciation and amortization of Simmons for such fiscal year, but before deduction of any such fee. The fees are paid semi-annually. The Company and Fenway had entered into a management agreement (the "Fenway Advisory Agreement") pursuant to which Fenway provided strategic advisory services to the Company. The Fenway Advisory Agreement was amended on October 21, 2002 to change the calculation of the annual management fee. In exchange for advisory services, the Company had agreed to pay Fenway (i) annual management fees of the greater of 0.25% of net sales for the prior fiscal year or 2.5% of Adjusted EBITDA for the prior fiscal year, not to exceed $3.0 million; (ii) fees in connection with the consummation of any acquisition transactions for Fenway's assistance in negotiating such transactions; and (iii) certain fees and expenses, 59 SIMMONS BEDDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including legal and accounting fees and any out-of-pocket expenses, incurred by Fenway in connection with providing services to the Company. Prior to October 21, 2002, the annual management fee to Fenway was calculated as 0.25% of net sales for the prior year. In conjunction with the Acquisition, the Fenway Advisory Agreement was terminated. Sleep Country, Fenway and Boston Gardens Advisors, LLC ("Boston Gardens") entered into a management agreement (the "Sleep Country Advisory Agreement") pursuant to which Fenway and Boston Gardens provided strategic advisory services to Sleep Country. In conjunction with the merger of Simmons Company and Sleep Country on February 28, 2003, the Sleep Country Advisory Agreement was terminated. Included in other expense in the accompanying Consolidated Statements of Operations for Successor '03, Predecessor '03, 2002 and 2001 is $0.1 million, $2.8 million, $2.4 million and $2.5 million, respectively, related to the management fees for services provided by THL and Fenway to the Company and its subsidiaries. In connection with the Transactions, the Company agreed to pay an affiliate of THL a transaction fee equal to $20.0 million plus all out-of-pocket expenses incurred by THL relating to the Transactions and the related financing. Mr. Eitel owns a motor yacht, which as of November 1, 2003, he has agreed to make available to the Company for 30 days each year for use as a venue for corporate and other functions. As compensation for the use of Mr. Eitel's motor yacht, commencing November 1, 2003, we have agreed to pay compensation to the captain of Mr. Eitel's motor yacht in the amount of $80,000, plus benefits. In fiscal year 2003, the total amount of salary and benefits paid under this agreement was approximately $15,000. We estimate that payments in 2004 for the services of the captain of Mr. Eitel's motor yacht will total approximately $93,000. During fiscal 2003, Rousch Consulting Group, Inc. provided consulting services to the Company for aggregate payments of approximately $160,000, inclusive of out-of-pocket expenses of approximately $45,000. Rousch Consulting Group, Inc. is wholly owned by Edward L. Rousch, husband of our Executive Vice President -- Human Resources and Assistant Secretary, Rhonda C. Rousch. NOTE R -- SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) Although not required, following is a condensed summary of consolidated quarterly results for 2003. The results of operations for the Combined Fourth Quarter represent the mathematical addition of the historical amounts for the Predecessor period (September 28, 2003 through December 19, 2003) and the Successor period (December 20, 2003 through December 27, 2003) and are not indicative of the results that would have actually been obtained if the Acquisition had occurred on September 28, 2003.
PREDECESSOR PREDECESSOR PREDECESSOR COMBINED FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- (IN THOUSANDS) = Net sales........................ $186,615 $199,299 $217,924 $202,495 Gross profit..................... 88,382 94,561 104,491 101,222 Operating income (loss).......... 19,908 12,591 24,602 (58,306) Net income (loss)................ 7,480 3,485 15,573 (67,824)
NOTE S -- SUBSEQUENT EVENT As further described in Note A, the Company's indirect parent, THL Bedding Holding Company, changed its name to Simmons Company and the Company changed its name from Simmons Company to Simmons Bedding Company effective July 14, 2004. 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has been no occurrence requiring a response to this item. ITEM 9A. CONTROLS AND PROCEDURES. (a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this annual report on Form 10-K, the Company has carried out an evaluation, under the supervision and the participation of the Company's management, including the Company's principal executive officer and the Company's principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. (b) As required by Exchange Act Rule 13a-15(d), our management, including our principal executive officer and principal financial officer, also conducted an evaluation of the our internal controls over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Based on that evaluation, there has been no such change during the period presented by this report. (c) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 61 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT AND DIRECTORS The directors and principal officers of Simmons, and their positions and ages as of March 1, 2004, are as follows:
NAME AGE POSITION - ---- --- -------- Charles R. Eitel.......................... 54 Chairman of the Board of Directors and Chief Executive Officer Robert W. Hellyer......................... 44 President and Director William S. Creekmuir...................... 48 Executive Vice President, Chief Financial Officer, Assistant Treasurer, Assistant Secretary and Director Rhonda C. Rousch.......................... 49 Executive Vice President -- Human Resources and Assistant Secretary Robert M. Carstens........................ 40 Senior Vice President -- Manufacturing Kevin Damewood............................ 47 Senior Vice President -- Sales and Marketing Kristen K. McGuffey....................... 38 Senior Vice President, General Counsel and Secretary Allen N. Podratsky........................ 48 Senior Vice President -- Product Development and Supply Chain Management W. Wade Vann.............................. 50 Senior Vice President and Chief Information Officer Brian P. Breen............................ 43 Vice President -- Treasurer and Assistant Secretary Earl C. Brewer............................ 58 Vice President -- Taxation and Assistant Secretary Mark F. Chambless......................... 46 Vice President, Corporate Controller and Assistant Secretary Donald J. Hofmann......................... 51 Vice President -- New Business Development and Domestic Licensing Timothy F. Oakhill........................ 41 Vice President -- International Licensing Todd M. Abbrecht.......................... 35 Director David A. Jones............................ 54 Director Albert L. Prillaman....................... 58 Director Scott A. Schoen........................... 45 Director George R. Taylor.......................... 32 Director
The present principal occupations and recent employment history of each of our executive officers and directors listed above is as follows: Charles R. Eitel joined Simmons in January 2000 as Chairman of the Board of Directors and Chief Executive Officer of Simmons and Simmons Holdings, Inc. Prior to joining Simmons, Mr. Eitel served as President and Chief Operating Officer of Interface, Inc., a leading global manufacturer and marketer of floor coverings, interior fabrics and architectural raised floors. Prior to serving as Chief Operating Officer, he held the positions of Executive Vice President of Interface, President and Chief Executive Officer of the Floor Coverings Group, and President of Interface Flooring Systems, Inc. Mr. Eitel is a director of Duke Realty Corporation, an industrial real estate company (REIT) based in Indianapolis, Indiana and American Fidelity Assurance Company in Oklahoma City, Oklahoma. Robert W. Hellyer joined Simmons in 1995 and has served as President and director of Simmons and Simmons Holdings, Inc. since January 2001. Prior to assuming his current position, Mr. Hellyer served as Executive Vice President -- Sales and Marketing, Executive Vice President -- Sales, General Manager -- Janesville and Vice President of Sales -- Janesville. Prior to joining Simmons, Mr. Hellyer held various sales positions with Stearns & Foster. Mr. Hellyer is a member of the Board of Trustees of ISPA. William S. Creekmuir joined Simmons in April 2000 and serves as Executive Vice President, Chief Financial Officer, Assistant Treasurer, Assistant Secretary and director of both Simmons and Simmons Holdings, Inc. Prior to joining Simmons, Mr. Creekmuir served as Executive Vice President, Chief Financial Officer, Secretary and Treasurer of LADD Furniture, Inc., a publicly traded furniture manufacturer. Prior to joining LADD in 1992, he worked 15 years with KPMG in their audit practice, the last five years of which he was a partner, including partner in charge of their national furniture manufacturing practice. Mr. Creekmuir is Chairman of the Statistics Committee for ISPA. Mr. Creekmuir is also a member of the Business Advisory 62 Council to the Walker College of Business at Appalachian State University. Mr. Creekmuir is a Certified Public Accountant. Rhonda C. Rousch joined Simmons in November 2001 and has served as Executive Vice President -- Human Resources and Assistant Secretary since October 2002. Prior to assuming her current position, Ms. Rousch served as Senior Vice President -- Human Resources and Assistant Secretary. Prior to joining Simmons, from September 2000 to November 2001, Ms. Rousch was Vice President of Human Resources for MW Manufacturers, Inc. Prior to September 2000, Ms. Rousch was the Director of Organizational Readiness for Harley-Davidson, Inc. Robert M. Carstens joined Simmons in February 1994 and serves as Senior Vice President of Manufacturing. Mr. Carstens previously held a variety of positions at Simmons including Vice President of Operations, and Operations Manager in both the Piscataway, New Jersey and Atlanta, Georgia facilities. Mr. Carstens began his bedding manufacturing career in 1983 at Sealy Corporation, where he held various positions including Operations Manager. Kevin Damewood joined Simmons in January 2000 and has served as Senior Vice President -- Sales and Marketing since January 2004. Prior to assuming his current position, Mr. Damewood served as Senior Vice President -- Sales since July 2001 and prior to that he served as Vice President -- National Accounts. Mr. Damewood also worked for Simmons from July 1996 to April 1999 as Vice President -- Sales for the Seattle and Salt Lake City plants. Between April 1999 and December 2000, Mr. Damewood was employed with Premier Bedding Group as Vice President of National Sales. Kristen K. McGuffey joined Simmons in November 2001 and has served as Senior Vice President -- General Counsel and Secretary since August 2002. Prior to assuming her current position, Ms. McGuffey served as Vice President -- General Counsel and Assistant Secretary. Prior to joining Simmons, from March 2000 to October 2001, Ms. McGuffey was employed by Viewlocity, Inc., with the most recent position of Executive Vice President and General Counsel. From March 1997 to February 2000, Ms. McGuffey was a partner of and, prior to that, an associate at Morris, Manning & Martin LLP. Prior to March 1997, Ms. McGuffey was an associate at Paul, Hastings, Janofsky & Walker, LLP. Allen N. Podratsky joined Simmons in May 2000 as Senior Vice President -- Product Development and Supply Chain Management. Prior to joining Simmons, from February 1999 to May 2000, Mr. Podratsky was Vice President of World-Wide Supply Chain Management for Xerox Engineering Systems, a division of Xerox Corporation. From 1992 to February 1999, Mr. Podratsky held various positions at Mattel, Inc. (Fisher-Price, Inc.), including Director Product Development and Director Commodity Management -- Plastics. Mr. Podratsky is the President of the Sleep Products Safety Council, an organization affiliated with ISPA. W. Wade Vann joined Simmons in October 2000 and has served as Senior Vice President of Information Technology and Chief Information Officer since January 2004. Prior to assuming his current position, Mr. Vann served as the Vice President of Information Technology and Chief Information Officer. Prior to joining Simmons, Mr. Vann held the position of Director of Information Technology with Broyhill Furniture Industries from October 1992 to October 2000. Brian P. Breen joined Simmons in July 1996 and has served as Vice President and Treasurer since January 2002. Prior to assuming his current position, Mr. Breen served as Vice President and Assistant Treasurer since September 2000 and prior to that served as Director of Financial Reporting of the Outlet Division. Prior to joining Simmons Mr. Breen held various financial reporting positions most recently serving as Controller for Six Flags Theme Parks. Mr. Breen is a Certified Treasury Professional. 63 Earl C. Brewer joined Simmons in February 2001 and has served as Vice President of Taxation and Assistant Secretary since then. Prior to joining Simmons, Mr. Brewer held similar positions at Oakwood Homes Corporation from March 2000 to February 2001 and at LADD Furniture, Inc. from October 1993 to February 2000. Mr. Brewer is a Certified Public Accountant. Mark F. Chambless joined Simmons in May 1995 and has served as Vice President and Corporate Controller since February 2000. Mr. Chambless is the Principal Accounting Officer for the Company. Prior to assuming his current position, Mr. Chambless was the Corporate Controller from November 1995 through February 2000 and prior to that served as a Divisional Controller. Prior to joining Simmons, Mr. Chambless worked nine years at Sealy Corporation where he held various positions including Plant Controller, Operations Manager and Divisional Controller. Donald J. Hofmann joined Simmons in 1995 and has served as Vice President of New Business Development and Domestic Licensing since January 2004. Prior to assuming his current position, Mr. Hofmann has held various positions within the Company, including Senior Vice President of Marketing and Vice President of Advertising. Prior to joining Simmons, Mr. Hofmann held various marketing and advertising positions, including President of Earle Palmer Brown Advertising and Executive Vice President of Marketing at Tupperware, Inc. Mr. Hofmann is a director of the Better Sleep Council, an organization affiliated with ISPA. Timothy F. Oakhill joined Simmons in January 1997 and has served as Vice President -- International since January 2004. Prior to assuming his current position, Mr. Oakhill managed various Simmons brands, including BackCare(R) and Deep Sleep(R) from January 1997 to August 2003 and Beautyrest(R) from August 2003 to January 2004. Prior to joining Simmons, Mr. Oakhill served as Marketing Manager for Eastman-Kodak Company and as an account supervisor for Bates Worldwide. Todd M. Abbrecht has been a director of Simmons since December 2003, following the consummation of the Transactions. Mr. Abbrecht is a Managing Director of Thomas H. Lee Partners, which he joined in 1992. Prior to joining the firm, Mr. Abbrecht was in the mergers and acquisitions department of Credit Suisse First Boston. Mr. Abbrecht is a director of Affordable Residential Communities, Inc., Michael Foods, Inc., and National Waterworks, Inc. David A. Jones has been a director of Simmons since December 2003, following the consummation of the Transactions. Mr. Jones has served as the Chairman of the Board of Directors and Chief Executive Officer of Rayovac Corporation since September 1996. From 1996 to April 1998, he also served as President. From 1995 to 1996, Mr. Jones was President, Chief Executive Officer and Chairman of the Board of Directors of Thermoscan, Inc. Mr. Jones currently serves on the Board of Directors of Tyson Foods, Inc. and Pentair, Inc. and previously served on the Board of Directors for United Industries Corporation. Albert L. Prillaman has been a director of Simmons since December 2003, following the consummation of the Transactions. Mr. Prillaman is Chairman of the Board of Stanley Furniture Company, Inc., where he previously served as both President and Chief Executive Officer. Mr. Prillaman currently serves on the Board of Trustees of Roanoke College. Mr. Prillaman was a director of Culp, Inc. in High Point, North Carolina, and past Chairman of the Board of the American Furniture Manufacturers Association in High Point, North Carolina. Scott A. Schoen has been a director of Simmons since December 2003, following the consummation of the Transactions. Mr. Schoen is a Managing Director of Thomas H. Lee Partners, which he joined in 1986. Prior to joining the firm, Mr. Schoen was in the Private Finance Department of Goldman, Sachs & Co. Mr. Schoen is a director of AXIS Capital Holdings Limited, Affordable Residential Communities, Inc., Syratech Corporation, TransWestern Publishing, L.P., United Industries Corporation and Wyndham International. Mr. Schoen is a Vice Chairman of the Board and a member of the Executive Committee of the United Way of Massachusetts Bay. He is also a member of the Advisory Board of the Yale School of Management. 64 George R. Taylor has been a director of Simmons since December 2003, following the consummation of the Transactions. Mr. Taylor is a Vice President at Thomas H. Lee Partners, which he joined in 1996. Prior to joining the firm, Mr. Taylor was at ABS Capital Partners. Mr. Taylor is a director of Syratech Corporation. Each of our directors will hold office until his successor has been elected and qualified. Our executive officers are elected by and serve at the discretion of our Board of Directors. There are no family relationships between any of our directors or executive officers. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors for our indirect parent company, THL Holding, has established an audit committee, a compensation committee, a nominating and governance committee and a corporate benefits committee for itself and us. The members of the audit committee are Messrs. Prillaman, Taylor and Jones. The members of the compensation committee are Messrs. Schoen, Abbrecht and Eitel. The members of the corporate benefits committee are Messrs. Creekmuir, Eitel and Hellyer. The members of the nominating and governance committee are Messrs. Schoen, Abbrecht and Eitel. The audit committee oversees management regarding the conduct and integrity of our financial reporting, systems of internal accounting and financial and disclosure controls. The audit committee reviews the qualifications, engagement, compensation, independence and performance of our independent auditors, their conduct of the annual audit and their engagement for any other services. The audit committee also oversees management regarding our legal and regulatory compliance and the preparation of an annual audit committee report for the annual proxy statement. The compensation committee oversees our management compensation policies and practices, including determining and approving the compensation of the CEO and other senior executive officers; reviewing and approving management incentive compensation policies and programs; reviewing and approving equity compensation programs for employees and exercising discretion over the administration of such programs and producing an annual compensation committee report. The purpose of the nominating and governance committee is to identify, screen and review individuals qualified to serve as directors and recommending to the Board candidates for nomination for election at annual meetings of the stockholders or to fill Board vacancies; overseeing our policies and procedures for the receipt of stockholder suggestions regarding Board composition and recommendations of candidates for nomination by the Board; developing, recommending to the Board and overseeing implementation of our corporate governance guidelines and principles; reviewing, recommending to the Board approval of, if appropriate, and overseeing implementation of the Code of Ethics for Chief Financial Officers and the Code of Business Conduct and Ethics; and reviewing on a regular basis the overall corporate governance of Simmons Bedding and recommending improvements when necessary. The corporate benefits committee has the responsibility to determine all Corporate benefits for employees of the Company and to administer our employee benefit plans in accordance with the Company by-laws. From time to time, the boards of directors of THL Holding or Simmons Bedding may contemplate establishing other committees. DIRECTOR COMPENSATION All members of our board of directors are reimbursed for their usual and customary expenses incurred in connection with attending all board and other committee meetings. Non-employee directors, Messrs. Prillaman and Jones receive director fees of $25,000 per year and also own 2,500 shares of Class B common stock of THL Holding, which stock is subject to time and performance-based vesting. AUDIT COMMITTEE FINANCIAL EXPERT We have no financial expert. Our board intends to seek and consider retaining such an expert in fiscal 2004. CODE OF ETHICS We have a code of ethics (the "Code of Ethics"), within the meaning of 17 CFR Section 229.406, that applies to the Company's Chief Executive Officer, Chief Financial Officer, Corporate Controller and Vice President - Audit Services. If the Company makes an amendment to the Code of Ethics, or grants a waiver from a provision of the Code of Ethics to the Chief Executive Officer, Chief Financial Officer, Corporate Controller, or Vice President - Audit Services, then the Company will make any required disclosure of such amendment or waiver on the Company's website (www.simmons.com) or in a current report on Form 8-K filed with the SEC. 65 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth all cash compensation earned in the previous three years by our Chief Executive Officer and each of our other five most highly compensated executive officers during the past year (the "Named Executive Officers"). The compensation arrangements for each of these officers that are currently in effect are described under the caption "Employment Arrangements" below. The bonuses set forth below include amounts earned in the year shown but paid in the subsequent year.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION -------------------- --------------------------------------------- RESTRICTED ALL OTHER OTHER STOCK OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) (#) (#) ($)(9) - --------------------------- ---- --------- -------- --------------- ---------- ------- ------------ Charles R. Eitel......... 2003 $585,717 $558,249 $29,200,225(1) 183,529(2) $44,534 Chairman, Chief 2002 562,083 613,039 18,800(1) -- -- 48,952 Executive Officer 2001 528,847 275,249 105,093(1) -- -- 27,137 Robert W. Hellyer........ 2003 323,440 233,680 11,263,286(3) 126,176 -- 11,462 President 2002 311,000 258,915 11,500(3) -- -- 33,613 2001 293,750 111,754 66,502(3) -- -- 40,276 William S. Creekmuir..... 2003 311,000 224,692 10,955,069(4) 114,706 -- 27,924 Executive Vice 2002 300,000 249,758 177,540(4) -- -- 32,339 President -- Chief 2001 298,750 103,715 81,910(4) -- -- 12,293 Financial Officer Donald J. Hofmann........ 2003 195,000 101,113 2,169,168(5) 3,440 -- 13,571 Vice President -- New 2002 190,000 119,407 -- -- -- 27,238 Business Development 2001 189,164 41,853 -- -- -- 27,380 & Domestic Licensing Mark A. Parrish(6)....... 2003 152,880 110,453 2,188,762(7) -- -- 8,501 Executive Vice 2002 259,166 215,763 11,500(7) -- 25,000 66,778 President -- Chief 2001 120,833 88,109 6,875(7) -- 275,000 60,430 Operations Officer Kevin Damewood........... 2003 208,750 95,111 2,050,345(8) 6,880 -- 13,700 Senior Vice President -- 2002 193,750 93,607 -- -- -- 26,212 Sales and Marketing 2001 172,987 47,137 -- -- -- 19,125
- --------------- (1) Such amounts principally include (i) exercise of stock options held in predecessor company that were held by The Charles R. Eitel Revocable Trust, of which Mr. Eitel is trustee, of $29,177,145 in 2003; (ii) a car allowance of $12,000 in 2003, 2002 and 2001; and (iii) club initiation and membership fees of $11,080, $6,800 and $93,093 in 2003, 2002 and 2001, respectively. These items were taxable to Mr. Eitel. The personal income tax impact of a 2001 club initiation and membership fee was assumed by Simmons which resulted in additional compensation of $40,009. (2) Restricted stock shares are held by The Charles R. Eitel Revocable Trust, of which Mr. Eitel is the trustee. (3) Such amounts principally include (i) exercise of stock options held in predecessor company of $11,254,286 in 2003; (ii) a car allowance of $9,000 in 2003, 2002 and 2001; and (iii) moving expenses of $55,502 in 2001. These items were taxable to Mr. Hellyer. The personal income tax impact of the 2001 moving expenses was assumed by Simmons which resulted in additional compensation of $10,315. (4) Such amounts principally include (i) exercise of stock options held in predecessor company of $10,806,350 in 2003; (ii) a car allowance of $9,000 in 2003, 2002 and 2001; (iii) commute and temporary housing expenses of $16,852 and $70,910 in 2002 and 2001, respectively; (iv) moving expenses of $120,000 in 2002; and (v) reimbursement of mortgage costs of $80,409 and $29,187 in 2003 and 2002, respectively. These items were taxable to Mr. Creekmuir. The personal income tax impact of certain commute and temporary housing expenses and moving expenses was assumed by Simmons which resulted in additional compensation of $59,310, $38,674 and $34,562 in 2003, 2002 and 2001, respectively. (5) Such amount represents the exercise of stock options held in predecessor company. (6) Mr. Parrish is no longer employed by Simmons. (7) Such amounts principally include (i) exercise of stock options held in predecessor company of $2,067,000 in 2003; (ii) severance payments of $116,653 in 2003; (iii) a car allowance of $5,109, $9,000 and $4,875 in 2003, 2002 and 2001, respectively; and (iv) forgiveness of a loan of $112,692 in 2003. The personal income tax impact of the forgiveness of a loan was assumed by Simmons which resulted in additional compensation of $83,215 in 2003. (8) Such amount represents the exercise of stock options held in predecessor company. (9) All other compensation amounts include: (a)contributions to our ESOP in 2002 and 2001, respectively, in the amounts of $16,170 and $0 for Mr. Eitel; $17,147 and $21,911 for Mr. Hellyer; $14,229 and $0 for Mr. Creekmuir; $14,193 and $13,545 for Mr. Damewood; and $14,877 and $21,837 for Mr. Hofmann, respectively; (b)contributions to our 401(k) plan in 2003, 2002 and 2001, respectively, in the amounts of $12,000, $11,058 and $14,500 for Mr. Eitel; $12,000, $10,875 and $14,812 for Mr. Hellyer; $12,000, $9,750 and $6,750 for Mr. Creekmuir; $12,000, $10,696, and $5,100 for Mr. Damewood; $7,232, $4,550 and $0 for Mr. Parrish; and $12,000, $11,057 and $5,100 for Mr. Hofmann, respectively; and 66 (c)premiums for term life insurance and long-term disability insurance in 2003, 2002 and 2001, respectively, in the amounts of $22,268, $21,724 and $12,636 for Mr. Eitel; $7,845, $5,591 and $3,552 for Mr. Hellyer; $10,899, $8,340 and $5,543 for Mr. Creekmuir; $1,700, $1,323 and $480 for Mr. Damewood; $1,269, $1,798, and $0 for Mr. Parrish; and $1,571, $1,304 and $443 for Mr. Hofmann, respectively. These premiums were taxable to Messrs. Eitel, Hellyer, Creekmuir, Damewood, Parrish, and Hofmann. The personal income tax impact of these items were assumed by Simmons for Messrs. Eitel, Hellyer and Creekmuir, which resulted in additional compensation in 2003, 2002 and 2001, respectively, in the amounts of $10,266, $9,994 and $5,756 for Mr. Eitel; $3,617, $2,543 and $2,452 for Mr. Hellyer; and $5,025, $3,845 and $2,548 for Mr. Creekmuir. OPTION/SAR GRANTS IN LAST FISCAL YEAR There were no options granted in fiscal year 2003. In connection with the transactions, all option plans were terminated. 67 EMPLOYMENT ARRANGEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL ARRANGEMENTS Executive Employment Agreements. Four of our senior executives, Charles Eitel, William Creekmuir, Robert Hellyer and Rhonda Rousch entered into executive employment agreements with THL Bedding Holding Company and Simmons on substantially similar terms to their previous existing arrangements. The agreements have two-year terms with evergreen renewal provisions and contain usual and customary restrictive covenants, including two-year non-competition provisions, non-disclosure of proprietary information provisions, provisions relating to non-solicitation/no hire of employees or customers and non-disparagement provisions. In the event of a termination without "cause" or departure for "good reason," the terminated senior executives are entitled to severance equal to two years salary plus an amount equal to their pro-rated bonus for the year of termination. Put/Call Arrangements. Under THL Bedding Holding Company's Securityholders' Agreement, THL Bedding Holding Company has the right to purchase for fair market value a management stockholder's Class A common stock upon termination of such management stockholder's employment for any reason; provided that, if such employee is terminated for "cause" or voluntarily quits, Simmons may repurchase such shares at the lower of fair market value and cost. In addition, upon termination of Charles Eitel, William Creekmuir, Robert Hellyer or Rhonda Rousch by Simmons without "cause" or by the employee for "good reason," such employee may require Simmons to repurchase shares of Class A common stock held by them for fair market value. With respect to other employee holders of Class A Common Stock, if such employee is terminated without "cause," then such employee may require Simmons to repurchase shares of Class A Common Stock held by such employee for the lower of fair market value and cost. Fair market value will be initially determined by the Board of Directors of THL Bedding Holding Company. Under restricted stock agreements, upon termination of employment for any reason, Simmons has the right to repurchase such terminated employee's Class B common stock. EMPLOYEE BENEFIT PLANS The THL Bedding Holding Company Equity Incentive Plan was adopted in connection with the Transactions and is used to attract and retain the best available personnel, to provide additional incentive to persons who provide services to us, and to promote the success of our business. The Plan is administered by the board of directors of THL Bedding Holding Company or, at its election, by one or more committees consisting of one or more members who have been appointed by that board of directors. The board of directors of THL Bedding Holding Company is authorized to grant options, restricted stock or other awards to our employees, directors, and consultants or any direct or indirect corporate or other subsidiary in which we own at least 50% of the outstanding equity interests. Restricted shares of Class B common stock representing up to fifteen percent (15%) of the capital stock of THL Bedding Holding Company (on a fully diluted basis) may be issued pursuant to 68 awards under the Plan. Awards of restricted stock shall be made pursuant to restricted stock agreements and may be subject to vesting and other restrictions as determined by the board of directors of THL Bedding Holding Company, or a committee of the board. Among other things, the restricted stock agreements provide, under certain conditions, for acceleration in vesting of the stock upon a change in control and all restricted stock vests on the eight anniversary of the issuance of the restricted stock. See "Certain Relationships and Related Party Transactions -- Restricted Stock Agreement." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Following the Acquisition, compensation decisions regarding our executive officers are made by the compensation committee (the "Committee") of the Board of Directors of THL Bedding Holding Company. The members of the Committee as of December 27, 2003 are Messrs. Abbrecht, Eitel and Schoen. Mr. Eitel is our Chairman of the Board and Chief Executive Officer. Mr. Eitel cannot vote on his own compensation. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Committee is responsible for the general compensation policies of the Company, and in particular is responsible for setting and administering the policies that govern executive compensation. The Committee evaluates the performance of management and determines the compensation levels for the Chief Executive Officer (the "CEO") and the executive officers of the Company. The CEO determines compensation levels for all other executive officers subject to the informal approval of the Committee. The objective of the Committee is to establish policies and programs to attract and retain key executives, and to reward performance by these executives which benefit the Company. The primary elements of executive compensation are base salary, annual cash bonus and restricted stock awards. The salary is based on factors such as the individual executive officer's level of responsibility, and comparison to similar positions in the Company and in comparable companies. The annual cash bonuses are currently based on the Company's performance measured against attainment of financial objectives. Restricted stock awards are intended to align the executive officer's interests with those of the Company and its stockholders in promoting the long-term growth of the Company, and are determined based on the executive officer's level of responsibility, number of stock options previously granted, and contributions toward achieving the objectives of the Company. Further information on each of these compensation elements follows. SALARIES Base salaries are adjusted annually, following a review by either the CEO, President, or Executive Vice President & Chief Financial Officer. In the course of the review, performance of the individual with respect to specific objectives is evaluated, as are any increases in responsibility, and salaries for similar positions. The specific objectives for each executive officer are set by either the CEO, President, or Executive Vice President & Chief Financial Officer, and will vary for each executive position and for each year. Because the focus of the review is individual achievement, performance of the Company does not weigh heavily in the result. When all reviews are completed, the CEO makes a recommendation to the Committee for their review and final approval. 69 With respect to the CEO, the Committee reviews and fixes his base salary primarily on the Committee's assessment of his performance and its expectations as to his future contributions. Competitive compensation data is also a major factor in establishing the CEO's salary, but no precise formula is applied in considering this data. The Committee's review takes place annually. ANNUAL CASH BONUSES Certain of our employees are eligible, pursuant to their employment agreements, to receive annual cash bonuses based upon the financial performance of the Company. RESTRICTED STOCK AWARDS THL Holding has adopted a management equity incentive plan to provide incentives to our employees and directors and the employees and directors of THL Holding by granting them restricted stock awards of Class B common stock of THL Holding. These restricted stock awards are intended to provide an incentive to continue as employees over a long term, and to align their interests with the Company by providing a stake in THL Holding. In making grants, THL Holding's compensation committee takes into account the total number of shares available for grant, prior grants outstanding, and estimated requirements for future grants. Individual awards take into account the executive officer's contributions to the Company, scope of responsibilities, strategies and operational goals, salary and previous stock option awards under the former management stock incentive plan. In determining a restricted stock award for the CEO, THL Holding's compensation committee weighs all of the above factors, but also recognizes the CEO's critical role in developing strategies for the long-term benefit of the Company. Restricted stock awards are an important element in attracting and retaining capable executives at all levels, and this is particularly so in the case of the CEO. OTHER BENEFITS Periodically, the Compensation Committee assesses the other benefits provided to Executive Officers of the Company. The Committee continually reviews the Company's compensation programs to ensure the overall package is competitive, balanced, and that proper incentives and rewards are provided. Compensation Committee: Todd M. Abbrecht Charles R. Eitel Scott A. Schoen 70 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Simmons Bedding Company is an indirect wholly owned subsidiary of Simmons Company. The following table sets forth certain information regarding beneficial ownership of Simmons Company by: (1) each person or entity owning any class of Simmons Company's outstanding securities and (2) each member of the board of directors of Simmons Company (which is identical to the board of directors of Simmons Bedding), each of our named executive officers, each member of our management committee and our executive officers as a group. Simmons Company's outstanding securities consisted of 3,680,308.49 shares of Class A Common Stock as of March 8, 2004. We have also authorized 688,235 shares of Class B Common Stock, of which 657,139 shares were outstanding as of March 8, 2004 for issuance pursuant to the restricted stock agreement under our equity incentive plan. See "Certain Relationships and Related Party Transactions -- Amended and Restated Certificate of Incorporation of Simmons Company." The Class A common stock and Class B common stock generally have identical voting rights. To our knowledge, each such stockholder has sole voting and investment power as to the common stock shown unless otherwise noted. Beneficial ownership of the common stock listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended.
SECURITIES BENEFICIALLY OWNED ---------------------------------------------------------------- PERCENTAGE PERCENTAGE CLASS A OF CLASS A CLASS B OF CLASS B COMMON COMMON COMMON COMMON PERCENT NAME AND ADDRESS STOCK STOCK STOCK STOCK OF TOTAL - ---------------- ------------ ---------- ------------ ---------- -------- Principal Securityholders: Thomas H. Lee Partners L.P. and Affiliates(1).......... 3,270,940.05 88.9% -- --% 75.4% Fenway Partners Capital Fund II, L.P. and Affiliates(2).............. 387,837.03 10.5 -- -- 8.5 Directors and Executive Officers: Charles R. Eitel(3)........... -- * 183,529 27.0 4.2 Robert W. Hellyer(3).......... -- * 126,176 19.2 2.9 William S. Creekmuir(3)....... -- * 114,706 17.5 2.6 Kevin Damewood(3)............. -- * 6,880 1.0 * Mark A. Parrish(4)............ -- * -- * * Donald J. Hofmann(3).......... -- * 3,440 * * Todd M. Abbrecht(1)........... 3,270,940.05 88.9 -- -- 75.4 David A. Jones(5)............. 2,000.00 * 2,500 * * Albert L. Prillaman(6)........ 2,500.00 * 2,500 * * Scott A. Schoen(1)............ 3,270,940.05 88.9 -- -- 75.4 George R. Taylor(1)........... 3,270,940.05 88.9 -- -- 75.4 All directors and named executive officers as a group (11 persons)(1)............... 3,275,440.05 90.0% 439,731 66.9% 87.6%
- --------------- * less than 1% (1) Includes interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V. L.P., Thomas H. Lee Investors Limited Partnership, 1997 Thomas H. Lee Nominee Trust, Putnam Investments Holdings, LLC, Putnam Investments Employees' Securities Company I, LLC, and Putnam Investments Employees' Securities Company II, LLC., Thomas H. Lee Equity Fund V, L.P. and Thomas H. Lee Parallel Fund V, L.P. are Delaware limited partnerships, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company. Thomas H. Lee Equity (Cayman) Fund V, L.P. is an exempted limited partnership formed under the laws of the Cayman Islands, whose general partner is THL Equity Advisors V, LLC, a Delaware limited liability company registered in the Cayman Islands as a foreign company. Thomas H. Lee 71 Advisors, LLC, a Delaware limited liability company, is the general partner of Thomas H. Lee Partners, a Delaware limited partnership, which is the sole member of THL Equity Advisors V, LLC. Thomas H. Lee Investors Limited Partnership (f/k/a THL-CCI Limited Partnership) is a Massachusetts limited partnership, whose general partner is THL Investment Management Corp., a Massachusetts corporation. The 1997 Thomas H. Lee Nominee Trust is a trust with US Bank, N.A. serving as Trustee. Thomas H. Lee, a Managing Director of Thomas H. Lee Advisors, LLC, has voting and investment control over common shares owned of record by the 1997 Thomas H. Lee Nominee Trust. Each of Scott A. Schoen and Todd M. Abbrecht are Managing Directors of Thomas H. Lee Advisors, LLC. George R. Taylor is a Vice President of Thomas H. Lee Advisors, LLC. Each of Messrs. Schoen, Abbrecht and Taylor may be deemed to beneficially own Class A Common Stock held of record by Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V. L.P. Each of these individuals disclaims beneficial ownership of such units except to the extent of their pecuniary interest therein. The address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Scott A. Schoen, Todd M. Abbrecht and George R. Taylor is 75 State Street, Boston, MA 02109. Putnam Investments Holdings LLC, Putnam Investments Employees' Securities Company I, LLC and Putnam Investments Employees' Securities Company II, LLC are co-investment entities of Thomas H. Lee Partners and each disclaims beneficial ownership of any securities other than the securities held directly by such entity. The address for the Putnam entities is One Post Office Square, Boston, MA 02109. (2) Includes interest owned by Simmons Holdings, LLC, FPIP, LLC and FPIP Trust, LLC. The address for Fenway Capital Fund II, L.P. is 152 West 57th Street, 59th Floor, New York, New York 10019. (3) Excludes investment in Deferred Compensation Plan discussed herein that tracks the Class A Common Stock even though no actual purchase of Class A Common Stock is made. The address of Charles Eitel, Robert Hellyer, William Creekmuir, Donald Hofmann and Kevin Damewood is c/o Simmons Bedding Company, One Concourse Parkway, Suite 800, Atlanta, Georgia 30328. (4) Mark Parrish is no longer employed by Simmons Bedding. (5) The address for David A. Jones is 7440 Wildercliff Drive, Atlanta, Georgia 30328. (6) The address for Albert L. Prillaman is c/o Stanley Furniture Company, 1641 Fairystone Park Highway, P.O. Box 30, Stanleytown, Virginia 24168. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS MANAGEMENT AGREEMENT Pursuant to the management agreement entered into in connection with the Transactions, THL Managers V, LLC renders certain advisory and consulting services to Simmons and each of its subsidiaries. In consideration of those services, Simmons agreed to pay to THL Managers V, LLC, an affiliate of Thomas H. Lee Partners, semi-annually, an aggregate per annum management fee equal to the greater of: - $1,500,000; or - an amount equal to 1.0% of the consolidated earnings before interest, taxes, depreciation and amortization of Simmons for such fiscal year, but before deduction of any such fee. 72 In connection with the Transactions, Simmons agreed to pay THL Managers V, LLC at the closing of the Transactions a transaction fee equal to $20,000,000 plus all out-of-pocket expenses incurred by Thomas H. Lee Partners prior to the closing of the transaction for services rendered by it in connection with the Transactions. Simmons also agreed to indemnify THL Managers V, LLC and its affiliates from and against all losses, claims, damages and liabilities arising out of or related to the performance by Thomas H. Lee Partners Managers V, LLC of the services pursuant to the management agreement. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THL BEDDING HOLDING COMPANY The Amended and Restated Certificate of Incorporation of THL Bedding Holding Company contains, among other provisions, the following terms: Description of the Capital Stock of THL Bedding. THL Bedding Holding Company has two classes of common stock -- Class A common stock and Class B common stock. The Class A common stock is held by THL, Fenway Partners and those members of management who elected to acquire such shares in connection with the Acquisition. The Class A common stock earns a preferred return of 6% per annum. Each holder of Class A common stock is entitled to one vote (or a fraction thereof) for each share (or fraction thereof) of Class A common stock owned by such holder. THL Bedding Holding Company is also authorized to issue Class B common stock, which has identical rights to the Class A common stock, except with respect to distributions (as described below). The Class B common stock is restricted and subject to vesting as described in restricted stock agreements with the holders. Each holder of Class B common stock is entitled to one vote (or a fraction thereof) for each share (or fraction thereof) of Class B common stock issued to such holder. The Class A common stock and Class B common stock will be entitled to receive distributions in the following priority: - holders of Class A common stock will be entitled to receive an amount equal to a 6% cumulative, compounding quarterly, preferred return on their invested capital; - holders of Class A common stock will be entitled to receive a return of their invested capital; and - holders of the Class A common stock and Class B common stock will be entitled to share in all remaining distributions on a pro rata basis based on the aggregate outstanding shares of Class A common stock and Class B common stock. SECURITYHOLDERS' AGREEMENT Pursuant to the Securityholders' Agreement entered into in connection with the Acquisition, securities of THL Bedding Holding Company are subject to certain restrictions on transfer, other than certain exempt transfers as defined in the Securityholders' Agreement, as well as the other provisions described below. The Securityholders' Agreement provides that all parties to the agreement will vote all their shares to elect and continue in office the board of directors of THL Bedding Holding Company, consisting of up to nine directors composed of: - five persons designated by THL; - one person who will be the Chief Executive Officer of Simmons Company; and - up to three independent persons designated by the nominating and governance committee. 73 The Securityholders' Agreement also provides: - holders of Class A Common Stock with customary "tag-along" rights with respect to transfers of shares of THL Bedding Holding Company beneficially owned by THL; - THL Bedding Holding Company and then THL with a "right of first refusal" with respect to transfers of shares of THL Bedding Holding Company held by the management stockholders and Fenway Partners; - holders of Class A Common Stock with customary "preemptive rights"; - THL with "drag-along" rights with respect to all shares of Class A common stock and Class B common stock in a sale of THL Bedding Holding Company or its subsidiaries; and - four Simmons senior managers holding Class A Common Stock with the right to "put" all or a portion of their shares to THL Bedding Holding Company at fair market value if terminated without cause or for good reason. - THL Bedding Holding Company the right to purchase all or a portion of a terminated management stockholder's shares of THL Bedding Holding Company; and - employees, other than the four Simmons senior managers, holding Class A Common Stock right to "put" all or a portion of their shares to THL Bedding Holding Company at the lower of fair market value and cost if terminated without cause. Upon a public offering, the fair market value of THL Bedding Holding Company will be determined by its Board of Directors. The shares of Class A common stock (including those deemed held in our deferred compensation plan) will be exchanged for shares of Class B common stock (or, with respect to participants in the deferred compensation plan, a deemed investment in Class B common stock), with the number of shares of Class B common stock to be based upon the value of the Class A common stock (including shares deemed held in the deferred compensation plan) at the time of the offering. To the extent we have cash available and to the extent not restricted by market conditions related to the offering, the holders of Class A common stock (and participants in the deferred compensation plan) will be entitled to receive in cash, unless otherwise determined by the Board of Directors of THL Bedding Holding Company, an amount up to their original investment plus the 6% accrued yield. Any amounts received in cash by the holders of Class A common stock will reduce the value of the Class A common stock used to compute the number of shares of Class B common stock to be issued in such exchange. EQUITY REGISTRATION RIGHTS AGREEMENT THL is entitled to request up to four registrations of the Class A common stock of THL Bedding Holding Company under the Securities Act at any time after the closing of the Acquisition. In connection therewith, each signatory of the registration rights agreement agrees that it will vote, or cause to be voted, all common stock over which such person has power to vote to effect any stock split deemed necessary to facilitate the effectiveness of a requested registration. All holders of vested common stock are entitled to piggyback rights on any registration by THL Bedding Holding Company. DEFERRED COMPENSATION PLAN Certain members of management who were entitled to receive option proceeds in connection with the Acquisition elected to become participants in a deferred compensation plan whereby deferred compensation accounts will be deemed to be invested in Class A common stock (although no actual Class A common stock will be purchased) and will track distributions to be made to the holders of Class A common stock. RESTRICTED STOCK AGREEMENT Certain members of management were entitled to purchase shares of Class B common stock at a purchase price of $0.01 per share pursuant to a Restricted Stock Agreement. Twenty-five percent of the shares of Class B common stock become eligible for vesting at the end of each of 2004, 2005, 2006 and 2007. Vesting is subject to annual performance targets and includes catch-up provisions and acceleration upon a change of 74 control. Upon a manager's termination, THL Bedding Holding Company is entitled to repurchase (1) unvested shares of Class B common stock for the lesser of fair market value or the original purchase price, and (2) vested shares of Class B common stock at fair market value. CONSULTING SERVICES During fiscal 2003, Rousch Consulting Group, Inc. provided consulting services to Simmons for aggregate payments of approximately $160 thousand, inclusive of out-of-pocket expenses of approximately $45 thousand. Rousch Consulting Group, Inc. is wholly owned by Edward L. Rousch, husband of our Executive Vice President -- Human Resources and Assistant Secretary, Rhonda C. Rousch. TRANSACTIONS WITH MR. EITEL Mr. Eitel owns a motor yacht, which as of November 1, 2003, he has agreed to make available to the Company for 30 days each year for use as a venue for corporate and other functions. As compensation for the use of Mr. Eitel's motor yacht, commencing November 1, 2003, we have agreed to pay compensation to the captain of Mr. Eitel's motor yacht in the amount of $80 thousand per year, plus benefits, and to pay up to $25 thousand annually, including benefits, as compensation of any first mate which Mr. Eitel may hire. In fiscal year 2003, the total amount of salary and benefits paid under this agreement was approximately $15 thousand. We estimate that payments in 2004 for the services of the captain of Mr. Eitel's motor yacht will total approximately $93 thousand. During fiscal 2003, Mr. Eitel paid Simmons approximately $10 thousand as reimbursement of the costs associated with his personal use of our corporate aircraft. Beginning in fiscal 2004, we have agreed not to require Mr. Eitel to reimburse us for his use of our corporate aircraft. PURCHASE OF SLEEP COUNTRY On February 28, 2003, we acquired the stock of SC Holdings, Inc. ("Sleep Country"), a mattress retailer with 47 stores in the Pacific Northwest, from a fund affiliated with Fenway Partners for approximately $18.4 million, plus additional contingent consideration based upon future performance. This acquisition was financed from borrowings under our existing senior credit facility. Sleep Country used the proceeds received to repay bank debt of $17.8 million and debt to an affiliate of $0.6 million. In connection with the acquisition, we paid a fund affiliated with Fenway Partners and a former shareholder of Sleep Country approximately $14.8 million additional final consideration. AGREEMENT WITH FENWAY Prior to the date of the Acquisition, Fenway provided strategic advisory services to us. In exchange for advisory services, beginning October 21, 2002, we paid Fenway (i) annual management fees of the greater of 0.25% of net sales for the prior fiscal year or 2.5% of Adjusted EBITDA for the prior fiscal year, not to exceed $3.0 million; (ii) fees in connection with the consummation of any acquisition transactions for Fenway's assistance in negotiating such transactions; and (iii) certain fees and expenses, including legal and accounting fees and any out-of-pocket expenses, incurred by Fenway in connection with providing services to us. Prior to October 21, 2002, the annual management fee to Fenway was calculated as 0.25% of net sales for the prior year. In conjunction with the Acquisition, the Fenway Advisory Agreement was terminated. Prior to the date of the Acquisition, Fenway Partners provided strategic advisory services to our subsidiaries, Sleep Country and SC US Acquisition Corp. In exchange for advisory services, we paid Fenway Partners (i) annual management fees equal to the greater of 0.25% of net sales of Sleep Country for the prior fiscal year or $150,000; and (ii) fees in connection with the consummation of any acquisition transactions for Fenway Partners' assistance in negotiating those transactions. In conjunction with the Acquisition, the Management Advisory Agreement was terminated. Included in other expense in the accompanying Consolidated Statements of Operations for Successor '03, Predecessor '03, 2002 and 2001 is $0.1 million, $2.8 million, $2.4 million and $2.8 million, respectively, related to the management fees for services provided by THL and Fenway to us and our subsidiaries. AGREEMENT WITH FENWAY PARTNERS RESOURCES, INC. Prior to the date of the Acquisition, Fenway Partners Resources, Inc. provided financial, managerial and operational advisory services to Simmons Bedding. Beginning in April 2002, we paid Fenway Partners Resources, Inc. $150,000 per year for those services plus out-of-pocket expenses. The president of Fenway Partners Resources Inc. is Dale Morrison, who served as a director of Simmons Bedding until the Acquisition. In conjunction with the Acquisition, the Consulting Agreement was terminated. 75 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Aggregate fees were billed to us by our principal accountants, PricewaterhouseCoopers LLP, for audit services related to the two most recent fiscal years and for other professional services billed in the most recent two fiscal years were as follows:
2002 2003 --------- -------- Audit Fees $258,378 $160,591 Audit-Related Fees 8,052 55,338 Tax Fees 139,804 450,217 All Other Fees 109,700 328,674 -------- -------- Total $515,934 $994,820 ======== ========
76 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements of Simmons Company and its subsidiaries are included in Part II, Item 8: Report of Independent Accountants Consolidated Statements of Operations for the period from December 20, 2003 through December 27, 2003, period from December 29, 2002 through December 19, 2003, and for the years ended December 28, 2002 and December 29, 2001 Consolidated Balance Sheets at December 27, 2003 and December 28, 2002 Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the period from December 20, 2003 through December 27, 2003, period from December 29, 2002 through December 19, 2003, and for the years ended December 28, 2002 and December 29, 2001 Consolidated Statements of Cash Flows for the period from December 20, 2003 through December 27, 2003, period from December 29, 2002 through December 19, 2003, and for the years ended December 28, 2002 and December 29, 2001 Notes to the consolidated financial statements (a)(2) Financial Statement Schedule Schedule II - Valuation Accounts (a)(3) The exhibits to this report are listed in section (c) of Item 14 below. (b) Reports on Form 8-K filed during the fourth quarter: A report on Form 8-K was filed on November 12, 2003, reporting our results of operations for the quarter and nine months ended September 27, 2003. A report on Form 8-K was filed on November 17, 2003, reporting our Fifth Amendment to the Credit Guaranty Agreement dated as of October 29, 1998 and announcing the sale of the Company to an affiliate of Thomas H. Lee Partners. A report on Form 8-K was filed on November 19, 2003, reporting THL Bedding Company commenced a cash tender offer and consent solicitation for any and all of the $150,000,000 aggregate principal amount of 10.25% Senior Subordinated Notes due 2009 of the Company. A report on Form 8-K was filed on November 25, 2003, reporting the Company, has entered into an ESOP Stock Sale Agreement (the "ESOP Stock Sale Agreement") by and among THL Bedding Company , Holdings and State Street Bank and Trust Company, solely in its capacity as trustee of the Simmons Company Employee Stock Ownership Trust (the "Trust") dated as of November 21, 2003. A report on Form 8-K was filed on December 2, 2003, reporting our results of operations for the ten months and last twelve months ended November 1, 2003. A report on Form 8-K was filed on December 5, 2003, announcing THL Bedding Company received the requisite consents to amend the indenture relating to the Company's Senior Subordinated Notes. 77 EXHIBIT INDEX (a) The following exhibits are filed with or incorporated by reference into this Registration Statement. For the purpose of this exhibit index, references to "the Registrant" include Simmons Bedding Company, both prior to and following the transactions that occurred on December 19, 2003. For a description of these transactions, see "Transactions." The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from either the (i) Registration Statement on Form S-4 under the Securities Act of 1933 for the Registrant, File No. 333-76723 or its amendments (referred to as "S-4"), (ii) Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (referred to as "9/30/00 10-Q"), (iii) Annual Report on Form 10-K for the year ended December 29, 2001 (referred to as "2001 10-K"), (iv) Quarterly Report on Form 10-Q for the quarter ended March 30, 2002 (referred to as "3/30/02 10-Q"), (v) Quarterly Report on Form 10-Q for the quarter ended June 29, 2002 (referred to as "6/29/02 10-Q"), (vi) Quarterly Report on Form 10-Q for the quarter ended September 28, 2002 (referred to as "9/28/02 10-Q"), (vii) Annual Report on Form 10-K for the year ended December 28, 2002 (referred to as "2002 10-K") or (viii) Annual Report on Form 10-K for the year ended December 27, 2003 (referred to as "2003 10-K"). Exhibits filed herewith are denominated by a plus sign (+).
NUMBER DESCRIPTION ------ ----------- *2.1 Agreement and Plan of Merger dated as of December 19, 2003, by and between THL Bedding Company and Simmons Holdings, Inc. (2003 10-K). *2.2 Agreement and Plan of Merger dated as of December 19, 2003, by and between Simmons Company and Simmons Holdings, Inc. (2003 10-K). *3.1 Amended and Restated Certificate of Incorporation of Simmons Company (2003 10-K). *3.2 Certificate of Ownership and Merger of Simmons Company with and into Simmons Holdings, Inc. (2003 10-K). *3.3 By-laws of Simmons Company (2003 10-K).
78
NUMBER DESCRIPTION ------ ----------- *4.1 Indenture dated as of December 19, 2003, among Simmons Company (f/k/a THL Bedding Company), the Guarantors party thereto and Wells Fargo Bank Minnesota, National Association, as trustee (2003 10-K). *4.2 Exchange and Registration Rights Agreement dated as of December 19, 2003, Simmons Company (f/k/a THL Bedding Company), Goldman, Sachs & Co., Deutsche Bank Securities, UBS Securities LLC, and the Guarantors party thereto (2003 10-K). *4.3 Indenture dated as of March 19, 1999, between Simmons Company and SunTrust Bank, as trustee (S-4). *4.3.1 Supplemental Indenture dated as of December 2, 2003 by and among Simmons Company and SunTrust Bank, as trustee (2003 10-K). *10.1 Labor Agreement between The Simmons Manufacturing Company, LLC and The International Union of Electronic, Electrical, Salaried Machine & Furniture Workers and Communication Workers of America, A.F.L. -- C.I.O., Local 8962FW for all employees at the San Leandro, California plant of the Company excluding executives, sales employees, office workers, supervisors, foremen, timekeepers, watchmen, Teamsters or persons in any way identified with management for the period from April 1, 2004 to April 1, 2006 (S-4). *10.2 Labor Agreement between the Company and The United Steel Workers of America, Local No. 13-02, for all employees at the Shawnee, Kansas plant of the Company excluding executives, sales employees, office employees, supervisors, timekeepers, and mechanics, for the period from April 22, 2002 to April 19, 2004 (9/28/02). *10.4 Labor Agreement between the Company and The United Steel Workers, Local No. 422 for all production and maintenance employees at the Dallas, Texas plant of the Company excluding supervisors, foremen, factory clerks, office employees, time keepers, watchmen or persons in any way identified with management for the period from October 16, 2001 to October 15, 2004 (2001 10-K). *10.5 Labor Agreement between the Company and The United Steel Workers, Local No. 2401 for all production at the Atlanta, Georgia plant of the Company excluding office workers, supervisors, foremen, inspectors, watchmen, plant guards, departmental coordinators, carload checkers or persons in any way identified with management for the period from October 16, 2001 to October 15, 2005 (2001 10-K). *10.6 Labor Agreement between the Company and The United Steel Workers, Local No. 515U for all employees at the Los Angeles, California plant of the Company excluding executives, sales employees, office workers, and supervisors for the period from October 16, 2001 to October 15, 2005 (2001 10-K). *10.7 Labor Agreement between the Company and The United Steel Workers, Local No. 420 for employees at the Piscataway, New Jersey plant of the Company excluding watchmen, office janitors, maintenance department employees, truck drivers, tool makers, machinists, supervisors, porters, matrons, main office, clerical, and maintenance helpers for the period of October 16, 2001 to October 15, 2005 (2001 10-K). *10.8 Labor Agreement between the Company and The United Steel Workers, Local No. 424 for all production employees at the Columbus, Ohio plant of the Company excluding executives, sales employees, office workers, timekeepers, watchmen, office janitors, maintenance department employees, truck drivers, foremen, supervisors, private chauffeurs, main office, clerical, and engine room and power plant employees for the period from October 16, 2001 to October 15, 2004 (2001 10-K). *10.9 Lease Agreement at Concourse between Concourse I, Ltd., as Landlord, and the Company, as Tenant, dated as of April 20, 2000, as amended (9/30/00 10-Q).
79
NUMBER DESCRIPTION ------ ----------- *10.10 Lease between Beaver Ruin Business Center-Phase V between St. Paul Properties, Inc., as Landlord, and the Company, as Tenant, dated as of October 19, 1994, as amended by Addendum to Lease, dated as of September 1, 1995 (S-4). *10.11 Loan Agreement, dated as of November 1, 1982, between the City of Janesville, Wisconsin and the Company, as successor by merger to Simmons Manufacturing Company, Inc., relating to $9,700,000 City of Janesville, Wisconsin Industrial Development Revenue Bond, Series A (S-4). *10.12 Loan Agreement between the City of Shawnee and the Company relating to the Indenture of Trust between City of Shawnee, Kansas and State Street Bank and Trust Company of Missouri, N.A., as Trustee, dated as of December 1, 1996 relating to $5,000,000 Private Activity Revenue Bonds, Series 1996 (S-4). *10.13 Loan Agreement dated as of December 12, 1997 between Simmons Caribbean Bedding, Inc. and Banco Santander Puerto Rico (S-4). *10.14 Simmons Retirement Savings Plan adopted February 1, 1987, as amended and restated January 1, 2002 (3/30/02 10-Q). *10.14.1 First Amendment to the Simmons Retirement Savings Plan effective for years beginning after December 31, 2001 (3/30/02 10-Q). *10.16 Retirement Plan for Simmons Company Employees adopted October 31, 1987, as amended and restated May 1, 1997 (3/30/02 10-Q). *10.16.1 First Amendment to the Retirement Plan for Simmons Company Employees effective for years ending after December 31, 2001 (3/30/02 10-Q). *10.17 Stock Purchase Agreement dated as of November 17, 2003, by and among Simmons Holdings, Inc., THL Bedding Company and the sellers named therein (2003 10-K). *10.18 ESOP Stock Sale Agreement dated as of November 21, 2003, by and among Simmons Holdings, Inc., State Street Bank and Trust Company, solely in its capacity as trustee, of the Simmons Company Employee Stock Ownership Trust, and THL Bedding Company (2003 10-K). *10.19 Amendment to Employee Stock Ownership Plan Trust Agreement dated as of December 16, 2003, between Simmons Company and State Street Bank and Trust Company as trustee under the Trust Agreement (2003 10-K). *10.20 Management Agreement dated as of December 19, 2003, by and between Simmons Company and THL Managers V, LLC (2003 10-K). *10.21 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding Company and Charles R. Eitel (2003 10-K). *10.22 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding Company and Robert W. Hellyer (2003 10-K). *10.23 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding Company and William S. Creekmuir (2003 10-K). *10.24 Senior Manager Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding Company and Rhonda C. Rousch (2003 10-K). *10.25 Restricted Stock Agreement dated as of December 19, 2003, between THL Bedding Holding Company and the persons named therein (2003 10-K). *10.26 THL Bedding Holding Company Equity Incentive Plan (2003 10-K). *10.27 THL Bedding Holding Company Deferred Compensation Plan (2003 10-K). *10.28 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding Company, Simmons Company and Charles R. Eitel (2003 10-K). *10.29 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding Company, Simmons Company and Robert W. Hellyer (2003 10-K). *10.30 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding Company, Simmons Company and William S. Creekmuir (2003 10-K). *10.31 Employment Agreement dated as of December 19, 2003, among THL Bedding Holding Company, Simmons Company and Rhonda C. Rousch (2003 10-K). *10.32 Management Subscription and Stock Purchase Agreement dated as of December 19, 2003, by and among THL Bedding Holding Company and the persons named therein (2003 10-K). *10.33 Credit and Guaranty Agreement, dated as of December 19, 2003, among THL Bedding Company, as Company, THL-SC Bedding Company and certain subsidiaries of the Company, as Guarantors, the financial institutions listed therein, as Lenders, UBS Securities LLC, as Joint Lead Arranger and as Co-Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent, General Electric Capital Corporation, as Co-Documentation Agent, CIT Lending Services Corporation, as Co-Documentation Agent and Goldman Sachs Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger and as Co-Syndication Agent (2003 10-K). *10.34 Senior Unsecured Term Loan and Guaranty Agreement, dated December 19, 2003, among THL Bedding Company, as Company, THL-SC Bedding Company and certain subsidiaries of the Company, as Guarantors, the financial institutions listed therein, as Lenders, Goldman Sachs Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger and as Co-Syndication Agent, UBS Securities LLC, as Joint Lead Arranger and as Co-Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent (2003 10-K). *10.35 Assumption Agreement, dated December 19, 2003, made by Simmons Holdings, Inc., Simmons Company and certain subsidiaries of Simmons, as Guarantors, in favor of Deutsche Bank, AG, New York Branch, as Administrative Agent for banks and other financial institutions or entities, the Lenders, parties to the Credit Agreement and Term Loan Agreement (2003 10-K). *10.36 Pledge and Security Agreement, dated December 19, 2003, between each of the grantors party thereto and Deutsche Bank AG, New York Branch, as the Collateral Agent (2003 10-K). *10.37 2002 Stock Option Plan (2002 10-K). *10.38 Simmons Company Employee Stock Ownership Plan adopted January 31, 1988, as amended and restated December 29, 2001 (3/30/02 10-Q). *10.38.1 First Amendment to the Simmons Company Employee Stock Ownership Plan effective for years ending after December 31, 2001 (3/30/02 10-Q). *12.1 Computation of ratio of earnings to fixed charges. *21.1 Subsidiaries of Simmons Company. *24.1 Power of Attorney (included on the signature pages hereto) 31.1 Chief Executive Officer Certification of the Type Described in Rule 13a-14(a) and Rule 15d-14(a) 31.2 Chief Financial Officer Certification of the Type Described in Rule 13a-14(a) and Rule 15d-14(a) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
80 SIMMONS BEDDING COMPANY SCHEDULE II -- VALUATION ACCOUNTS VALUATION ACCOUNTS
Col. A Col. B Col. C Col. D Col. E ------------------ --------------- --------------- --------------- -------------- Balance at Balance at Beginning of End of Description Period Additions Deductions Period ----------- ------------ --------- ---------- ---------- Fiscal year ended December 27, 2003 Doubtful accounts $ 3,134 $ 3,840 $ 4,054 $ 2,920 Discounts and returns, net 2,152 -- 112 2,040 ----------- --------- ---------- ---------- $ 5,286 $ 3,840 $ 4,166 $ 4,960 =========== ========= ========== ========== Fiscal year ended December 28, 2002 Doubtful accounts $ 1,879 $ 3,082 $ 1,827 $ 3,134 Discounts and returns, net 2,885 -- 733 2,152 ----------- --------- ---------- ---------- $ 4,764 $ 3,082 $ 2,560 $ 5,286 =========== ========= ========== ========== Fiscal year ended December 29, 2001 Doubtful accounts $ 4,312 $ 6,172 $ 8,605 $ 1,879 Discounts and returns, net 5,190 -- 2,305 2,885 Tax valuation allowance 3,999 -- 3,999 -- ----------- --------- ---------- ---------- $ 13,501 $ 6,172 $ 14,909 $ 4,764 =========== ========= ========== ==========
81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIMMONS BEDDING COMPANY (Registrant) NOVEMBER 8, 2004 By: /S/ William S. Creekmuir ------------------------------------------------ William S. Creekmuir, Executive Vice President & Chief Financial Officer (Principal Financial Officer)
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William S. Creekmuir, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/ Charles R. Eitel November 8, 2004 - ----------------------------------------------------- Charles R. Eitel, Chairman of the Board of Directors; Director; and Chief Executive Officer (Principal Executive Officer) /S/ Todd M. Abbrecht November 8, 2004 - ----------------------------------------------------- Todd M. Abbrecht, Director /S/ William P. Carmichael November 8, 2004 - ----------------------------------------------------- William P. Carmichael, Director /S/ David A. Jones November 8, 2004 - ----------------------------------------------------- David A. Jones, Director /S/ B. Joseph Messner November 8, 2004 - ----------------------------------------------------- B. Joseph Messner, Director /S/ Albert L. Prillaman November 8, 2004 - ----------------------------------------------------- Albert L. Prillaman, Director
82 /S/ Scott A. Schoen November 8, 2004 - ----------------------------------------------------- Scott A. Schoen, Director /S/ George R. Taylor November 8, 2004 - ----------------------------------------------------- George R. Taylor, Director /S/ Mark F. Chambless November 8, 2004 - ----------------------------------------------------- Mark F. Chambless, Vice President & Corporate Controller; (Principal Accounting Officer)
83 EX-31.1 2 g90934exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO EXHIBIT 31.1 CERTIFICATIONS CHIEF EXECUTIVE OFFICER'S SECTION 302 CERTIFICATION I, Charles R. Eitel, Chief Executive Officer of Simmons Bedding Company, certify that: 1. I have reviewed this Annual Report on Form 10-K of Simmons Bedding Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions based upon the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ Charles R. Eitel --------------------------------- Name: Charles R. Eitel Title: Chief Executive Officer EX-31.2 3 g90934exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CHIEF FINANCIAL OFFICER'S SECTION 302 CERTIFICATION I, William S. Creekmuir, Chief Financial Officer of Simmons Bedding Company, certify that: 1. I have reviewed this Annual Report on Form 10-K of Simmons Bedding Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions based upon the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ William S. Creekmuir -------------------------------- Name: William S. Creekmuir Title: Chief Financial Officer EX-32.1 4 g90934exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 32.1 CERTIFICATION REQUIRED BY 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, Charles R. Eitel, as Chief Executive Officer of Simmons Bedding Company (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge: (1) the Annual Report on Form 10-K of the Company for the year ended December 27, 2003 (the "Report"), being filed with the U.S. Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2004 /s/ Charles R. Eitel --------------------------------- Name: Charles R. Eitel Title: Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Simmons Bedding Company and will be retained by Simmons Bedding Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 g90934exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO EXHIBIT 32.2 CERTIFICATION REQUIRED BY 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, William S. Creekmuir, as Chief Financial Officer of Simmons Bedding Company (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that to my knowledge: (1) the Annual Report on Form 10-K of the Company for the year ended December 27, 2003 (the "Report"), being filed with the U.S. Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2004 /s/ William S. Creekmuir -------------------------------- Name: William S. Creekmuir Title: Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Simmons Bedding Company and will be retained by Simmons Bedding Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----