Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ------------------
Commission file number 333-76723
------------
SIMMONS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1007444
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 600
Atlanta, Georgia 30328
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code (770) 512-7700
----------------------
Securities registered pursuant to Section 12(b) of the Act: None.
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 [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 24, 2000 was $ 0 .
------
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 the 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. [ ]
The number of shares of the registrant's common stock outstanding as of March
24, 2000 is 31,964,452.
----------
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
2
ITEM 1. BUSINESS
GENERAL
Founded in 1871, Simmons (the "Company") is a leading manufacturer and
distributor of premium branded bedding products in the United States and the
world leader in Pocketed Coil(TM) innerspring technology. We manufacture and
license a broad range of mattresses and related sleep products under
well-recognized brand names including Simmons(R), Beautyrest(R), BackCare(R),
Connoisseur(R) and Maxipedic(R). Sales of conventional bedding, which includes
fully assembled mattresses and box springs, accounted for substantially all of
our 1999 net sales.
We sell to a diversified nationwide base of over 2,700 customers,
representing more than 5,600 retail outlets. We support our sales to furniture
stores, specialty sleep shops, department stores and warehouse showrooms with
significant local and national brand advertising and promotional spending as
well as extensive customer support services. We operate 18 strategically located
manufacturing facilities across the United States and in Puerto Rico. Unlike
most of our competitors, which operate as associations of independent licensees,
we are one of two national industry participants that operates each of its
manufacturing facilities, allowing us greater quality control and
standardization of best manufacturing practices.
RECENT HISTORY OF THE COMPANY
Prior Ownership
On March 22, 1996, Simmons Holdings, Inc. ("Holdings"), a company
organized on behalf of INVESTCORP S.A. ("Investcorp"), management and certain
other investors, acquired 100% of the outstanding common stock of the Company
from affiliates of Merrill Lynch Capital Partners, Inc., the Simmons Company
Employee Stock Ownership Plan (together with a trust forming a part thereof, the
"ESOP") and certain management stockholders (collectively, the "Sellers") for
(i) a purchase price of $253.2 million (including the refinancing or assumption
of existing indebtedness and the purchase of management stock options, and
excluding the payment of fees, expenses and compensation payable to management)
plus (ii) the issuance to the ESOP of 5,670,406 shares of the Company's Series A
Preferred Stock, having one vote per share and a liquidation preference of $5.00
per share (together with the financing thereof, the "Acquisition"). Financing
for the Acquisition was provided by (i) $85.0 million of capital provided by
affiliates of Investcorp, management and certain other investors, (ii) $80.4
million of borrowings under a $115.0 million senior credit facility among the
Company, certain lenders and Chase Manhattan Bank (formerly known as Chemical
Bank) ("Chase"), as administrative agent and (iii) $100.0 million of borrowings
under a Subordinated Loan Facility among the Company, certain lenders (including
an affiliate of Investcorp) and Chase, as administrative agent (the
"Subordinated Loan Facility"). The Subordinated Loan Facility was repaid on
April 18, 1996 with the net proceeds of the issuance of Senior Subordinated
Notes which, in turn, were replaced with Series A Senior Subordinated Notes due
2006 in a registered exchange offer completed in September 1996.
Recapitalization
On July 16, 1998, Holdings entered into a recapitalization agreement
with the Company and REM Acquisition, Inc., a transitory Delaware merger
corporation ("REM"), sponsored by Fenway Partners, Inc., ("Fenway"). Pursuant to
the agreement on October 29, 1998 REM merged with and into Holdings (the
"Recapitalization"), with Holdings being the surviving corporation. The
Recapitalization
2
3
resulted in certain stockholders of Holdings who are affiliates of or investors
arranged by Investcorp receiving an aggregate amount of cash equal to
approximately $193.4 million, and certain stockholders of Holdings who are
members of management of the Company receiving an aggregate amount of cash equal
to approximately $14.0 million. Investcorp retained shares of common stock of
Holdings with an estimated fair value of $9.0 million and management retained
shares of stock and options to purchase stock of Holdings with an estimated fair
value of $16.5 million. As part of the Recapitalization, REM purchased the
outstanding shares of Series A Preferred Stock of the Company (the "Series A
Preferred Stock") owned by the ESOP that had been allocated to its participants
for an aggregate purchase price of $15.4 million, and the ESOP exchanged its
remaining outstanding shares of Series A Preferred Stock for shares of common
stock of Holdings. The Series A Preferred Stock purchased by REM was cancelled
in connection with the Transactions, as defined below. The ESOP retained shares
of stock of Holdings with an estimated fair value of $23.4 million.
Financing for the Recapitalization, the related transactions, and the
fees and expenses incurred therewith, was provided by (i) the Company's
borrowings under a new $270.0 million senior credit facility (the "Senior Credit
Facility") which refinanced the majority of the Company's existing senior and
subordinated obligations, (ii) the Company's borrowings of $75.0 million Senior
Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the Company's
borrowings of $30.0 million under the Junior Subordinated Notes (the "Junior
Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings' borrowings of
$10.0 million under the Junior PIK Notes issued to an affiliate of Fenway, and
(v) $177.0 million of capital provided by Fenway, affiliates of Investcorp,
management and certain other investors of Holdings.
The Recapitalization, the refinancing under the Senior Credit Facility,
the Senior Bridge Loans financing and the Junior Simmons Notes financing are
collectively referred to herein as the "Transactions". As a result of the
Recapitalization and related transactions, Simmons Holdings, LLC, an entity
controlled by funds managed by Fenway, acquired 75.1% of the outstanding voting
shares of Holdings, and management, the ESOP and Investcorp retained
approximately 5.9%, 13.7% and 5.3%, respectively, of the outstanding shares of
Holdings. The Company has accounted for the Transactions as a leveraged
recapitalization, whereby the historical bases of the assets and liabilities of
the Company have been maintained.
On March 16, 1999, we completed a refinancing, which consisted of the
sale of $150.0 million of 10.25% Senior Subordinated Notes due 2009 (the
"Notes") pursuant to a private offering. We used the net proceeds from this
offering to:
(1) repay the indebtedness and related accrued interest under the
Senior Bridge Loans and the Junior Simmons Notes issued by us;
(2) repay the amounts outstanding and related accrued interest
under our revolving credit facility; and
(3) prepay a portion of the amounts outstanding and related
accrued interest under our term loan facility.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated
Notes due 2009 (the "New Notes") in exchange for all Notes, pursuant to an
exchange offer whereby holders of the Notes received New Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.
3
4
MANAGEMENT CHANGES
On January 4, 2000, Mr. Zenon Nie resigned as our Chairman of the Board
of Directors, Chief Executive Officer and President, and Charles R. Eitel was
hired as Chairman of the Board of Directors and Chief Executive Officer. During
January 2000, Mr. Eitel completed an assessment of the effectiveness of our
organizational structure, and in early February, 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
going forward. The management reorganization resulted in the termination of 14
management employees. In connection with that reorganization, we hired Peter
Brink to serve as our Chief Operations Officer effective February 8, 2000, and
named Roger W. Franklin as our interim Chief Financial Officer. We are in the
process of finalizing our selection of a Chief Financial Officer.
INDUSTRY OVERVIEW
The domestic wholesale bedding industry generated sales of over $4.0
billion in 1999 according to industry sales data compiled by the International
Sleep Products Association ("ISPA"). Although fragmented with approximately 700
manufacturers, the industry is mature and stable. The stability of the bedding
market is supported by the fact that over 70% of bedding sales result from
replacement purchases. We believe that key demographic trends are driving growth
in the demand for larger sized, premium bedding products including;
- - the rapidly growing 45-64 year old population category, a group with
higher levels of disposable income and which historically has been more
likely to purchase premium bedding;
- - the increasing consumer awareness of the health-related benefits of
proper rest; and
- - the increasing number and size of bedrooms in homes.
Most of conventional bedding is sold to furniture stores and specialty
sleep shops. The remaining channels of distribution include department stores,
national mass merchants, membership clubs and contract customers.
COMPETITION
There are approximately 700 bedding manufacturers in the United States,
with three companies, Simmons, Sealy Corporation, and Serta, Inc. accounting for
a significant portion of the industry's wholesale revenues. We believe we
principally compete against these two primary competitors on the basis of brand
recognition, product quality and the quality of customer support programs, which
include 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 Corporation have national, company
operated manufacturing and distribution capabilities.
The rest of the United States conventional bedding market consists of
approximately seven smaller national manufacturers and nearly 700 independent
local and regional manufacturers. These local and regional manufacturers
generally focus on the sale of lower price point products. While we primarily
manufacture high margin, differentiated bedding products, we also offer a full
line of bedding products to our retailer base in order for these retailers to
maintain their competitive positioning.
4
5
PRODUCTS
We provide our customers with a full range of mattress products that
cover the breadth of the market price points. Our strategic focus is on premium
bedding products sold at retail price points between $699 and $2,999.
We employ two different base manufacturing technologies in our
mattresses, the pocketed coil and the open coil, and market our products under a
variety of well known brands. Most of our products are based on our patented
Pocketed Coil(TM) technology, which we believe offers a substantially better
sleep experience than our competitors' products. Pocketed Coil(TM) products such
as the Beautyrest(R) line account for the majority of our sales, as well as our
retail floor presence and brand image.
Our Beautyrest(R) and Connoisseur(R) lines employ Pocketed Coil(TM)
manufacturing technology. Pocketed Coil(TM) mattresses are designed to be the
most comfortable and durable mattresses in the market. Unlike open coil
mattresses in which each innerspring coil is joined to adjacent coils at the top
and the bottom, Pocketed Coil(TM) innersprings are constructed so that each row
of innerspring coils is joined to adjacent rows of coils in the center third of
the fabric pocket enclosing each coil. This permits the top and bottom of each
coil to respond independently to pressure applied to the surface of the
mattress. As a result, Pocketed Coil(TM) design enables the mattress to contour
to the user's body, reduces lateral transmission of movement in the mattress and
provides exceptional comfort.
Beautyrest(R). Beautyrest(R), our flagship premium product, has been
our primary focus for 75 years and we expect it to continue to generate the
majority of sales. Beautyrest(R) has employed Pocketed Coil(TM) technology since
its introduction in 1925. The Beautyrest(R) line is available to end-users
through a broad range of distribution channels including furniture stores, major
department stores, specialty sleep shops and warehouse showrooms.
Connoisseur(R). We introduced the Connoisseur(R) line to capitalize on
the accelerating growth in the premium bedding segment. The Connoisseur(R) line
combines the benefits of Pocketed Coil(TM) technology with variable pressure
foam for maximum comfort and support. Connoisseur(R) is the only luxury bedding
product that is designed with an enhanced Pocketed Coil(TM) construction. Most
luxury brands build their line with increased amounts of upholstery materials as
opposed to increased amounts of support coils. Connoisseur(R) employs both. The
Connoisseur(R) product line is primarily available through selected major
department stores and specialty sleep shops.
BackCare(R). BackCare(R), our second flagship brand, was introduced in
1995. The BackCare(R) line was created to meet the needs of health conscious
consumers, as well as chronic back pain sufferers. We have positioned
BackCare(R) as another of our premium bedding products. BackCare(R) has received
an endorsement from the National Foundation for Spinal Health. BackCare(R)
employs five zone construction designed through each element of the sleep set.
Anatomic foam provides support under the lower back and thighs while offering
comfort under the calves, upper shoulders and buttocks. Anatomic foam also
allows the back to better assume a natural position ensuring proper spinal
alignment and comfort.
We expect increasing consumer concerns for comfort and health to help
support increased retail penetration of the BackCare(R) product line. To ensure
continued retail penetration, we have developed a BackCare(R) national
television advertising campaign entitled "Five Zones for Your Bones".
Maxipedic(R). Maxipedic(R) provides our customers with a superior open
coil product. The Maxipedic(R) mattress features non-skid quilting and a variety
of high quality foam components. The
5
6
matching foundation features a steel grid that anchors the coils, reducing
lateral motion and providing uniform firmness. This product is intended to
provide customers with a high quality, moderately priced, open coil product.
CUSTOMERS
Our strong brand name 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 warehouse showrooms. We manufacture and supply
conventional bedding to over 5,600 retail outlets, representing more than 2,700
customers. Furthermore, our sales to specialty sleep shops, the fastest growing
channel of retail bedding distribution, has been increasing.
We also distribute branded products on a contract sale basis directly
to commercial users of bedding products such as hotels, motels, and commercial
centers. Major commercial accounts include Westin Hotel Limited Partnership,
Hyatt Corporation, Marriott International, Inc. and The Walt Disney Company.
In 1999, Starwood Hotels selected Beautyrest(R) as the bed for their
"Heavenly Bed" program. Starwood's Heavenly Bed program is a luxury hotel room
program targeted at their Preferred Customer Club members.
Our 10 largest customers accounted for approximately 36% of 1999 net
sales, while sales to Heilig-Meyers Company and its subsidiaries, represented
approximately 11% of 1999 net sales.
SALES, MARKETING AND ADVERTISING
Our products are sold by approximately 170 local field sales
representatives, backed by sales management centralized at each of our 18
manufacturing facilities, as well as national account representatives. This
selling infrastructure provides retailers with coordinated national marketing
campaigns as well as local support that is tailored to the competitive
environment of the local market.
Our sales strategy focuses on two areas:
(1) cooperative promotional advertising and other retailer support
programs designed to complement individual retailers'
marketing programs; and
(2) national advertising designed to establish and build brand
awareness with consumers.
We develop advertising and retail sales incentive packages specifically
for each individual retailer. Point-of-sale materials including mattresses and
box springs that we design and supply highlight the differentiating features of
our products. In addition, we offer training for retail sales people through our
Mattress Business Academy programs. We believe that our sales training and
consumer education programs are the most extensive in the bedding industry. We
have designed these programs, delivered on-site at our retailers' facilities or
at our research and education center, to teach retail floor salespeople how to
match customers with their mattress comfort preference by improving the retail
floor salespersons' product knowledge and sales skills. We seek to improve our
retailers' unit sales as well as increase sales of bedding in the higher price
segment. We also establish individual incentive programs for our customers and
their sales personnel. Our sales force is trained extensively in advertising,
merchandising and salesmanship which increases the value of the marketing
support they provide to retailers. We
6
7
believe that our focus on the training of sales representatives and our
customers' retail floor salespeople differentiates us from most of our largest
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,
cotton, insulator pads, innersprings, fabrics and roll goods consisting of foam,
fiber, ticking and non-wovens. We obtain a large percentage of our required raw
materials from a small number of suppliers. In 1999, we bought approximately 83%
of our raw material needs from 10 suppliers. Supplier concentration is common in
the bedding industry.
We have long-term supply agreements with Leggett & Platt, Incorporated,
Foamex International Inc. and Amoco Fabrics and Fiber Company. With the
exception of Leggett & Platt, we believe that we can readily replace our other
suppliers because we have already identified and used alternative sources.
Leggett & Platt supplies the majority of several components, including spring
components, insulator pads, wire, fiber, quilt backing and flange material, to
the bedding industry. In 1999, we bought approximately one-third of our raw
materials from Leggett & Platt. We expect that in 2000 we will buy a comparable
portion of our raw materials from Leggett & Platt. To ensure a long-term
adequate supply of various components, we have entered into agreements with
Leggett & Platt, generally expiring in the year 2010, for the supply of grid
tops, innersprings and wire. Among other things, these agreements generally
require us to purchase a majority of our requirements of several components from
Leggett & Platt.
SEASONALITY
Our sales volume is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than the margin
percentages obtained in the remaining part of the year. We believe that
seasonality of profitability is a factor that affects the conventional bedding
industry generally and that it is primarily due to retailers' emphasis in the
first quarter on price reductions and promotional bedding and manufacturers'
emphasis on close-outs of the prior year's product lines. These two factors
together result in lower profit margins.
ENGINEERING AND DEVELOPMENT
We invest substantially in new product development, enhancement of
existing products and improved operating processes. We believe new product
development and product enhancements are crucial to maintaining our strong
industry position. We maintain close contact with bedding industry developments
through sleep research conducted by industry groups and by our engineering
department, as well as through participation 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 the
Simmons Institute of Technology and Education ("SITE"), a state-of-the-art
38,000 square foot research and education center in Atlanta, Georgia.
Approximately 24 engineers and technicians are 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
7
8
that our engineering staff gives us a competitive advantage over some of our
competitors who do not have significant in-house engineering departments.
WARRANTIES; PRODUCT RETURNS
Our conventional bedding products generally offer 10 year limited
warranties against manufacturing defects, while some promotional products carry
one year warranties. 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 immaterial. 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 vendors or outlet stores.
PATENTS, TRADEMARKS AND LICENSES
We own many trademarks, including Simmons(R), Beautyrest(R),
BackCare(R), Connoisseur Collection(R), Maxipedic(R) and Pocketed Coil(TM), most
of which are registered in the United States and in many foreign countries. We
protect our manufacturing equipment and processes as trade secrets and through
patents. We possess several patents on the equipment used to manufacture our
Pocketed Coil(TM) innersprings. While we do not consider our overall success to
be dependent upon any particular intellectual property rights, we cannot assure
you that the degree of protection offered by the various patents will be
sufficient, that patents will be issued in respect of pending patent
applications, or that we will be able to protect our technological advantage
upon the expiration of our 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.
Through the early 1990s, we disposed of most of our foreign operations
and secondary domestic lines of business. As a result, we now license the
Simmons(R) name and many of our trademarks, processes and patents on an
exclusive basis to third-party manufacturers abroad to produce and distribute
conventional bedding products within their designated territories and to third-
party manufacturers in the U.S. to manufacture and distribute juvenile bedding
and non-bedding upholstered furniture, primarily on perpetual or automatically
renewable terms. In addition, we have licensed the Simmons(R) name and other
trademarks, generally for limited terms, for domestic use to third-party
manufacturers of adjustable beds, down comforters, pillows, bed pads, blankets,
futons, airbeds and waterbeds.
EMPLOYEES
As of January 31, 2000, we had approximately 2,700 employees.
Approximately 1,200 of these were represented by labor unions. Employees at nine
of our 18 manufacturing facilities are represented by at least one of the
following unions: the Upholstery Division of the United Steelworkers, the
Teamsters, the United Furniture Workers, the Longshoremen and the International
Association of Machinists and Aerospace Workers. Union contracts typically are
negotiated for four-year terms. A majority of our current contracts expire in
2001. Labor relations historically have been good. We have had no labor-related
work stoppages in over 20 years. Since 1980, we have opened nine new plants,
none of which are unionized. Approximately 1,300 of our current and former
employees are participants in the ESOP.
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
8
9
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. As is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties or any associated offsite disposal location, or if
contamination from prior activities is discovered at any of our properties, we
may be held liable and the amount of such liability could be material. We are
currently evaluating our potential liability with respect to the cleanup of
environmental contamination at and in the vicinity of our leased manufacturing
facilities in San Leandro, California.
We have recorded a reserve to reflect our potential liability for
environmental matters. Because of the uncertainties associated with
environmental remediation, we cannot assure you that the costs incurred with
respect to the potential liabilities will not exceed the 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.
FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. A number of the matters and subject areas discussed in the
foregoing "Business" section and in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of such matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and such discussion also may materially differ from our actual future experience
involving any one or more of such matters and subject areas. We have attempted
to identify, in context, certain of the factors that it currently believes may
cause actual future experience and results to differ from the our current
expectations regarding the relevant matter or subject area. The operation and
results of our bedding manufacturing business may also be subject to the effect
of other risks and uncertainties in addition to the relevant qualifying factors
identified elsewhere in the foregoing "Business" section and in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," including, but not limited to, general economic conditions in the
geographic areas and market segments in which we operate, the ability to achieve
further market penetration, additional customers and distribution channels,
aggressive promotional and discounting tactics by certain of our national
competitors, and other risks and uncertainties described from time to time in
our reports filed with the Commission.
9
10
ITEM 2. DESCRIPTION OF FACILITIES
Our corporate offices are located at One Concourse Parkway, Atlanta, Georgia
30328. The following table sets forth selected information regarding
manufacturing and other facilities we operated as of January 31, 2000:
Year of
Date Lease Square
Location Occupied Expiration Footage Union Affiliation
-------- -------- ---------- ------- -----------------
Manufacturing Facilities:
Atlanta, Georgia 1992 2007 148,300 United Steelworkers of America
Charlotte, North Carolina 1993 2003 144,180 None
Columbus, Ohio 1988 2004 190,000 United Steelworkers of America,
International Association of Machinists
and Aerospace Workers
Dallas, Texas 1998 2008 140,981 United Steelworkers of America
Denver, Colorado 1998 2008 129,000 None
Fredericksburg, Virginia 1995 2010 128,500 None
Honolulu, Hawaii 1993 2003 58,530 International Longshoremen's and
Warehousemen's Union
Jacksonville, Florida 1973 2003 205,729 United Steelworkers of America
Janesville, Wisconsin 1982 Owned 288,700 None
Shawnee, Kansas 1997 Owned 130,000 United Steelworkers of America
Los Angeles, California 1982 2005 223,382 International Brotherhood of Teamsters,
United Steelworkers of America
Phoenix, Arizona 1997 2007 103,408 None
Piscataway, New Jersey 1988 2003 264,908 International Association of Machinists
and Aerospace Workers,
United Steelworkers of America
Salt Lake City, Utah 1998 2008 77,500 None
San Leandro, California 1964 2007 260,500 United Furniture Workers of America
Seattle, Washington 1992 2002 133,610 None
Springfield, Massachusetts 1988 2006 129,000 None
Trujillo Alto, Puerto Rico 1998 Owned 50,000 None
------------
Subtotal 2,806,228
Other Facilities in Atlanta, Georgia:
Corporate Headquarters 1992 2003 37,500 None
SITE Research and Development Center 1994 2005 38,000 None
Consumer Service Center 1977 2003 30,960 None
------------
Total Square Footage 2,912,688
============
Our manufacturing facilities yield a combined practical capacity of
over 25,000 units per day, assuming two eight-hour shifts daily. Management
believes that our facilities, taken as a whole, have adequate productive
capacity and sufficient manufacturing equipment to conduct business at levels
meeting current demand.
10
11
ITEM 3. LEGAL PROCEEDINGS
On April 3, 1998, Serta, Inc. filed a complaint against Simmons in the
United States District Court for the Northern District of Illinois, Eastern
Division, alleging that some Simmons products--including those sold in
connection with the trademarks Connoisseur Collection(R), Crescendo(TM), and
some World Class Beautyrest(R) and BackCare(R) Ultimate models--infringe one of
their U.S. patents and that our use of the term "Crescendo" infringes their
alleged common-law trademark, "Crescendo". Serta seeks compensatory damages in
an unspecified amount, interest, an accounting and disgorgement of profits
derived from allegedly infringing acts, treble damages, an order enjoining
further alleged infringement and requiring destruction of allegedly infringing
items, costs, expenses and attorney's fees. We have denied the material
allegations of the complaint. We also have asserted affirmative defenses and/or
counterclaims against Serta alleging non-infringement, invalidity and
unenforceability of the patent-in-suit, and alleging infringement by Serta of
our rights in the term "Crescendo" in various geographic areas to the extent
usage of the term by both Serta and us would be confusingly similar. Serta
requested the Patent and Trademark Office, the PTO, to reexamine the
patent-in-suit. Pending the outcome of the reexamination, and by agreement of
the parties, the pending lawsuit was stayed. In April 1999, the PTO reinstated
Serta's patent and the stay in the action was lifted.
In October 1999, Serta amended its complaint to join 14 U.S.
licensee/shareholders as plaintiffs and to add a claim for false advertising
under the Lanham Act as well as seek damages and injunctive relief in connection
with that claim. We again have denied the material allegations of the amended
complaint and asserted additional affirmative defenses and an additional
counterclaim seeking a declaratory judgment for unenforceability of the
patent-in-suit due to fraud on the PTO. Serta moved to dismiss this counterclaim
and we have filed a response. The court has not yet ruled on the motion. While
we deny that Serta is entitled to any relief and intend to defend the action
vigorously, settlement amounts could be material and we cannot assure you that
we will prevail in this action.
From time to time, we have been involved in various legal proceedings.
We believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
12
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 25, 1999 there is 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. Pursuant to the restrictions
contained in the Senior Credit Facility and the Indenture, the Company is not
expected to be able to pay dividends on its common stock for the foreseeable
future, other than certain limited dividends permitted by the Senior Credit
Facility and the Indenture governing the Notes.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial and Other Data
(dollars in thousands)
Set forth below are our selected historical consolidated financial
data. We derived our historical Statements of Operations and Balance Sheet Data
for 1999, 1998, 1997, the period from March 22, 1996 through December 28, 1996,
the period from December 31, 1995 through March 21, 1996, and 1995 from our
consolidated financial statements. You should read the information presented
below along with Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and accompanying notes and other financial information appearing in
Item 8.
As a result of the Investcorp acquisition, our assets and liabilities
were adjusted to reflect their estimated fair values as of March 22, 1996. In
addition, we entered into new financing arrangements and changed our capital
structure. Accordingly, the results for the periods subsequent to the Investcorp
acquisition are not comparable to the prior historical periods presented.
You should note the following when reading the table below:
- - EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization. We believe that EBITDA is a widely
accepted financial indicator of a company's ability to service or incur
debt and a similar measure is utilized for purposes of the covenants
contained in the Indenture. EBITDA and adjusted EBITDA are not
measurements of operating performance calculated in accordance with
generally accepted accounting principles and should not be considered
substitutes for operating income, net income, cash flows from operating
activities or other statements of operations or cash flow data prepared
in accordance with generally accepted accounting principles, or as
measures of profitably or liquidity. EBITDA and adjusted EBITDA may not
be indicative of our historical operating results, nor are they meant
to be predictive of potential future results. Our measures of EBITDA
and adjusted EBITDA may not be comparable to those recorded by other
companies.
- - Working capital represents total currents assets, excluding cash and
equivalents, less total current liabilities, excluding current
maturities of long-term debt and capital lease obligations.
12
13
Successor Predecessor
------------------------------------------------------ ---------------------------
Period from Period from
March 22, Dec. 31,
Year Ended Year Ended Year Ended 1996 1995 through Year Ended
Dec. 25, Dec. 26, Dec. 27, Through Dec. March 21, Dec. 30,
1999 1998 1997 28, 1996 1996 1995
--------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales $ 619,526 $ 600,773 $ 550,085 $ 423,870 $ 106,431 $ 489,815
Cost of products sold 350,721 348,842 319,074 254,127 66,630 292,825
--------- --------- --------- --------- --------- ---------
Gross profit 268,805 251,931 231,011 169,743 39,801 196,990
Selling, general and
administrative expenses 219,924 202,213 183,556 135,762 35,846 161,202
ESOP expense 7,169 6,453 6,230 3,797 1,203 4,533
Amortization of intangibles 7,628 7,629 7,679 5,650 1,324 5,753
Interest expense, net (1) 32,214 22,454 19,088 15,277 1,489 8,185
Other expense (income), net 2,331 3,321 1,571 (2,528) 96 400
Management compensation--
transaction related -- 14,223 -- 4,085 -- --
Management compensation--
severance related 6,600 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes
from continuing operations $ (7,061) $ (4,362) $ 12,887 $ 7,700 $ (157) $ 16,917
========= ========= ========= ========= ========= =========
Net income (loss) $ (9,129) $ (19,019) $ 6,362 $ 1,312 $ (439) $ 9,411
========= ========= ========= ========= ========= =========
OTHER DATA:
Adjusted EBITDA(2) $ 66,740 $ 62,264 $ 58,420 $ 42,737 $ 5,739 $ 42,153
Adjusted capital expenditures(3) 9,659 8,989 7,616 4,203 523 3,021
Depreciation and amortization 17,959 16,593 13,549 9,118 2,198 9,780
BALANCE SHEET DATA (END OF
PERIOD):
Working capital $ 53,897 $ 46,567 $ 37,133 $ 42,414 $ -- $ 20,171
Total assets 406,100 400,061 375,125 367,849 -- 254,492
Total debt, including current
Maturities 333,983 313,469 184,443 196,815 -- 93,768
Total common stockholders'
equity (deficit) (23,332) (12,301) 92,614 86,291 -- 44,372
(1) Interest expense, net includes the amortization of deferred debt
issuance costs of $1,433, $777, $613, $521, $84 and $679 for 1999,
1998, 1997, the period from March 22, 1996 to December 28, 1996, the
period from December 31, 1995 through March 21, 1996 and 1995,
respectively, and is net of interest income of $201, $184, $256, $119,
$36 and $162 for the same periods, respectively.
Interest expense, net for the years ending December 25, 1999 and
December 26, 1998 reflects the increase in senior and subordinated loan
indebtedness associated with the leveraged recapitalization effective
October 29, 1998. "See Note 1 of the Notes to Consolidated Financial
Statements."
13
14
(2) Items added back to EBITDA to arrive at adjusted EBITDA are as follows:
Successor Predecessor
------------------------------------------------------ ----------------------------
Period from Period from
March 22, Dec. 31,
Year Ended Year Ended Year Ended 1996 1995 through Year Ended
Dec. 25, Dec. 26, Dec. 27, Through Dec. March 21, Dec. 30,
1999 1998 1997 28, 1996 1996 1995
-------- -------- ---------- -------- ----------- --------
EBITDA $ 43,112 $ 34,685 $ 45,524 $ 32,095 $ 3,530 $ 34,882
ESOP expense 7,169 6,453 6,230 3,797 1,203 4,533
Other expense (income), net 2,331 3,321 1,571 (2,528) 96 400
Management compensation--
transaction related -- 14,223 -- 4,085 -- --
Management compensation--
severance related 6,600 -- -- -- -- --
Interest income 201 184 256 119 36 162
SWIFT/UNITE expense -- 2,208 2,347 3,467 640 1,815
Management strategic initiatives 444 418 1,693 -- -- --
Receivable write-off (a) 6,883 -- -- -- -- --
Inventory written-up to fair
market value (b) -- -- -- 1,000 -- --
Discontinued product line -- 772 799 702 234 361
-------- -------- -------- -------- -------- --------
Adjusted EBITDA $ 66,740 $ 62,264 $ 58,420 $ 42,737 $ 5,739 $ 42,153
======== ======== ======== ======== ======== ========
(a) For specific information related to this write-off, see "Significant Developments--A cquisition
of a Customer" contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(b) Reflects non-recurring write up to fair market value in connection with the Investcorp
acquisition.
(3) Adjusted capital expenditures are exclusive of expenditures related to
(a) our SWIFT and UNITE programs of $2,808, $3,786, $6,531, $1,044
and $2,813 for 1998, 1997, the period from March 22, 1996
through December 28, 1999, the period from December 31, 1995
through March 21, 1996 and 1995, respectively; and
(b) New plant facilities of $3,756, $4,299, $2,612, $0 and $0 for
the same periods, respectively.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion along with the "Selected Historical
Consolidated Financial and Other Data" and our consolidated financial statements
and the accompanying notes included elsewhere herein.
GENERAL
Simmons is a leading manufacturer and distributor of premium branded
bedding products in the United States and is the world leader in Pocketed
Coil(TM) innerspring technology. We design, manufacture, distribute and license
a broad range of mattresses, box springs, bedding frames and sleep accessories
under well recognized brand names including Simmons(R), Beautyrest(R),
BackCare(R), Connoisseur Collection(R), and Maxipedic(R). While we provide a
full range of conventional bedding products, our focus is on the higher-end
market segments, emphasizing retail price points from $699 to $2,999 per queen
set. We believe that these products offer more attractive growth prospects and
higher gross margins than lower-end products.
RESULTS OF OPERATIONS
The following table sets forth some components of our consolidated
statement of operations data expressed as a percentage of net sales.
Fiscal Year
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 56.6 58.1 58.0
------- ------- -------
Gross margin 43.4 41.9 42.0
Selling, general and administrative expenses 35.5 33.7 33.4
------- ------- -------
Operating income before ESOP expense and
amortization of intangibles
7.9% 8.2% 8.6%
======= ======= =======
Adjusted EBITDA margin
10.8% 10.4% 10.6%
======= ======= =======
FISCAL 1999 AS COMPARED TO FISCAL 1998
Net Sales. Net sales increased 3.1%, or $18.7 million, from $600.8
million in 1998 to $619.5 million in 1999. We attribute $26.7 million of this
increase to a 4.4% increase in our bedding average unit selling price, offset,
in part, by a $8.0 million or 1.3% decline in our bedding unit sales volume. The
bedding average unit selling price increase is attributable to sales of higher
priced products, particularly in the BackCare(R) line and a higher product mix
concentration of BackCare(R) and Beautyrest(R) products. The movement in product
mix is the result of our brand positioning of Better Sleep Through Science(TM).
The decline in bedding unit sales volume is attributable to the shift in product
mix toward higher price point products occurring primarily in the second half of
1999.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for 1999 improved 1.5 percentage points from 58.1% in 1998 to 56.6% in
1999. Our gross margin improvement reflects the shift in product mix toward
higher price point products, raw material cost efficiencies and increased
productivity in certain of our manufacturing facilities.
15
16
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses increased from 33.7% in 1998
to 35.5% in 1999. We attribute this increase to the following:
(1) the non-recurring write-off of $6.9 million related to the
assumption of certain assets, leases and liabilities of two
customers in exchange for amounts owed to us, "See Note 17 to
Notes to Consolidated Financial Statements.";
(2) an increase in cooperative advertising and promotion costs as
we move our mix toward higher price point products which carry
higher promotional rates; and
(3) higher legal and consulting fees.
Offsetting these increases, in part, were lower:
(1) distribution costs; and
(2) various other selling and marketing expenses.
ESOP Expense. ESOP expense increased $0.7 million from $6.5 million in
1998 to $7.2 million in 1999. We attribute this increase to an increase in the
appraised value of the shares subject to the ESOP in 1999.
Amortization of Intangibles. Amortization of intangibles for 1999
remained stable at approximately $7.6 million.
Interest Expense, Net. Interest expense, net increased $9.8 million
from $22.5 million in 1998 to $32.2 million in 1999 due primarily to increased
indebtedness as a result of the Recapitalization and the March 1999 Refinancing
and higher amortization of deferred debt issuance costs in 1999. "See Note 1 of
the Notes to Consolidated Financial Statements."
Other Expense, Net. Other expense, net decreased $1.0 million from $3.3
million in 1998 to $2.3 million in 1999. An increase in management advisory
services paid to Fenway was offset by non-recurring charges incurred in 1998
related to the Recapitalization.
Management Compensation--Transaction Related. In 1998, in connection
with the Recapitalization, we incurred non-recurring costs of $14.2 million
consisting of:
(1) $6.3 million related to the election by management to cancel a
portion of their compensatory incentive stock options which
were immediately vested; and
(2) $7.9 million of management bonuses.
Management Compensation--Severance Related. In connection with the
termination of and decision to terminate certain senior executives, we incurred
costs in 1999 of $6.6 million consisting of:
(1) $3.2 million related to the severance provisions contained in
certain executive employment agreements; and
(2) $3.4 million related to the cancellation of vested
compensatory incentive stock options.
Provision for Income Taxes. Our effective tax rates for 1999 and 1998
differ from the federal statutory rate primarily because of non tax-deductible
amortization of goodwill.
16
17
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
Extraordinary Item. In 1999, we recorded a $2.2 million extraordinary
charge, net of $1.1 million of related income taxes, representing the remaining
unamortized debt issuance costs related to certain long-term obligations repaid
in connection with the March 1999 Refinancing.
Net Income. For the reasons set forth above, we incurred a net loss of
$9.1 million as compared to net loss of $19.0 million for 1998.
FISCAL 1998 AS COMPARED TO FISCAL 1997
Net Sales. Net sales increased 9.2%, or $50.7 million, from $550.1
million in 1997 to $600.8 million in 1998. We attribute $29.2 million of this
increase to a 5.3% increase in our bedding unit sales volume and $21.5 million
of it to a 3.9% increase in our bedding average unit selling price. The growth
in bedding unit sales volume resulted primarily from increased BackCare(R)
product shipments and an increase in open coil contract bedding sales in the
last three quarters of 1998. Bedding average unit selling price increased due to
a shift in our product mix to higher priced products, particularly in the
Beautyrest(R) and BackCare(R) lines.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for 1998 remained stable at approximately 58.1% as compared to the same
time period a year ago. Our gross margins for 1998 reflect an increase in unit
sales of some premium products with gross margins lower than our average, offset
by raw material cost efficiencies together with higher levels of procurement.
Gross margins during 1998 also benefited from the increase in bedding average
unit selling price described above.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses increased from 33.4% in 1997
to 33.7% in 1998. We attribute this increase to an increase in marketing
expenditures and to higher depreciation expense, offset, in part, by increased
royalty income, a lower bad debt provision and reduced discretionary
expenditures. Marketing expenditures increased due to higher cooperative
advertising and promotion costs. Depreciation increased due to the amortization
of the systems upgrade project.
ESOP Expense. ESOP expense increased slightly from $6.2 million in 1997
to $6.5 million in 1998. We attribute this slight increase to an increase in the
appraised value of the shares subject to the ESOP in 1998.
Amortization of Intangibles. Amortization of intangibles for 1998
remained stable at approximately $7.6 million.
Interest Expense, Net. Interest expense, net increased $3.4 million
from $19.1 million in 1997 to $22.5 million in 1998 due primarily to increased
indebtedness and higher interest rates primarily in the fourth quarter of 1998.
Other Expense, Net. Other expense, net increased $1.7 million from $1.6
million in 1997 to $3.3 million in 1998. We attribute the increase to various
non-recurring expenses incurred in connection with the Recapitalization.
Management Compensation--Transaction Related. In connection with the
Recapitalization, we incurred non-recurring costs in 1998 of $14.2 million
consisting of:
(1) $6.3 million related to the election by management to cancel a
portion of their compensatory incentive stock options which
were immediately vested; and
17
18
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
(2) $7.9 million of management bonuses.
Provision for Income Taxes. Our effective tax rates for 1998 and 1997
differ from the federal statutory rate primarily because of non tax-deductible
amortization of goodwill.
Extraordinary Item. In 1998, we recorded a $15.0 million extraordinary
charge representing the remaining unamortized debt issuance costs related to the
repayment of some long-term obligations repaid and the redemption of the old
senior subordinated notes in connection with the Recapitalization.
Net Income. For the reasons set forth above, we incurred a net loss of
$19.0 million as compared to net income of $6.4 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to fund liquidity needs is net cash
provided by operating activities and availability under our senior credit
facility. Our primary use of funds consists of payments of principal and
interest, capital expenditures, severance and equity related repurchases.
Our operating activities generated cash of $0.9 million in 1999
compared to $14.0 million used in 1998. The difference is due primarily to a
higher net loss during 1998, the timing of payments of accounts payable, the
timing of accounts receivable collections, severance related expenses and the
non-recurring write-off related to the assumption of certain assets.
Our capital expenditures totaled $9.7 million for the 1999. These
capital expenditures consisted primarily of normal recurring capital
expenditures. We believe that annual capital expenditure limitations in our
Senior Credit Facility and the Indenture will not significantly inhibit us from
meeting our ongoing capital needs.
Effective March 22, 2000, the Company amended its Senior Credit Facility as
follows:
(1) for purposes of calculating Adjusted EBITDA, to permit the
add-back of $13.5 million and $3.8 million to 1999 and 2000,
respectively, as severance charges and certain one-time
charges;
(2) to delay the step-ups in Minimum Cash Interest Coverage and
Minimum Fixed Charge Coverage ratios by one year;
(3) to increase Permitted Capital Expenditures; and
(4) to permit the Company to add up to $50 million in additional
Term Loan C capacity.
As of December 25, 1999, we had no borrowings and $79.8 million
available under our revolving credit facility. Due to severance and certain
one-time charges, at December 25, 1999, the Company was not in compliance with
certain of these financial covenants; however, the Company amended such
covenants on March 22, 2000 and was in compliance through December 25, 1999
based on the amended covenants.
The terms of the Senior Credit Facility require an additional payment
on the Company's outstanding Term Loans on an annual basis based upon the
Company's excess cash flows ("Consolidated Excess Cash Flow," as defined in the
Senior Credit Facility). Based upon the Company's cash flows for the year ended
December 25, 1999, the payment required under the Consolidated Excess Cash Flow
provision would have been approximately $4.5 million. This payment was
permanently waived effective March 22, 2000, in accordance with the amendment to
the Senior Credit Facility previously discussed above.
18
19
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
On March 16, 1999, we completed a refinancing (the "March 1999
Refinancing"), which consisted of the sale of $150.0 million of 10.25% Senior
Subordinated Notes due 2009 (the "Notes") pursuant to a private offering. We
used the net proceeds from this offering to:
(1) repay the indebtedness and related accrued interest under the
senior bridge loan agreement and the junior subordinated notes
issued by us;
(2) repay the amounts outstanding and related accrued interest
under our Revolving Credit Facility; and
(3) prepay a portion of the amounts outstanding and related
accrued interest under our Term Loan Facility.
Following the prepayments made from the proceeds of the original
offering, our term loan facility was reduced to approximately $166.1 million and
will require annual principal amortization payments of $0.3 million in 2000,
$1.1 million in 2001 and $14.9 million in 2002.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated
Notes due 2009 (the "New Notes") in exchange for all Notes, pursuant to an
exchange offer whereby holders of the Notes received New Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.
SEASONALITY
Our sales volume is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than the margin
percentages obtained in the remaining part of the year. We believe that
seasonality of profitability is a factor that affects the conventional bedding
industry generally and that it is primarily due to retailers' emphasis in the
first quarter on price reductions and promotional bedding and manufacturers'
emphasis on close-outs of the prior year's product lines. These two factors
together result in lower profit margins.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Financial statements for
prior periods need not be restated. We are currently reviewing the provisions of
SFAS No. 133 and do not believe that our financial statements will be materially
impacted by the adoption of this provision.
SIGNIFICANT DEVELOPMENTS
Acquisition of a Customer
On January 21, 2000, one of our wholly-owned subsidiaries, Gallery
Corp. ("Gallery"), acquired substantially all of the retail store locations and
other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and
CBMC had previously operated retail stores in the Los Angeles,
19
20
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
Orange County and San Diego, California areas, selling primarily mattresses and
related bedding products. Through Gallery, we acquired the H&H and CBMC assets
in resolution of those companies' outstanding debt obligations to us, and our
assumption of certain other liabilities of H&H and CBMC. As a result of these
transactions, Gallery will operate approximately 30 retail locations in Southern
California previously owned by H&H and CBMC. These customers were indebted to us
in an amount approximating $23.9 million, relating to notes, certain advances
and trade receivables. We have included in long-term receivables at December 25,
1999 and December 26, 1998, amounts of $14.2 million and $3.4 million,
respectively, and have included in current assets at December 26, 1998 an amount
of $6.0 million related to these customers.
Based on an independent third party appraisal of the businesses
acquired, we have charged $6.9 million to expense in 1999 representing amounts
receivable from these customers in excess of the collateral value. The eventual
recovery of our investment in this business is dependent upon the ability of the
operations to achieve improvements sufficient to generate profitable operations
and positive cash flows. We currently believe that such improvements are
achievable, based upon our expertise in bedding manufacturing and distribution,
our knowledge of this business' markets, and its established presence in its
market. In addition, the sale of all or a portion of the stock of this customer,
or its underlying assets to a third party may be considered. However, the actual
achievement of such improvements or the realization in respect of the stock or
assets of this customer is not assured.
Pending Customer Transaction
A customer is indebted to us in an amount approximating $4.2 million,
relating to notes and trade receivables. We have included in long-term
receivables at December 25, 1999 and December 26, 1998, amounts of $4.2 million
and $1.0 million, respectively, and have included in current assets at December
26, 1998, an amount of $1.9 million related to this customer. We are currently
pursuing an acquisition of the capital stock of this customer at an amount equal
to the fair market value of the business less obligations owed to us. We believe
the collateral value of this customer's business exceeds the net amount of the
receivable; however, the results and timing of any eventual transaction is
uncertain. We have not received a completed independent third party appraisal of
the value of the capital stock of this customer at this time. Further, the
eventual recovery of our investment in this business is dependent upon the
ability of the operations to achieve improvements sufficient to generate
profitable operations and positive cash flows. We currently believe that such
improvements are achievable, based upon our expertise in bedding manufacturing
and distribution, our knowledge of this business' markets, and its established
presence in its market. In addition, the sale of all or a portion of the stock
of this customer, or its underlying assets to a third party may be considered.
However, the actual achievement of such improvements or the realization in
respect of the stock or assets of this customer is not assured.
Pending Acquisition - United Sleep Products
On October 8, 1999, we announced our intent to enter into negotiations
to acquire United Sleep Products of New York, Inc. and its subsidiaries United
Sleep Products, Inc. and United Sleep Products Futon Company, and Kinder
Furniture & Bedding Company of Indiana. The acquisition is subject to the
execution of definitive documentation of the transaction and other customary
conditions.
Organizational Changes - Severance Arrangements
On January 4, 2000, we announced that Charles R. Eitel had been
appointed as our new Chairman and Chief Executive Officer. We recorded
non-recurring severance expense for the year ended December 25, 1999 of
approximately $6.6 million, including compensation expense related to vested
stock option cancellations, relating to the resignation of Zenon S. Nie, our
former Chief Executive Officer and the
20
21
Simmons Company and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
resignations of two other executive level employees during the fourth quarter.
In addition, we have accrued $3.9 million in distributions payable to Holdings
in connection with Holding's repurchase of Holdings common stock.
During January 2000, Charles R. Eitel, our new Chairman and Chief
Executive Officer, completed an assessment of the effectiveness of the
organizational structure and in early February 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
going forward. The management reorganization resulted in the termination of 14
management employees. During February 2000, we recorded non-recurring severance
expense of $3.8 million, including compensation expense related to vested stock
option cancellations. In addition, we have accrued $2.3 million in distributions
payable to Holdings in connection with Holding's repurchase of Holdings common
stock.
IMPACT OF YEAR 2000 ISSUE
We did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its on-going business as a result of the "Year 2000 issue." However,
it is possible that the full impact of the date change, which was of concern due
to computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues such as leap year-related problems may occur with billing,
payroll, or financial closings at month end, quarterly or year end. We believe
that any such problems are likely to be minor and correctible. In addition, we
could still be negatively impacted if our customers or suppliers are adversely
affected by the Year 2000 or similar issues. We currently are not aware of any
significant Year 2000 or similar problems that have arisen for our customers or
suppliers.
The total estimated cost for Year 2000 preparedness, including system
upgrades, was approximately $0.7 million and was funded by operating cash flows.
As of December 25, 1999, all costs had been incurred. Of the total cost of the
preparedness, no amounts were attributable to new software and equipment, and
therefore, all of these costs were expensed as incurred.
The above statement in its entirety is designated a Year 2000 readiness
disclosure under the Year 2000 Information and Readiness Disclosure Act.
21
22
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 statement.
See the preceding note for additional information regarding the Private
Securities Litigation Reform Act.
We are exposed to market risk from changes in interest rates. In order
to address this risk and meet the requirements of the Senior Credit Facility, we
have developed and implemented a policy to maintain the percentage of fixed and
variable debt within certain parameters through the use of interest rate
collars. At December 25, 1999, the amount covered by collars was $95.0 million
with effective interest rates between 7.16% and 9.50%. The estimated fair values
of the interest rate collars are derived from valuation models based upon
recognized financial principles and estimates about relevant future market
conditions. The collars had no impact on interest expense in 1999. The amounts
exchanged are based upon the notional amounts of the interest rate collars, as
well as on the other terms of the collars, which relate to interest payments and
exchange rates. For detailed information on the terms and fair values of our
financial instruments and derivative instruments, see Note 8 to the Consolidated
Financial Statements.
This analysis presents the hypothetical increase in interest expense of
those financial instruments and derivative instruments held by us at December
25, 1999, which are sensitive to changes in interest rates. All other factors
remaining unchanged, a hypothetical 10 percent increase in interest rates for
one year on our variable rate financial instruments and derivative instruments
would increase interest expense by approximately $1.7 million in 2000, as
compared to a hypothetical increase in interest expense of approximately $1.5
million in 1999.
22
23
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Simmons Company
In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14(a)(1) present fairly, in all
material respects, the financial position of Simmons Company (the "Company') at
December 25, 1999 and December 26, 1998, and the results of its operations and
its cash flows for the years ended December 25, 1999, December 26, 1998 and
December 27, 1997, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. The 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 auditing standards
generally accepted in the United States which 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 23, 2000
23
24
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
December 25, December 26,
1999 1998
--------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents $ 4,533 $ 6,004
Accounts receivable, less allowance for doubtful accounts
of $3,449 and $4,177 74,326 71,354
Inventories 19,164 20,462
Deferred income taxes 8,713 7,440
Other current assets 10,394 14,792
--------- ---------
Total current assets 117,130 120,052
Property, plant and equipment, net 52,863 54,153
Patents, net of accumulated amortization of $10,459 and $7,663 6,570 9,366
Goodwill, net of accumulated amortization of $18,122 and $13,290 175,185 180,017
Deferred income taxes 18,778 17,704
Long-term receivables 22,220 6,594
Other assets 13,354 12,175
--------- ---------
$ 406,100 $ 400,061
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 15,984 $ 29,950
Accrued wages and benefits 8,449 5,323
Accrued taxes 1,992 6,578
Accrued interest 7,098 3,260
Accrued advertising and incentives 15,413 15,321
Other accrued expenses 9,764 7,049
Current maturities of long-term obligations 799 1,832
--------- ---------
Total current liabilities 59,499 69,313
Noncurrent liabilities:
Long-term obligations 333,184 311,637
Postretirement benefit obligations other than pensions 8,863 7,702
Other 10,582 11,626
--------- ---------
Total liabilities 412,128 400,278
--------- ---------
Commitments and contingencies
Redemption Obligation--ESOP, net of related unearned
compensation of $6,180 and $11,400 17,304 12,084
Common stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized,
31,964,452 shares issued and outstanding 320 320
Accumulated deficit (23,608) (12,535)
Accumulated other comprehensive loss (44) (86)
--------- ---------
Total common stockholders' deficit (23,332) (12,301)
--------- ---------
$ 406,100 $ 400,061
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
24
25
Simmons Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
--------- --------- ---------
Net sales $ 619,526 $ 600,773 $ 550,085
Cost and expenses:
Cost of products sold 350,721 348,842 319,074
Selling, general and administrative 219,924 202,213 183,556
ESOP expense 7,169 6,453 6,230
Amortization of intangibles 7,628 7,629 7,679
Interest expense, net 32,214 22,454 19,088
Other expense, net 2,331 3,321 1,571
Management compensation--severance related 6,600 -- --
Management compensation--transaction related -- 14,223 --
--------- --------- ---------
Income (loss) before income taxes and extraordinary
item (7,061) (4,362) 12,887
Provision (benefit) for income taxes (105) (345) 6,525
--------- --------- ---------
Income (loss) before extraordinary item (6,956) (4,017) 6,362
Extraordinary loss from early extinguishment of debt,
Net of income tax benefit of $1,095 and $7,079 2,173 15,002 --
--------- --------- ---------
Net income (loss) (9,129) (19,019) 6,362
--------- --------- ---------
Other comprehensive income:
Foreign currency translation adjustment 42 (31) (34)
--------- --------- ---------
Comprehensive income (loss) $ (9,087) $ (19,050) $ 6,328
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
25
26
Simmons Company and Subsidiaries
Consolidated Statements of Changes in Common Stockholders' Equity (Deficit)
(in thousands, except share amounts)
Total
Retained Accumulated Common
Additional Earnings Other Stockholders'
Common Common Paid-In (Accumulated Comprehensive Treasury Equity
Shares Stock Capital Deficit) Income Stock (Deficit)
----------- -------- -------- -------- -------- -------- --------
December 28, 1996 31, 964,452 $ 320 $ 84,680 $ 1,312 $ (21) $ -- $ 86,291
Net income -- -- -- 6,362 -- -- 6,362
Other comprehensive income:
Change in foreign currency
translation -- -- -- -- (34) -- (34)
Purchase of treasury stock -- -- -- -- -- (5) (5)
----------- -------- -------- -------- -------- -------- --------
December 27, 1997 31, 964,452 320 84,680 7,674 (55) (5) 92,614
Net loss -- -- -- (19,019) -- -- (19,019)
Other comprehensive loss:
Change in foreign currency
translation -- -- -- -- (31) -- (31)
Purchase of treasury stock -- -- -- -- -- (55) (55)
Excess of ESOP expense at fair
market value over cost -- -- 731 -- -- -- 731
Increase in ESOP Redemption
Obligation based on fair
market value -- -- (10,582) -- -- -- (10,582)
Distribution to Holdings -- -- (74,829) (1,190) -- 60 (75,959)
----------- -------- -------- -------- -------- -------- --------
December 26, 1998 31, 964,452 320 -- (12,535) (86) -- (12,301)
Net loss -- -- -- (9,129) -- -- (9,129)
Other comprehensive income:
Change in foreign currency
translation -- -- -- -- 42 -- 42
Excess of ESOP expense at fair
market value over cost -- -- 1,949 -- -- -- 1,949
Distribution to Holdings -- -- (1,949) (1,944) -- -- (3,893)
----------- -------- -------- -------- -------- -------- --------
December 25, 1999 31, 964,452 $ 320 $ -- $(23,608) $ (44) $ -- $(23,332)
=========== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
26
27
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (9,129) $ (19,019) $ 6,362
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 17,959 16,593 13,549
ESOP expense 7,169 6,453 6,230
Non-cash portion of extraordinary loss 2,173 (921) --
Provision for bad debts 7,597 75 2,750
Provision for deferred income taxes (1,252) (1,902) 6,226
Other, net 1,864 1,072 613
Net changes in operating assets and liabilities:
Accounts receivable (23,085) (10,335) (1,604)
Inventories 1,298 (492) (1,137)
Other assets 5,034 (5,208) (5,235)
Accounts payable (13,966) 2,103 3,047
Accrued liabilities 5,262 (2,427) 1,500
--------- --------- ---------
Cash provided by (used in) operating activities 924 (14,008) 32,301
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (9,041) (15,553) (15,355)
Issuance of notes receivable (4,100) -- --
Proceeds from notes receivable 100 -- --
--------- --------- ---------
Net cash used in investing activities (13,041) (15,553) (15,355)
--------- --------- ---------
Cash flows from financing activities:
Distribution to Holdings (3,893) (75,959) --
Distribution to Holdings for purchase of ESOP shares -- (15,450) --
Proceeds of Senior Credit Facility -- 200,000 --
Payments on Senior Credit Facility (23,972) (10,000) --
Proceeds of Senior Bridge Loans -- 75,000 --
Payments on Senior Bridge Loans (75,000) -- --
Proceeds of Junior Simmons Notes -- 30,000 --
Payments on Junior Simmons Notes (30,391) -- --
Proceeds of 10.25% Senior Sub Notes due 2009 150,000 -- --
Payment on 10.75% Senior Sub Notes due 2006 -- (100,000) --
Proceeds of other long-term borrowings -- 33,871 34,329
Payments on other long-term borrowings (514) (99,845) (46,701)
Payments of financing costs (5,626) (11,074) --
Treasury stock purchases -- (55) (5)
--------- --------- ---------
Net cash provided by (used in) financing activities 10,604 26,488 (12,377)
--------- --------- ---------
Net effect of exchange rate changes on cash 42 (31) (34)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (1,471) (3,104) 4,535
Cash and cash equivalents, beginning of period 6,004 9,108 4,573
--------- --------- ---------
Cash and cash equivalents, end of period $ 4,533 $ 6,004 $ 9,108
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 24,985 $ 19,517 $ 17,526
========= ========= =========
Cash paid for income taxes $ 4,985 $ 322 $ 60
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
27
28
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share amounts)
1. THE COMPANY
Simmons Company ("Simmons" or "the Company") is one of the largest
bedding manufacturers in the United States. The Company manufactures and
distributes mattresses, box springs, bedding frames and sleep accessories.
Simmons sells through all major distribution channels, including furniture
stores, specialty sleep shops, department stores and warehouse showrooms. The
Company manufactures and supplies conventional bedding to over 5,600 retail
outlets, representing more than 2,700 customers.
Simmons also sells bedding products to certain institutional customers,
such as schools and government entities, and to the lodging industry and
licenses its patents and trademarks to various domestic and foreign
manufacturers.
The Recapitalization
On July 16, 1998, the Company's parent, Simmons Holdings, Inc.
("Holdings") entered into a recapitalization agreement with the Company and REM
Acquisition, Inc., a transitory Delaware merger corporation ("REM"), sponsored
by Fenway Partners, Inc., ("Fenway"). Pursuant to the agreement on October 29,
1998 REM merged with and into Holdings (the "Recapitalization"), with Holdings
being the surviving corporation. The Recapitalization resulted in certain
stockholders of Holdings who are affiliates of or investors arranged by
INVESTCORP S.A. ("Investcorp") receiving an aggregate amount of cash equal to
approximately $193.4 million, and certain stockholders of Holdings who are
members of management of the Company receiving an aggregate amount of cash equal
to approximately $14.0 million. Investcorp retained shares of common stock of
Holdings with an estimated fair value of $9.0 million and management retained
shares of stock and options to purchase stock of Holdings with an estimated fair
value of $16.5 million. As part of the Recapitalization, REM purchased the
outstanding shares of Series A Preferred Stock of the Company (the "Series A
Preferred Stock") owned by the Simmons Employee Stock Ownership Plan (the
"ESOP") that had been allocated to its participants for an aggregate purchase
price of $15.4 million, and the ESOP exchanged its remaining outstanding shares
of Series A Preferred Stock for shares of common stock of Holdings. The Series A
Preferred Stock purchased by REM was cancelled in connection with the
Transactions, as defined below. The ESOP retained shares of stock of Holdings
with an estimated fair value of $23.4 million.
Financing for the Recapitalization, the related transactions, and the
fees and expenses incurred therewith, was provided by (i) the Company's
borrowings under a new $270.0 million senior credit facility (the "Senior Credit
Facility") which refinanced the majority of the Company's existing senior and
subordinated obligations, (ii) the Company's borrowings of $75.0 million Senior
Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the Company's
borrowings of $30.0 million under the Junior Subordinated Notes (the "Junior
Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings' borrowings of
$10.0 million under the Junior PIK Notes issued to an affiliate of Fenway, and
(v) $177.0 million of capital provided by Fenway, affiliates of Investcorp,
management and certain other investors of Holdings.
The Recapitalization, the refinancing under the Senior Credit Facility,
the Senior Bridge Loans financing and the Junior Simmons Notes financing are
collectively referred to herein as the "Transactions". As a result of the
Recapitalization and related transactions, Simmons Holdings, LLC, an entity
controlled by funds managed by Fenway, acquired 75.1% of the outstanding voting
shares of Holdings, and management, the ESOP and Investcorp retained
approximately 5.9%, 13.7% and 5.3%,
28
29
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
respectively, of the outstanding shares of Holdings. The Company has accounted
for the Transactions as a leveraged recapitalization, whereby the historical
bases of the assets and liabilities of the Company have been maintained.
2. PRINCIPAL ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and all its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates and Reclassifications
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles. 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.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 1999, 1998 and 1997 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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. 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 10 - 25 years
Machinery and equipment 5 - 15 years
Computers and software 3 - 7 years
Whenever events or changes in circumstances indicate that the carrying
value may not be recoverable, management assesses whether there has been a
permanent impairment in the value of long-lived assets by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the long-lived asset. The factors considered by management in this assessment
include
29
30
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
operating results, trends and prospects, as well as the effects of obsolescence,
demand, competition and other economic factors. If a permanent 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.
Patents and Goodwill
The costs of patents acquired are being amortized using the
straight-line method over the estimated remaining economic lives of the
respective patents, principally seven years. Amortization expense was
approximately $2,796, $2,796 and $2,799 for 1999, 1998 and 1997, respectively.
Goodwill is being amortized on a straight-line basis, over the
estimated periods benefited, principally 40 years. Amortization expense was
$4,832, $4,833 and $4,880 for 1999, 1998 and 1997, respectively.
Whenever events or changes in circumstances indicate that the carrying
value may not be recoverable, management assesses whether there has been a
permanent impairment in the value of intangible assets by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the intangible 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 a permanent
impairment is deemed to exist, management would record an impairment change
equal to the excess of the carrying value over discounted cash flows associated
with the goodwill.
Revenue Recognition
The Company recognizes revenue at the time the product is shipped to
the customer.
ESOP Expense
The Company follows the provisions of Statement of Position No. 93-6 of
the American Institute of Certified Public Accountants, "Employers' Accounting
for Employee Stock Ownership Plans," whereby ESOP expense is recognized as an
amount equal to the fair market value of the shares committed to be released to
participants' accounts. The unearned compensation balance continues to be
amortized using the shares allocated method (i.e., at cost). The difference in
these two amounts, if any, is recorded as an adjustment to additional paid-in
capital.
Other Comprehensive Income
Comprehensive income equals net income plus other comprehensive income.
Other comprehensive income refers to revenue, expenses, gains and losses which
are reflected in stockholders' equity (deficit) but excluded from net income.
The component comprising other comprehensive income is foreign currency
translation adjustment.
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 $491, $1,112 and $1,185 for 1999, 1998 and 1997.
30
31
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Advertising Costs
The Company records the cost of advertising as an expense when
incurred. Advertising expense was $65,773, $61,869 and $54,802 for 1999, 1998
and 1997, respectively, and is included as a component of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Significant Concentrations of Risk
The Company manufactures and markets sleep products, including
mattresses and box springs to retail establishments primarily in the United
States. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Sales to three of
the Company's major customers aggregated approximately 18%, 21% and 21% of total
sales for each of 1999, 1998 and 1997, respectively. Accounts receivable from
one customer was approximately 7% of total accounts receivable at both December
25, 1999 and December 26, 1998. Sales to Heilig-Meyers entities represented
approximately 11.0%, 11.8% and 10.7% of net sales for 1999, 1998 and 1997,
respectively.
Purchases of raw materials from one vendor represented approximately
22%, 23% and 24% of cost of products sold for 1999, 1998 and 1997, respectively.
The Company maintains cash balances in excess of FDIC insurance limits
at certain large financial institutions. The Company monitors the financial
condition of such institutions and considers the risk of loss to be remote.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Financial statements for
prior periods need not be restated. We are currently reviewing the provisions of
SFAS No. 133 and do not believe that our financial statements will be materially
impacted by the adoption of this provision.
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company is structured so that the employees of the Company have a
beneficial ownership of the stock of Holdings or, prior to the Transactions, of
the Company through their participation in the ESOP.
The Company makes annual contributions to the ESOP in an amount up to
25% of eligible participant compensation, subject to certain limitations and
conditions. The ESOP then uses all such contributions to repay the internal ESOP
loan. As a result, there is no cash cost associated with the contributions to
the ESOP.
31
32
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
On October 29, 1998, REM purchased 2,295,110 shares of the Company's
Series A Preferred Stock from the ESOP, representing all the shares held by the
ESOP that had been allocated to plan participants as of such date for an
aggregate purchase price of approximately $15.4 million, which amount was
reinvested, at the direction of the participants, into diversified investments
in the respective accounts of such participants in the ESOP. The Series A
Preferred Stock purchased by REM was cancelled in connection with the
Transactions. Immediately prior to the Recapitalization, the ESOP exchanged its
remaining outstanding shares of Series A Preferred Stock for 3,482,036 shares of
common stock of Holdings.
The ESOP pledged all of its shares of Holdings common stock or, prior
to the Transactions, the Company's common stock as collateral for the internal
ESOP loans from the Company. These shares are held by State Street Bank and
Trust Company, the ESOP trustee, in a suspense account and are released to the
ESOP participants' accounts based on debt service. In 1997, 1,096,152 shares
were released to participant's accounts for the 1996 ESOP allocation. In 1998,
1,160,734 shares were released to participant's accounts for the 1997 ESOP
allocation. In 1999, 1,133,737 shares were released to participant's accounts
for the 1998 ESOP allocation. As of December 25, 1999, 1,071,263 shares of
Holdings common stock have been committed to be released. The remaining
unallocated shares of Holdings common stock held in the ESOP had an estimated
fair value of approximately $8,596 ($6.7315 per share) at December 25, 1999.
Under the ESOP, employees are eligible to participate in the ESOP
following the date when the employee has completed at least one year of service
and has reached age 21. All employees of the Company, except employees who are
covered by a negotiated collective bargaining agreement (unless the collective
bargaining agreement provides for participation in the ESOP) or who are
nonresident aliens, are covered by the ESOP. Approximately 49% of the Company's
full-time employees are participants in the ESOP. The participants and
beneficiaries of the ESOP are not subject to income tax with respect to
contributions made on their behalf until they receive distributions from the
ESOP.
Under the provisions of the ESOP, the Company or Holdings is obligated
to repurchase participant shares which have been distributed under the terms of
the ESOP, as long as the shares are not publicly traded or if the shares are
subject to trading limitations. The Company repurchased approximately 974 shares
from ESOP participants in 1997 at a price of $5.00 per share, 5,711 shares from
ESOP participants in 1998 (prior to the Transactions) at a price of $5.00 per
share and on behalf of Holdings, 2,886 shares from ESOP participants in 1999 at
a price of $6.7315 per share. The shares repurchased in 1998 and 1997 are
reflected as treasury stock in the common stockholders' equity section of the
balance sheet for periods prior to the Transactions. The shares repurchased in
1999 are reflected as an intercompany receivable from Holdings.
Because of the Company's or Holdings' obligation to repurchase its
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 under ESOP as
of December 25, 1999 and December 26, 1998, respectively. Additionally, pursuant
to generally accepted accounting principles, the Company has classified a
proportional amount of unearned compensation under ESOP in the same manner.
32
33
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 25, 1999 and
December 26, 1998:
December 25, December 26,
1999 1998
------- ------
Accounts receivable $81,183 $79,628
Allowance for doubtful accounts (3,449) (4,177)
Allowance for cash discounts and other (3,408) (4,097)
------- ------
$74,326 $71,354
====== ======
5. INVENTORIES
Inventories consisted of the following at December 25, 1999 and
December 26, 1998:
December 25, December 26,
1999 1998
------- ------
Raw materials $11,664 $12,823
Work-in-progress 1,357 1,376
Finished goods 6,143 6,263
------- -------
$19,164 $20,462
====== ======
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
25, 1999 and December 26, 1998:
December 25, December 26,
1999 1998
------- ------
Land, buildings and improvements $17,575 $16,343
Machinery and equipment 52,807 46,050
Construction in progress 2,934 7,336
------- -------
73,316 69,729
Less accumulated depreciation (20,453) (15,576)
------ ------
$52,863 $54,153
====== ======
Depreciation expense for 1999, 1998 and 1997 was $10,331, $8,964 and
$5,870, respectively.
7. OTHER ASSETS
Other assets consisted of the following at December 25, 1999 and December 26,
1998:
December 25, December 26,
1999 1998
------- ------
Debt issuance costs, net of accumulated $12,330 $11,405
amortization of $1,472 and $177, respectively
Other 1,024 770
------- --------
$13,354 $12,175
====== ======
33
34
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Debt issuance costs are amortized using the effective interest method.
Amortization of $1,433, $777 and $613 for 1999, 1998 and 1997, respectively, is
included as a component of interest expense in the accompanying consolidated
statements of operations.
8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 26, 1998
and December 27, 1997:
December 25, December 26,
1999 1998
------- ------
Senior Credit Facility:
Tranche A Term Loan $48,607 $70,000
Tranche B Term Loan 68,657 70,000
Tranche C Term Loan 48,764 50,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 5.15%, due 2016 4,800 5,000
Banco Santander loan 2,969 3,164
Senior Bridge Loans - 75,000
Junior Simmons Notes - 30,000
10.25% Series B Senior Subordinated Notes due 2009 150,000 -
Other, including capital lease obligations 486 605
---------- ----------
333,983 313,469
Less current portion (799) (1,832)
----------- ----------
$333,184 $311,637
========== ==========
The Senior Credit Facility provides for loans of up to $270.0 million,
consisting of the Term Loan Facility of $190.0 million and the Revolving Loan
Facility of $80.0 million. Following the prepayments made from the proceeds of a
private offering of 10.25% Series B Senior Subordinated Notes due 2009, the Term
Loan Facility was reduced to approximately $166.0 million. Our indebtedness
under the Senior Credit Facility bears interest at a floating rate, is
guaranteed by Holdings and one of our current domestic subsidiaries and is
collateralized by substantially all of our assets.
The interest rates per annum in effect at December 25, 1999 for the
Tranche A term, Tranche B term and Tranche C term loans were 8.31%, 8.81% and
9.06%, respectively.
The use of interest rate risk management instruments, such as collars,
is required under the terms of the Senior Credit Facility. The Company has
developed and implemented a policy to maintain the percentage of fixed and
variable debt within certain parameters. Through the use of collars the Company
limits its exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates. At December 25, 1999, the amount
covered by collars was $95.0 million with effective interest rates between 7.16%
and 9.50%. The estimated fair value of these collars at December 25, 1999 was
approximately $1.1 million. While collars represent an integral part of the
Company's interest rate risk management program, their impact on interest
expense for the year ended December 25, 1999 was not significant.
At December 25, 1999, the amount under the Revolving Credit Facility
that was available to be drawn was $79.8 million, after giving effect to $0.2
million that was reserved for the Company's reimbursement obligations with
respect to outstanding letters of credit. The remaining availability under the
Revolving Credit Facility may be utilized to meet the Company's current working
capital requirements, including issuance of stand-by and trade letters of
credit. The Company also may utilize
34
35
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
the remaining availability under the Revolving Credit Facility to fund
acquisitions and capital expenditures.
On March 16, 1999, we completed a refinancing, which consisted of the
sale of $150.0 million of 10.25% Senior Subordinated Notes due 2009 (the
"Notes") pursuant to a private offering. We used the net proceeds from this
offering to:
(1) repay the indebtedness and related accrued interest under the
senior bridge loan agreement and the junior subordinated notes
issued by us;
(2) repay the amounts outstanding and related accrued interest
under our Revolving Credit Facility; and
(3) prepay a portion of the amounts outstanding and related
accrued interest under our Term Loan Facility.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated
Notes due 2009 (the "New Notes") in exchange for all Notes, pursuant to an
exchange offer whereby holders of the Notes received New Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.
Effective March 22, 2000, the Company amended its Senior Credit Facility as
follows:
(1) for purposes of calculating Adjusted EBITDA, to permit the
add-back of $13.5 million and $3.8 million to 1999 and 2000,
respectively, as severance charges and certain one-time
charges;
(2) to delay the step-ups in Minimum Cash Interest Coverage and
Minimum Fixed Charge Coverage ratios by one year;
(3) to increase Permitted Capital Expenditures; and
(4) to permit the Company to add up to $50 million in additional
Term Loan C capacity.
The Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge, cash interest coverage and leverage
ratios. The Senior Credit Facility also contains covenants which, among other
things, limit capital expenditures, the incurrence of additional indebtedness,
investments, dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. Due to severance and
certain one-time charges, at December 25, 1999, the Company was not in
compliance with certain of these financial covenants; however, the Company
amended such covenants on March 22, 2000 and was in compliance through December
25, 1999 based on the amended covenants.
The terms of the Senior Credit Facility require an additional payment
on the Company's outstanding Term Loans on an annual basis based upon the
Company's excess cash flows ("Consolidated Excess Cash Flow," as defined in the
Senior Credit Facility). Based upon the Company's cash flows for the year ended
December 25, 1999, the payment required under the Consolidated Excess Cash Flow
provision would have been approximately $4.5 million. This payment was
permanently waived effective March 22, 2000, in accordance with the amendment to
the Senior Credit Facility previously discussed.
In November 1998, Simmons Caribbean Bedding, Inc., a wholly owned
subsidiary of the Company, entered into a permanent loan facility with Banco
Santander in the amount of $3.2 million accruing interest at a fluctuating rate
based on the London Interbank Offered Rate (or LIBOR) plus the applicable
spread. The actual rate was 8.1% as of December 25, 1999.
35
36
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Future maturities of long-term obligations as of December 25, 1999 are
as follows:
1999 $ 799
2000 1,617
2001 15,472
2002 16,779
2003 21,713
Thereafter 277,603
-------
$333,983
=======
The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of similar terms and
maturities except for the 10.25% Series B Senior Subordinated Notes due 2009
which are at quoted market values. The fair value of the Company's 10.25% Series
B Senior Subordinated Notes due 2009 was $141,750 at December 25, 1999. All
other long-term debt approximates the carrying value at December 25, 1999.
9. OTHER EXPENSE, NET
Other expense, net is comprised of the following:
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
--------- --------- ----------
Recapitalization/acquisition related
expenses $ 124 $1,012 $ -
Management advisory fee 1,505 1,074 1,000
Other non-operating expenses 702 1,235 571
----- ----- ------
$2,331 $3,321 $1,571
===== ===== =====
10. EXTRAORDINARY ITEMS
In March 1999, we recorded a $2,173 (net of income tax benefit of
$1,095) charge representing the remaining unamortized debt issuance costs
related to certain long-term obligations repaid in connection with the March
1999 Refinancing.
In October 1998, the Company recorded a $15,002 charge (net of income
tax benefit of $7,079) representing the remaining unamortized debt issuance
costs of $4,184 (net of income tax benefit of $1,974) related to long-term
obligations repaid as a result of the refinancing of certain debt in connection
with the recapitalization and the redemption premium obligation of $10,818 (net
of income tax benefit of $5,105) related to the early redemption of the
Company's then outstanding 10.75% Senior Subordinated Notes due 2006.
11. LEASES
The Company leases certain facilities and equipment under operating
leases. Rent expense was $14,298, $12,705 and $11,258 for 1999, 1998 and 1997,
respectively.
36
37
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
The following is a schedule of the future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 25, 1999:
2000 $13,791
2001 13,380
2002 12,753
2003 9,389
2004 6,660
Thereafter 14,997
------
$70,970
======
12. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock incentive plans. The
Company has adopted the disclosure-only provisions of Financial Accounting
Standards Board Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123").
On September 23, 1999, the board of directors established the 1999
Stock Option Plan ("1999 Plan"), which provides for the granting of up to
3,456,000 options for shares of Holdings common stock to directors (including
those who are not employees), all executive officers of the Company and its
Subsidiaries and other employees, consultants and advisors. Under the terms of
the 1999 Plan, options may be either incentive or nonqualified. Generally, the
options outstanding under the 1999 Plan are granted at prices which equate to or
are above the market value of the common stock of Holdings on the date of grant
and vest ratably over a five year period based upon the achievement of an annual
Adjusted EBITDA target, as defined in the plan, or as otherwise established by
the Compensation Committee of the Board of Directors. The 1999 Plan permits the
Compensation Committee to grant other incentive options on terms and conditions
established by the Committee. Under APB 25, because the vesting of the plan
options is 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, is not
determinable and compensation expense will be recognized until the measurement
date. No compensation expense was recognized in 1999.
In 1996, the board of directors established a Management Stock
Incentive Plan (the "1996 Plan"), which provided for the granting of
nonqualified options for Class C common stock of Holdings to members of
management and certain key employees. The options outstanding under the 1996
Plan were granted at prices which equate to or were above the market value of
the Class C stock on the date of grant. Under APB 25, because the exercise price
of employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recorded.
In 1996, the Company entered into an agreement with Holdings whereby if
Holdings grants any options to purchase shares of common or Class C Stock of
Holdings to a director, employee or consultant of the Company, the Company will
grant to Holdings corresponding options, exercisable only upon exercise of the
Holdings options, to purchase the same number of shares of common stock of the
Company at the same per share exercise price and subject to substantially the
same terms and conditions as the Holdings options. All references to stock
options pertain to the Holdings options which have been attributed to the
Company for disclosure purposes.
37
38
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Information relating to stock options during 1999, 1998 and 1997 is as
follows:
Weighted
Average
Number Exercise
of Shares Price
---------- --------
Shares under option at December 27, 1997 3,168,602 $2.73
Granted 59,000 $5.15
Forfeited (17,062) $2.66
Canceled (1,571,463) $2.72
---------- --------
Shares under option at December 26, 1998 1,639,077 $2.73
Granted 2,880,000 $6.73
Forfeited (100,000) $6.73
Canceled (41,585) $2.88
---------- --------
Shares under option at December 25, 1999 4,377,492 $5.27
========== ========
Shares exercisable at December 27, 1997 574,369 $2.66
========== ========
Shares exercisable at December 26, 1998 1,639,077 $2.73
========== ========
Shares exercisable at December 25, 1999 1,597,492 $2.73
========== ========
All outstanding options were nonqualified options.
Pro forma information regarding net income is required by SFAS 123, and
has been determined as if the Company had accounted for the employee stock
options under the fair value method under that Statement. The fair value for
these options was estimated at the date of grant using the minimum present value
method with the following weighted average assumptions for 1999, 1998 and 1997:
1999 1998 1997
--------------- --------------- ----------------
Risk-free interest rate 5.71% 5.47% 6.08%
Expected life 7 years 7 years 7 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. The Company's
pro forma net earnings were as follows:
1999 1998 1997
------------- -------------- -------------
Net earnings (loss)--as reported $(9,915) $(19,019) $6,362
Net earnings (loss)--proforma (10,032) (20,309) 6,133
Weighted average fair value of options
granted during the year 2.17 1.60 1.00
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
As a result of the Transactions, the vesting of the issued and
outstanding stock options under the 1996 plan was accelerated. At the time of
the Transaction option holders under the 1996 plan elected to cancel a portion
of their options. For option shares canceled, each holder received reasonable
compensation for the options, which was equal to the spread between the
recapitalization price of $6.7315 and the respective per share exercise price
for the canceled options. The remaining option shares are fully vested and are
exercisable at their respective issuance price (ranging from $2.66 to $5.15).
38
39
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
13. INCOME TAXES
The components of the provision for income taxes are as follows:
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
------- ------- ------
Current tax provision:
Federal $ -- $657 --
State 600 600 --
Foreign 547 300 $299
------- ------- ------
1,147 1,557 299
------- ------- ------
Deferred tax provision:
Federal (1,007) (1,530) 5,230
State (245) (372) 996
------- ------- ------
(1,252) (1,902) 6,226
------- ------- ------
$(105) $(345) $6,525
======= ======= ======
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 1999, 1998 and 1997 provision for income taxes is
as follows:
Year ended Year ended Year ended
December 25, December 26, December 27,
1999 1998 1997
------- ------- ------
Income taxes at federal statutory rate $(2,401) $(1,483) $4,382
State income taxes, net of federal
benefit 438 (218) 657
Goodwill amortization 1,643 1,643 1,393
Other, net 215 (287) 93
------- ------- ------
$(105) $(345) $6,525
======= ======= ======
39
40
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
In addition, the Company recorded a deferred tax benefit of $1,095 and
$7,079 for 1999 and 1998, respectively, associated with the extraordinary item.
Components of the net deferred income tax asset at December 25, 1999 and
December 26, 1998 are as follows:
December 25, December 26,
1999 1998
-------- --------
Current deferred income taxes:
Accounts receivable and inventory reserves $ 3,886 $ 3,757
Accrued liabilities not currently deductible 8,556 8,253
Prepaids and other assets, not currently taxable (3,729) (4,570)
-------- --------
8,713 7,440
Noncurrent deferred income taxes:
Property basis differences (6,554) (7,382)
Patents basis differences (2,230) (3,222)
ESOP liability basis differences 3,604 6,247
Net operating loss carryforwards 21,321 19,610
Valuation allowance (3,999) (3,999)
Other noncurrent accrued liabilities, not
currently deductible 6,636 6,450
-------- --------
18,778 17,704
-------- --------
Net deferred tax asset $ 27,491 $ 25,144
======== ========
At December 25, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $54,670, all of which are
limited to utilization under the Internal Revenue Code. Due to such limitations,
the Company believes it is more likely than not that it will not realize the
full benefit of the loss carryforwards and has provided a valuation allowance of
approximately $3,999 to reserve such amounts as of December 25, 1999. These
carryforwards expire through 2019. Undistributed earnings to be permanently
reinvested by the international subsidiaries totaled approximately $2,798 at
December 25, 1999. Because these earnings are to be permanently reinvested, no
U.S. deferred income tax has been recorded for them.
14. RETIREMENT PLANS
Simmons 401(k) Plan
The Company has a defined contribution pension plan (a 401(k) plan) for
substantially all employees other than employees subject to collective
bargaining agreements. Eligible participants may make limited contributions to
the defined contribution plan; however, no employer contributions are allowed.
Nonqualified Employee Stock Ownership Plan
The Company also has an unfunded nonqualified employee stock ownership
plan to provide benefits to certain employees who were not eligible to
participate in the ESOP. Benefits are to be paid in cash and are computed based
on the value of shares the participants would have received had they
participated in the ESOP.
Participants are entitled to receive accrued benefits upon termination
of employment with the Company, retirement, death, or permanent disability.
Benefits vest based on the provisions of the ESOP. The Company charged
approximately $137, $184 and $64 to expense for 1999, 1998 and 1997,
respectively. The Company made distributions to participants in the amount of
$233 in 1999. The
40
41
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
accrued benefits under the nonqualified plan were $277 and $373 at December 25,
1999 and December 26, 1998, respectively, and are included in other long-term
liabilities in the accompanying consolidated balance sheets.
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 1999, 1998
and 1997 were $1,725, $1,633 and $1,439, respectively.
The Company had accrued $2,573 and $2,653 at December 25, 1999 and
December 26, 1998, respectively, for a supplemental executive retirement plan
for a former executive. Such amounts are included in postretirement benefit
obligations other than pensions in the accompanying consolidated balance sheets.
Retiree Health Coverage
The Company provides certain health care and life insurance benefits to
eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or nonunion employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.
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 postretirement benefit obligations
other than pensions in the accompanying consolidated balance sheets.
41
42
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
The following table presents a reconciliation of the plan's status at
December 25, 1999 and December 26, 1998:
December 25, December 26,
1999 1998
-------- --------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 5,466 $ 5,138
Service cost 230 205
Interest cost 357 347
Benefits paid (97) (93)
Actuarial (gain)/loss (686) (131)
------- -------
Benefit obligation, end of year $ 5,270 $ 5,466
======= =======
Change in Plan Assets:
Fair value of assets, beginning of year $ -- $ --
Employer contributions 97 93
Benefits paid (97) (93)
------- -------
Fair value of assets, end of year $ -- $ --
======= =======
Reconciliation of Accrued Benefit Cost:
Funded status $(5,270) $(5,466)
Unrecognized prior service cost (183) (213)
Unrecognized net gain (1,537) (867)
------- -------
Accrued benefit cost, end of year $(6,990) $(6,546)
======= =======
Weighted-Average Assumptions:
Discount rate 7.50% 6.75%
Components of Net Periodic Benefit Cost:
Service cost $ 230 $ 205
Interest cost 357 347
Amortization of:
Prior service cost (30) (30)
Gain (16) (12)
------- -------
Net periodic benefit cost $ 541 $ 510
======= =======
A 9.5% annual rate of increase in the cost of health care benefits was
assumed for 1999; the rate was assumed to decrease 0.5% per year until 5.0% is
reached. A 1.0% change in assumed health care cost trend rates would have the
following effects:
1% 1%
Increase Decrease
----------------- --------------
Effect on Total of Service and Interest Cost Components $90 $(77)
Effect on Benefit Obligation $540 $(486)
42
43
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
15. CONTINGENCIES
On April 3, 1998, Serta, Inc. filed a complaint against Simmons in the
United States District Court for the Northern District of Illinois, Eastern
Division, alleging that some Simmons products--including those sold in
connection with the trademarks Connoisseur(R) collection, Crescendo(TM), and
some World Class Beautyrest(R) and Back Care(R) Ultimate models--infringe one of
their U.S. patents and that our use of the term "Crescendo" infringes their
alleged common-law trademark, "Crescendo". Serta seeks compensatory damages in
an unspecified amount, interest, an accounting and disgorgement of profits
derived from allegedly infringing acts, treble damages, an order enjoining
further alleged infringement and requiring destruction of allegedly infringing
items, costs, expenses and attorney's fees. We have denied the material
allegations of the complaint. We also have asserted affirmative defenses and/or
counterclaims against Serta alleging non-infringement, invalidity and
unenforceability of the patent-in-suit, and alleging infringement by Serta of
our rights in the term "Crescendo" in various geographic areas to the extent
usage of the term by both Serta and us would be confusingly similar. Serta
requested the Patent and Trademark Office, the PTO, to reexamine the
patent-in-suit. Pending the outcome of the reexamination, and by agreement of
the parties, the pending lawsuit was stayed. In April 1999, the PTO reinstated
Serta's patent and the stay in the action was lifted.
In October 1999, Serta amended its complaint to join 14 U.S.
licensee/shareholders as plaintiffs and to add a claim for false advertising
under the Lanham Act as well as seek damages and injunctive relief in connection
with that claim. We again have denied the material allegations of the amended
complaint and asserted additional affirmative defenses and an additional
counterclaim seeking a declaratory judgment for unenforceability of the
patent-in-suit due to fraud on the PTO. Serta moved to dismiss this counterclaim
and we have filed a response. The court has not yet ruled on the motion. While
we deny that Serta is entitled to any relief and intend to defend the action
vigorously, a settlement could be material and we cannot assure you that we will
prevail in this action.
From time to time, we have been involved in various legal proceedings.
We believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of our operations.
16. RELATED PARTY TRANSACTIONS
The Company, Holdings and Fenway entered into a management agreement
(the "Fenway Advisory Agreement") effective upon consummation of the
Transactions pursuant to which Fenway agreed to provide strategic advisory
services to the Company. In exchange for such services, the Company agreed to
pay Fenway (i) annual management fees of 0.25% of net sales for the prior fiscal
year, (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 the Company. Included in other expense is $1.5 million and $0.3 million for
the years ended December 25, 1999 and December 26, 1998, respectively, related
to the management fee.
The Company entered into an agreement with Holdings pursuant to which
the Company agreed to reimburse Holdings for certain expenses incident to
Holdings' ownership of the Company's capital stock for as long as Holdings and
the Company file consolidated federal income tax returns. Such expenses include
franchise taxes and other fees required to maintain Holdings' corporate
existence; operating costs incurred by Holdings attributable to its ownership of
the Company's capital stock not to exceed $850 per fiscal year; federal, state
and local taxes paid by Holdings and attributable to income of the Company and
its subsidiaries other than taxes arising from the sale or exchange by Holdings
of the Company's common
43
44
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
stock; the purchase price of capital stock or options to purchase capital stock
of Holdings owned by former employees of the Company or its subsidiaries not to
exceed $2.5 million per year permitted under the Senior Credit Facility, as
amended; and registration expenses incurred by Holdings incident to a
registration of any capital stock of Holdings under the Securities Act.
17. SUBSEQUENT EVENTS
Acquisition of a Customer
On January 21, 2000, one of our wholly-owned subsidiaries, Gallery
Corp. ("Gallery"), acquired substantially all of the retail store locations and
other assets of H&H Sleep Centers, Inc. ("H&H") and CBMC Corp. ("CBMC"). H&H and
CBMC had previously operated retail stores in the Los Angeles, Orange County and
San Diego, California areas, selling primarily mattresses and related bedding
products. Through Gallery, we acquired the H&H and CBMC assets in resolution of
those companies' outstanding debt obligations to us, and our assumption of
certain other liabilities of H&H and CBMC. As a result of these transactions,
Gallery will operate approximately 30 retail locations in Southern California
previously owned by H&H and CBMC. These customers were indebted to us in an
amount approximating $23.9 million, relating to notes, certain advances and
trade receivables. We have included in long-term receivables at December 25,
1999 and December 26, 1998, amounts of $14.2 million and $3.4 million,
respectively, and have included in current assets at December 26, 1998 an amount
of $6.0 million related to these customers.
Based on an independent third party appraisal of the businesses
acquired, we have charged $6.9 million to expense in 1999 representing amounts
receivable from these customers in excess of the collateral value. The eventual
recovery of our investment in this business is dependent upon the ability of the
operations to achieve improvements sufficient to generate profitable operations
and positive cash flows. We currently believe that such improvements are
achievable, based upon our expertise in bedding manufacturing and distribution,
our knowledge of this business' markets, and its established presence in its
market. In addition, the sale of all or a portion of the stock of this customer,
or its underlying assets to a third party may be considered. However, the actual
achievement of such improvements or the realization in respect of the stock or
assets of this customer is not assured.
Pending Customer Transaction
A customer is indebted to us in an amount approximating $4.2 million,
relating to notes and trade receivables. We have included in long-term
receivables at December 25, 1999 and December 26, 1998, amounts of $4.2 million
and $1.0 million, respectively, and have included in current assets at December
26, 1998, an amount of $1.9 million related to this customer. We are currently
pursuing an acquisition of the capital stock of this customer at an amount equal
to the fair market value of the business less obligations owed to us. We believe
the collateral value of this customer's business exceeds the net amount of the
receivable; however, the results and timing of any eventual transaction is
uncertain. We have not received a completed independent third party appraisal of
the value of the capital stock of this customer at this time. Further, the
eventual recovery of our investment in this business is dependent upon the
ability of the operations to achieve improvements sufficient to generate
profitable operations and positive cash flows. We currently believe that such
improvements are achievable, based upon our expertise in bedding manufacturing
and distribution, our knowledge of this business' markets, and its established
presence in its market. In addition, the sale of all or a portion of the stock
of this customer, or its underlying assets to a third party may be considered.
However, the actual achievement of such improvements or the realization in
respect of the stock or assets of this customer is not assured.
44
45
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements - Continued
- --------------------------------------------------------------------------------
Pending Acquisition - United Sleep Products
On October 8, 1999, we announced our intent to enter into negotiations
to acquire United Sleep Products of New York, Inc. and its subsidiaries United
Sleep Products, Inc. and United Sleep Products Futon Company, and Kinder
Furniture & Bedding Company of Indiana. The acquisition is subject to the
execution of definitive documentation of the transaction and other customary
conditions.
Organizational Changes - Severance Arrangements
On January 4, 2000, we announced that Charles R. Eitel had been
appointed as our new Chairman and Chief Executive Officer. We recorded
non-recurring severance expense for the year ended December 25, 1999 of
approximately $6.6 million, including compensation expense related to vested
stock option cancellations, relating to the resignation of Zenon S. Nie, our
former Chief Executive Officer and the resignations of two other executive level
employees during the fourth quarter. In addition, we have accrued $3.9 million
in distributions payable to Holdings in connection with Holding's repurchase of
Holdings common stock.
During January 2000, Charles R. Eitel, our new Chairman and Chief
Executive Officer, completed an assessment of the effectiveness of the
organizational structure and in early February 2000, we undertook an
enterprise-wide management reorganization to reflect a new management structure
going forward. The management reorganization resulted in the termination of 14
management employees. During February 2000, we recorded non-recurring severance
expense of $3.8 million, including compensation expense related to vested stock
option cancellations. In addition, we have accrued $2.3 million in distributions
payable to Holdings in connection with Holding's repurchase of Holdings common
stock.
45
46
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
46
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of March 22, 2000 and
position of each of our directors, executive officers and other key employees.
Each of our directors will hold office until the next annual meeting of our
shareholders or until his successor has been elected and qualified. Our officers
are elected by our Board of Directors and serve at the discretion of the Board
of Directors.
Name Age Position
- ---- --- --------
Charles R. Eitel 50 Chairman of the Board of Directors and
Chief Executive Officer
Peter Brink 50 Executive Vice President--Chief Operations Officer
and Director
Robert W. Hellyer 40 Executive Vice President--Sales
Peter Lamm 48 Director
Richard C. Dresdale 44 Director
Mark R. Genender 35 Director
Robert K. Barton 59 Senior Vice President--Human Resources
Donald J. Hofmann 47 Senior Vice President--Marketing
Michael P. Rakauskas 49 Senior Vice President--Strategic Planning
Roger W. Franklin 44 Interim Chief Financial Officer
Gary L. Senese 53 Vice President--Chief Information Officer
Charles R. Eitel joined Simmons in January 2000 as Chairman of the
Board of Directors and Chief Executive Officer. Prior to joining Simmons, Mr.
Eitel served as President and Chief Operating Officer of Interface, Inc., a
leading global manufacturer and marketer of floorcoverings, 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 Floorcoverings Group, and President of Interface
Flooring Systems, Inc. Mr. Eitel is a director of Duke-Weeks Corporation, an
industrial real estate company (REIT) based in Indianapolis, Indiana and
American Fidelity Assurance Company in Oklahoma City, Oklahoma.
Peter Brink joined Simmons in February 2000 as Executive Vice President
and Chief Operations Officer. Prior to joining Simmons, Mr. Brink served as
President and Chief Operating Officer of Paramount Apparel, an apparel and
headwear manufacturer. From 1997 to 1998 Mr. Brink served as Chief Operating
Officer of Warnaco Inc, an apparel manufacturer. From 1994 to 1997 Mr. Brink
served as Chief Operating Officer of Champion Products, a division of Sara Lee
Corporation.
Robert W. Hellyer joined Simmons in 1995 and has served as Executive
Vice President of Sales since 1999. Mr. Hellyer served as General
Manager--Janesville and Vice President of Sales--Janesville prior to assuming
his current position. Prior to joining Simmons, Mr. Hellyer held various sales
positions with Stearns & Foster.
Peter Lamm became a director of Simmons in 1998 in connection with the
Recapitalization. Mr. Lamm is Chairman and Chief Executive Officer and a
founding partner of Fenway, a New York-based direct investment firm for
institutional investors with a primary objective of acquiring leading
middle-market companies. From February 1982 to April 1994, Mr. Lamm was a member
of Butler Capital Corporation, a private investment firm, most recently as
Senior Direct Investment Officer and Managing Director. Mr. Lamm currently
serves as a director of Aurora Foods, Inc., Central Tractor Farm &
47
48
Country, Inc., Iron Age Corporation, Delimex Holdings, Inc., MW Manufacturers
Holdings Corp., DCI Holdings, Inc. and Blue Capital Management.
Richard C. Dresdale became a director of Simmons in 1998 in connection
with the Recapitalization. Mr. Dresdale is President and a founding partner of
Fenway. From June 1985 until March 1994, Mr. Dresdale was a member of Clayton,
Dubilier & Rice, Inc. a private investment firm, most recently as a Principal.
Mr. Dresdale currently serves as a director of Aurora Foods, Inc., Central
Tractor Farm & Country, Inc., Delimex Holdings, Inc., MW Manufacturers Holdings
Corp., DCI Holdings, Inc. and Blue Capital Management.
Mark R. Genender became a director of Simmons in 1999. Mr. Genender has
been a Managing Director of Fenway since 1999. From 1996 to 1999, Mr. Genender
was a Vice President of Fenway. From 1994 to 1996, Mr. Genender was a Director
of Sales and Marketing for Nabisco International. From 1991 to 1994, Mr.
Genender held various senior management positions at Hostess Frito-Lay, the
Canadian snack food division of PepsiCo, Inc. Prior to 1991, Mr. Genender was
employed by Goldman, Sachs & Co. in the Merger and Acquisitions department. Mr.
Genender currently serves as director of Delimex Holdings, Inc.
Robert K. Barton joined Simmons in 1982 and has served as Senior Vice
President--Human Resources since 1990. Prior to assuming his current position,
Mr. Barton served as Vice President--Human Resources, Vice
President--Administration, Vice President--Dealer Financial Services and
Director of Dealer Financial Services.
Donald J. Hofmann joined Simmons in 1995 and has served as Senior Vice
President--Marketing since February 2000. Mr. Hofmann served as Vice
President--Marketing and Vice President--Advertising prior to assuming his
current position. 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.
Michael P. Rakauskas joined Simmons in 1998 and has served as Senior
Vice President--Strategic Planning since February 2000. Prior to assuming his
current position Mr. Rakauskas served as Executive Vice President- Strategic
Ventures. Prior to joining Simmons, Mr. Rakauskas served as Executive Vice
President-Chief Financial Officer and as Senior Vice President-Administration
and Chief Financial Officer since 1995 of The Spring Air Company. Prior to 1995,
he held various positions including Vice President- Planning and Development,
Vice-President-Administration, Operations Manager, Corporate Controller and
several financial positions with Sealy Corporation. Mr. Rakauskas is a Certified
Public Accountant.
Roger W. Franklin joined Simmons in 1986 and has served as Interim
Chief Financial Officer since February 2000. Prior to assuming his current
position Mr. Franklin was Vice President--Finance and Treasurer, Vice
President--Controller and Director of Taxes. Prior to joining Simmons, Mr.
Franklin was a manager with Price Waterhouse, a predecessor to
PricewaterhouseCoopers LLP, in both the audit and tax areas from 1978 to 1986.
Mr. Franklin is a Certified Public Accountant.
Gary L. Senese joined Simmons in 1998 as Vice President--Chief
Information Officer. Prior to joining Simmons, Mr. Senese served as Vice
President--Chief Information Officer of VWR Scientific Products Corporation, a
laboratory supplies distributor, from 1995 until 1998 and as Vice
President--Chief Information Officer of Rubbermaid Commercial Products Inc. from
1989 to 1995.
48
49
DIRECTOR COMPENSATION
We pay no additional remuneration to our employees or to executives of
Fenway for serving as directors. See "--Executive Compensation". There are no
family relationships among any of the directors or executive officers.
49
50
ITEM 11. 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 four
most highly compensated 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 paid in connection with the Recapitalization and amounts earned in the
year shown but paid in the subsequent year.
SUMMARY COMPENSATION TABLE
Annual Compensation Number of Securities All Other
---------------------------------------- Underlying Long-Term Compensation
Name and Principal Position Year Salary ($) Bonus ($) Compensation Options (#) ($) (1)
- --------------------------- --------- ----------- ------------ ---------------------------- -----------------
Zenon S. Nie 1999 $612,373 $ -- 1,350,000 $ 16,130
Chairman, Chief Executive 1998 579,792 5,116,125 -- 287,846
Officer and President 1997 517,500 586,366 -- 32,853
Martin R. Passaglia 1999 267,500 -- 75,000 106,448
Senior Executive Vice 1998 267,500 295,573 -- 48,511
President 1997 267,500 211,325 -- 29,133
Jonathan C. Daiker 1999 236,000 -- 75,000 8,345
Executive Vice President-- 1998 226,917 496,053 -- 52,035
Finance & Administration, 1997 213,000 169,060 -- 27,008
Chief Financial Officer
Robert K. Barton 1999 209,000 -- 75,000 11,577
Senior Vice President-- 1998 202,417 276,102 -- 45,389
Human Resources 1997 180,000 143,517 -- 29,329
Joseph Ulicny 1999 197,000 -- 70,000 11,922
Executive Vice President-- 1998 190,417 161,389 -- 42,221
Market Development 1997 180,000 142,793 -- 28,600
(1) These amounts consist of:
(a) our contributions to our ESOP in 1998 and 1997, respectively, in the amounts of $272,570 and
$18,571 for Mr. Nie, $37,437 and $18,614 for Mr. Passaglia, $41,860 and $18,571 for Mr. Daiker,
$33,667 and $18,614 for Mr. Barton, and $30,233 and $18,571 for Mr. Ulicny, respectively; the
amount of our contribution to our ESOP for 1999 has not been determined;
(b) premiums for term life insurance and long-term disability insurance in 1999, 1998 and 1997,
respectively, in the amounts of $13,130, $13,276 and $14,282 for Mr. Nie, $10,071, $9,074 and
$10,519 for Mr. Passaglia, $6,345, $8,175 and $8,437 for Mr. Daiker, $9,577, $9,722 and $10,715
for Mr. Barton, $9,922, $9,988 and $10,029 for Mr. Ulicny, respectively;
(c) payments of benefits under non-qualified ESOP in 1999, in the amount of $85,632 for Mr.
Passaglia;
(d) $2,000 per named executive officer in 1999 and 1998 for financial planning services.
Mr. Nie's amount for 1999 was $3,000;
(e) $8,745 of vacation pay in 1999 for Mr. Passaglia.
50
51
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------------------
Percent of
Total Potential Realizable Value
Number of Options / of
Securities SARs Granted Exercise Assumed Annual Rates of
Underlying to Employees or Stock Price Appreciation
Option/ SARs in Fiscal Base Price Expiration For Option Terms
Name Granted (#) Year ($ / Sh) Date 5% ($) 10% ($)
---- -------------- -------------- ----------- -------------- -------------- --------------
Zenon S. Nie 1,350,000 46.9% $6.7315 2009 5,708,475 14,483,475
Martin R. Passaglia 50,000 1.7% $6.7315 2009 211,425 536,425
Jonathan C. Daiker 80,000 2.8% $6.7315 2009 338,280 858,280
Robert K. Barton 100,000 3.5% $6.7315 2009 422,850 1,072,850
Joseph Ulicny 100,000 3.5% $6.7315 2009 422,850 1,072,850
Aggregated Option Exercises
The table below sets forth information concerning the exercise of stock
options during 1999 and the value of unexercised stock options at the end of
1999 for our Chief Executive Officer and each of our other four most highly
compensated executive officers. There was no public trading market for our
common stock as of December 25, 1999. Therefore, the values in the table below
have been calculated on the basis of the per share consideration paid in
connection with the Recapitalization less the applicable exercise price. The
number of options shown as exercisable reflect options to purchase common stock
of Holdings retained in connection with the Recapitalization.
FISCAL YEAR END OPTION VALUES
Number of Shares Value of Unexercised
Underlying Unexercised In-The-Money
Options at Options at
Fiscal Year End (#) Fiscal Year End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ---------------- --------------- ---------------- ----------------
Zenon S. Nie 752,608 1,350,000 3,035,146 -
Martin R. Passaglia 51,642 50,000 198,370 -
Jonathan C. Daiker 121,439 80,000 490,724 -
Robert K. Barton 54,017 100,000 208,467 -
Joseph Ulicny 26,473 100,000 100,089 -
RETIREMENT PLANS
We maintain several single employer retirement plans including a single
employer defined benefit plan and two single employer defined contribution
plans, the ESOP and a 401(k) Plan, which are intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986. We also participate in a
number of multi-employer pension plans, from which we have no present intention
to withdraw. In the aggregate, these plans cover substantially all permanent
employees.
Simmons 401(k) Plan. The Simmons 401(k) Plan, formed in 1987, contains
a cash or deferred arrangement under Section 401(k) of the Internal Revenue
Code. Employees with 12 weeks of employment who have reached age 21 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.
51
52
Presently, approximately 862 employees participate in this plan.
Participants direct the investment of their account balances. Eligible employees
may defer the receipt of up to 6% of compensation on a pre-tax basis, subject to
various limitations. Participants are fully vested in their contributions at all
times. Other than the pre-tax deferrals mentioned above, we did not make any
contributions to the 401(k) plan during the 1999 plan year.
ESOP. The ESOP, formed in 1989, is a defined contribution pension
benefit plan that is designed to qualify as a leveraged employee stock ownership
plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code.
Assets of the ESOP are held in a trust for which State Street Bank & Trust
Company serves as trustee. The ESOP covers otherwise eligible employees of
Simmons who are 21 or older and who have completed at least one year of service
for Simmons. Generally, employees covered by collective bargaining agreements
are not permitted to participate, unless the collective bargaining agreement
expressly provides for participation. As of December 25, 1999, approximately
1,300 of our current and former employees were participants in the ESOP.
The ESOP provides benefits to each participating employee based on the
value of the stock allocated to such participant's account over the period of
such participant's participation in the plan. In general, benefits become
payable to participants only following retirement or other separation from
employment.
The ESOP is a leveraged ESOP. Leveraged ESOPs differ from other defined
contribution employee pension benefit plans in that they can borrow funds from
the employer sponsoring the plan or from other parties in order to acquire
company stock for allocation to participants' accounts as such indebtedness is
repaid. Pending such allocation, as described below, Simmons' stock acquired by
the ESOP is held by the ESOP trustee in a suspense account. In connection with
the establishment of the ESOP in 1989, the ESOP borrowed funds from us for the
purpose of acquiring Simmons' stock. As of December 25, 1999, the borrowed
amount outstanding was approximately $27.4 million. As of December 26, 1998, the
ESOP was indebted to us in the approximate principal amount of $39.4 million.
Prior to March 22, 1996, the date of the Investcorp acquisition, the ESOP held
11,671,663 shares of our common stock. On the closing of the Investcorp
acquisition, the ESOP sold 6,001,257 shares, representing all shares previously
allocated to participants' ESOP accounts, to Holdings for approximately $31.2
million in the aggregate, the net proceeds of which were reinvested in
diversified investments in the respective accounts of such participants in the
ESOP. Pursuant to the Investcorp acquisition, the remaining 5,670,406 shares,
representing all unallocated shares held in the suspense account, were converted
into our Series A preferred stock. Prior to the Recapitalization, if converted
into common stock of Simmons or capital stock of Holdings, this Series A
preferred stock would have represented direct or indirect ownership of 15.1% of
our common stock, after giving effect to such conversion, exclusive of
outstanding stock options.
On July 22, 1998, we entered into the ESOP Stock Sale and Exchange
Agreement with Holdings, the ESOP trustee and REM Acquisition, Inc., a
transitory merger corporation set up for the Recapitalization. Pursuant to this
agreement, immediately prior to the Recapitalization, REM purchased all of our
Series A preferred shares held by the ESOP that had been allocated to plan
participants as of such date for an aggregate purchase price of approximately
$15.4 million. These shares were cancelled in connection with the
Recapitalization. In addition, immediately prior to the Recapitalization, the
ESOP exchanged its remaining outstanding shares of our Series A preferred stock
for 3,482,036 shares of common stock of Holdings. The ESOP received a fairness
opinion from its financial advisor to the effect that the $15.4 million
consideration received for our shares under the ESOP agreement was fair to the
ESOP from a financial point of view.
52
53
We will make annual cash contributions to the ESOP in an amount up to
25% of eligible participant compensation, subject to limitations and conditions.
The ESOP will then use this cash to repay the internal loan to us. As a result,
there is no cash cost to us associated with the contributions to the ESOP. As
the internal loan is repaid, a portion of, the shares of Holdings held by the
ESOP will be allocated to participant accounts and non-cash compensation expense
equal to the fair value of the allocated shares will be charged to non-cash ESOP
expense. When the internal loan is repaid in full in approximately two years,
all shares of Holdings held by the ESOP immediately after the Recapitalization
will have been allocated to plan participants.
With limited exceptions, such as an exception required by law
permitting retirement age individuals with at least 10 years of plan
participation to liquidate over a six-year period those shares allocated to
their accounts, shares allocated to a participant's account under the ESOP
cannot be sold or otherwise transferred by the participant. The ESOP provides
for distributions to be made to participants following termination of
employment. With respect to participants whose termination of employment occurs
after becoming eligible for retirement at age 65, early retirement at age 55
with at least 10 years of service, or on account of permanent disability or
death, distribution generally is made during the plan year following the plan
year in which such termination occurs. In all other cases, distribution
generally is made or commences to be made after the expiration of a five plan
year period following the plan year in which termination occurs. Distributions
are made in cash, based on the fair market value, as determined pursuant to an
annual appraisal, of the shares allocated to the participant's account. A
participant entitled to a distribution is entitled under law to have our shares
allocated to his or her account distributed in kind. A participant electing to
have a distribution of shares has a limited right to require us to purchase such
shares at fair market value over an approximately two year period.
Defined Benefit Plan. We also sponsor a single employer defined benefit
pension plan for eligible employees called the Retirement Plan for Simmons
U.S.A. Employees. This plan currently benefits only employees covered by
specific collective bargaining agreements, and has approximately 120
participants. The monthly benefit for these participants upon normal retirement
is generally determined as the sum of:
(1) 0.75% of monthly earnings as of January 1, 1963 multiplied by
specified credited service as of May 1, 1963;
(2) 1.0% of the first $400 of monthly earnings plus 1.75% of
monthly earnings in excess of $400 for the time period from
May 1, 1963 through April 30, 1967; and
(3) 1.25% of the first $550 of monthly earnings plus 1.75% of
monthly earnings in excess of $550 for each year and completed
month of credited service, beginning May 1, 1967.
There is a reduction for benefits accrued under the Retirement Plan for
Simmons Employees, a predecessor plan that was terminated in 1987. A somewhat
different formula applies to employees who are represented by IAM Local 315 in
New Jersey and UFWA Local 262 in California. This plan is fully funded and will
incur no additional liability. None of the named executive officers benefits
under the plan.
Nonqualified Employee Stock Ownership Plan. In 1989, we instituted a
nonqualified plan to provide benefits to eligible employees similar to those
benefits provided under the ESOP, described above. This plan covers employees
who are not eligible to participate in the ESOP because of restrictions imposed
by the ESOP on employees who elected favorable income tax treatment under Code
Section 1042 with respect to the sale of employer securities to the ESOP.
Benefits are to be paid in cash and are computed based on the value of shares
the participants would have received had they participated in the
53
54
ESOP. Participants are entitled to receive accrued benefits upon termination of
employment with us, retirement, death or permanent disability. The nonqualified
plan provides for bookkeeping entries to be provided on account of each
designated employee, to be credited with the shares of stock which would have
been allocated to the designated employee's accounts under the ESOP but for the
fact that the ESOP terms restricted such an allocation. The same vesting
schedule and distribution provisions apply as are described in the ESOP. We
charged approximately $137,000 in 1999 and $184,000 in 1998. We made
distributions to participants in the amount of $233,000 in 1999. The accrued
benefits under the nonqualified plan were $277,000 at December 25, 1999 and
$373,000 December 26, 1998 and are included in other long term liabilities in
the accompanying balance sheets. We have continued the nonqualified plan after
the consummation of the Recapitalization.
Retiree Health Coverage. We provide health care and life insurance
benefits to eligible retired employees. Eligibility is defined as retirement
from active employment, having reached age 55 with 15 years of service, and
previous coverage as a salaried or non-union employee. Additionally, dependents
are eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. We also provide life insurance to all retirees who
retired before 1979. These plans are unfunded.
EMPLOYMENT ARRANGEMENTS
Charles R. Eitel, Chairman of the Board of Directors and Chief
Executive Officer, Holdings, and we have entered into an employment agreement
effective as of January 4, 2000. Pursuant to his employment agreement, Mr. Eitel
is entitled to receive (i) a base salary, currently $500,000 per year, or such
other amount as approved by our Board of Directors, (ii) an annual cash bonus
based upon the achievement of specified levels of operating performance by us,
and (iii) specified fringe benefits, including country club dues and provision
of an automobile. In addition, on the commencement of his employment, Mr. Eitel
was granted, under our 1999 Stock Option Plan, stock options to purchase
1,350,000 shares of common stock of Holdings at an exercise price of $6.7315 per
share. If Mr. Eitel's employment is terminated other than for death, incapacity
or cause, Mr. Eitel will be entitled to (i) payment of his base salary then in
effect for two years following the date of termination, (ii) a lump sum
pro-rated bonus amount, and (iii) participation in medical and dental benefit
programs for as long as applicable law and such plans permit.
Peter Brink, Executive Vice President--Chief Operations Officer, and we
have entered into an employment agreement effective as of February 8, 2000.
Pursuant to his employment agreement, Mr. Brink is entitled to receive (i) a
base salary, currently $325,000 per year, or such other amount as approved by
our Board of Directors, (ii) an annual cash bonus based upon the achievement of
specified levels of operating performance by us, (iii) fringe benefit
arrangements generally available to our executive officers, (iv) relocation
assistance, and (v) provision of an automobile. In addition, on commencement of
his employment, Mr. Brink was granted, under our 1999 Stock Option Plan, stock
options to purchase 500,000 shares of common stock of Holdings at an exercise
price of $6.7315 per share. If Mr. Brink's employment is terminated other than
for death, incapacity or cause, Mr. Brink will be entitled to (i) payment of his
base salary then in effect for two years following the date of termination,
subject to reduction if he commences other employment, (ii) a lump sum pro-rata
bonus amount, and (iii) participation in medical and dental benefit programs for
as long as applicable law and such plans permit.
Robert K. Barton, Senior Vice President--Human Resources, and we
entered into an employment agreement which commenced on June 29, 1998. This
employment agreement initially runs for two years and automatically extends one
year on a daily basis beginning on the first anniversary of the
54
55
commencement of employment term, subject to termination upon one year's notice.
This agreement currently provides a base annual salary, subject to further
increases approved by our Board of Directors, of $220,000. If Mr. Barton's
employment is terminated without cause, he shall be entitled to receive payment
of his base salary, an annualized bonus equal to 42.5% of his base salary then
in effect and participation in health and welfare benefit programs for the
longer of the remainder of the initial two year employment term or one year.
SEVERANCE ARRANGEMENTS
On February 22, 2000, Holdings, Zenon Nie and we entered into a
separation agreement. The terms of Mr. Nie's separation agreement provided for a
lump sum separation amount of $2,280,000. Subject to the approval of our lenders
under the Senior Credit Facility, Holdings also agreed to (i) repurchase 280,000
shares of Holdings common stock held by Mr. Nie for a total purchase price of
$1,884,820, of which $1,250,000 will be paid in a lump sum and $634,820 will be
paid under a promissory note maturing on January 4, 2001, and (ii) pay deferred
compensation over a three year period in an amount of $3,035,146. Mr. Nie also
received coverage and benefits under our employee benefit plans and programs for
three years, outplacement assistance up to $90,000, and reimbursements of legal
expenses incurred in the negotiation of the separation agreement up to $20,000.
The employment of Jonathan C. Daiker, Executive Vice President--Finance
and Administration, Chief Financial Officer and Director; Martin R. Passaglia,
Senior Executive Vice President, Secretary and Director; William L. Ayers, IV,
Executive Vice President--Sales; Joseph Ulicny, Executive Vice President--Market
Development; James P. Maher, Divisional President; and Cleve B. Murphy,
Divisional President, has been terminated. Pursuant to their employment
agreements, these former officers received the following separation payments:
Executive Separation Payment
- ---------- -------------------------
Mr. Daiker $336,300
Mr. Passaglia $381,188
Mr. Ayers $243,594
Mr. Ulicny $280,725
Mr. Maher $269,325
Mr. Murphy $263,625
Pursuant to their employment agreements, each of these former officers
also received continuation of health and welfare benefits and outplacement
assistance up to $20,000.
We have also entered into separation agreements with 10 other former
officers and managers. These separation agreements provide for an aggregate
separation payment of $524,750, the continuation of health and welfare benefits
and outplacement assistance.
MANAGEMENT STOCK INCENTIVE PLAN
Holdings has also adopted a management stock incentive plan to provide
incentives to our employees and directors and to the employees and directors of
Holdings by granting them awards tied to the common stock of Holdings. This
incentive plan is administered by the compensation committee of the Board of
Directors of Holdings, which has broad authority in administering and
interpreting the incentive plan. Awards to employees are not restricted to any
specified form or structure and may include, without limitation, restricted
stock, stock options, deferred stock or stock appreciation rights. Options
granted under the incentive plan may be options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code or options not
intended to so qualify. An award granted
55
56
under the incentive plan to an employee may include a provision terminating the
award upon termination of employment under some circumstances or accelerating
the receipt of benefits upon the occurrence of specified events, including, at
the discretion of the compensation committee of the Board of Directors of
Holdings, any change of control of Simmons.
Upon the closing of the Recapitalization, there were outstanding under
the incentive plan options to purchase an aggregate of 1,639,077 shares of
Holdings common stock issued to 47 individuals with a weighted average exercise
price of $2.825 per share. All such options are exercisable in full immediately.
In connection with the Recapitalization, management received cash for
shares of stock owned by them and also received with respect to outstanding
options, an amount equal to the difference between the per share merger
consideration and the exercise price per share.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") of the Board of Directors
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"). 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 stock option 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 based on the Company's performance measured against
attainment of financial and other objectives. Stock option 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
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 the CEO. 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 the individual's manager or the CEO, and will vary for each executive
position and for each year. Since this is a base salary review, 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.
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.
56
57
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, and less so on individual performance.
STOCK OPTION AWARDS
Holdings has adopted a management stock incentive plan to provide
incentives to our employees and directors and the employees and directors of
Holdings by granting them awards tied to the common stock of Holdings. These
stock options are intended to provide an incentive to continue as these
employees over a long term, and to align their interest with the Company by
providing a stake in Holdings. In making grants the Holdings' 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
number of unvested options. In determining an option grant for the CEO, the
Holdings' 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. Stock options are an important element in attracting and
retaining capable executives at all levels, and this is particularly so in the
case of the CEO.
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:
Charles R. Eitel
Peter Lamm
Richard C. Dresdale
57
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
After the consummation of the Recapitalization on October 29, 1998, we
had one class of issued and outstanding common stock and Holdings owned all of
it.
After the consummation of the Recapitalization, Holdings had
25,343,075.80 shares of issued and outstanding common stock, excluding its Class
B common stock. The following table describes the beneficial ownership of each
class of issued and outstanding equity securities of Holdings by each of our
directors and executive officers, our directors and executive officers as a
group and each person who beneficially owns more than 5% of the outstanding
shares of any class of equity securities of Holdings as of December 25, 1999. As
used in this table, beneficial ownership has the meaning set forth in Rule
13d-3(d)(1) of the Exchange Act.
Fenway Partners Capital Fund, L.P. and Fenway Partners Capital Fund II,
L.P. together hold substantially all of the voting interests of Simmons
Holdings, LLC, and may therefore be deemed to have the power to vote or dispose
of the shares of common stock held directly by Simmons Holdings, LLC.
Additionally, the general partners of Fenway Partners Capital Fund and Fenway
Partners Capital Fund II, Fenway Partners, L.P. and Fenway Partners II, LLC,
respectively, may also be deemed to own beneficially these Fenway funds'
holdings. Fenway Partners Management, Inc. is the general partner of Fenway
Partners, L.P. and may also be deemed to own beneficially the holdings of Fenway
Partners Capital Fund. Fenway provides investment advisory services to the
Fenway funds and may be deemed to beneficially own the shares held by the Fenway
funds. Messrs. Lamm and Dresdale control Fenway Partners, L.P., Fenway Partners
II, LLC, Fenway Partners, Inc. and Fenway Partners Management, Inc., and
therefore may be deemed to own beneficially our shares of common stock held by
Simmons Holdings, LLC. Mr. Genender is a managing director of Fenway, and Fenway
Partners Management, Inc., and they are each a limited partner of Fenway
Partners, L.P., and a member of Fenway Partners II, LLC. Accordingly, each may
be deemed to own beneficially our shares of common stock held by Simmons
Holdings, LLC. All of such persons and entities disclaim beneficial ownership of
any shares in which they do not have pecuniary interests.
The discussion above and the table below do not include 379,119.069
shares of Class B common stock, representing all of the issued and outstanding
shares of Class B common stock, issued by Holdings and held by FPIP, LLC, of
which Messrs. Lamm, Dresdale and Genender may be deemed to have beneficial
ownership. Messrs. Lamm, Dresdale and Genender disclaim beneficial ownership of
any such shares of common stock or Class B common stock, in which they do not
have pecuniary interests. Class B common stock has the same rights and
privileges as Holdings' other common stock except that currently, each share of
Class B common stock:
(1) has 16% of the amount of voting power of a share of common
stock; and
(2) entitles its holder to 16% of the amount of any distributions
by Holdings to which a holder of a share of Holdings' common
stock is entitled.
The voting power and rights to distributions of the Class B common
stock shall be increased to equal that of Holdings' common stock upon a
determination of the board of directors that the value of a share of common
stock, taking into account prior distributions, is equal to $6.7315 plus an
amount sufficient to generate an internal rate of return of 7.5% per year,
compounded annually.
58
59
Number of
Shares
Underlying
Number of Shares Exercisable Total
Name (excluding Options/ Options/ Ownership
---- Warrants) Warrants Total Shares Percentage
--------------------- ---------------- --------------- ------------
Simmons Holdings, LLC 19,030,131.18 1,653,703.24 20,683,834.42 76.62%
c/o Fenway Partners, Inc
152 West 57th Street
New York, NY 10019
ESOP shares 3,482,036.00 -- 3,482,036.00 13.74%
c/o State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
SH Investment Limited, a Cayman Islands 1,336,997.70 -- 1,336,997.70 5.28%
corporation
P.O. Box 1111, West Wind Building,
George Town, Grand Cayman, Cayman Islands(a)
Zenon S. Nie 280,000.00 752,608.00 1,032,608.00 (b) 3.96%
Martin R. Passaglia 171,458.00 51,642.00 223,100.00 (b) *
Jonathan C. Daiker 40,622.00 121,439.00 162,061.00 (b) *
Robert K. Barton 140,181.00 54,017.00 194,198.00 *
Joseph Ulicny 75,688.00 26,473.00 102,161.00 (b) *
Peter Lamm 19,030,131.18 1,653,703.24 20,683,834.42 76.62%
Richard C. Dresdale 19,030,131.18 1,653,703.24 20,683,834.42 76.62%
Mark R. Genender 19,030,131.18 1,653,703.24 20,683,834.42 76.62%
All directors and executive officers as a group
(8 persons) 19,738,080.18 2,659,882.24 22,397,962.42 79.98%
* Less than 1%.
(a) SH Investment Limited is an indirect wholly owned subsidiary of Investcorp S.A., a global investment firm whose
address is 37 rue Notre-Dame, Luxumbourg. SIPCO Limited may be deemed to control Investcorp S.A. through its
ownership of a majority of a company's stock that indirectly owns a majority of Investcorp S.A.'s shares. SIPCO
Limited's address is P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
(b) Subsequent to December 25, 1999, the employment of this executive officer has been terminated, and the shares of
Holdings common stock and options to purchase such common stock that were held by such officer have been
repurchased or otherwise terminated.
59
60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SUBSCRIPTION AGREEMENTS
Pursuant to the subscription agreements entered into in connection with
the Recapitalization, Simmons Holdings, LLC purchased 19,030,131.18 shares of
common stock of Holdings for $128.1 million. Under the subscription agreement
with Simmons Holdings, LLC, Holdings agreed to indemnify and pay various
expenses of Simmons Holdings, LLC and its affiliates and their advisors and
consultants.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, we entered into a stockholders
agreement with Holdings, Simmons Holdings, LLC, the ESOP, and the Investcorp
group. In addition, we entered into a stockholders agreement with Simmons
Holdings, LLC, Holdings and members of management. The stockholders agreements
provide, among other things, that in the event that Simmons Holdings, LLC
transfers to a non-affiliate sufficient common stock of Holdings that reduces
its ownership percentage below 75% of the shares it acquired in the
Recapitalization, the ESOP, the Investcorp group and the members of management
may participate in the transfer in proportion to their holdings, referred to as
tag-along rights. If Simmons Holdings, LLC sells at least 80% of the shares it
acquired in the Recapitalization, it may require the ESOP, the Investcorp group
and the members of management to participate in the transfer in proportion to
their holdings, referred to as a drag-along right. In addition, the stockholders
agreement with management provides, among other things, that:
(1) except under specific conditions, members of management may
not transfer their shares of common stock of Holdings; and
(2) upon termination of employment of a member of management,
Holdings and Simmons Holdings, LLC may purchase the shares of
common stock owned by such employee and such employee may
require Holdings to purchase such shares.
FENWAY ADVISORY AGREEMENT
We, Holdings and Fenway entered into an advisory agreement effective
upon consummation of the Recapitalization pursuant to which Fenway agreed to
provide strategic advisory services to Holdings and us. In exchange for such
services, Holdings and we agreed to pay Fenway the following:
(1) annual management fees of 0.25% of net sales for the prior
fiscal year;
(2) fees in connection with the consummation of any acquisition
transactions for Fenway's assistance in negotiating such
transactions; and
(3) fees and expenses, including legal and accounting fees and any
out-of-pocket expenses incurred by Fenway in connection with
providing services to Holdings and us.
The annual management fees are subject to increase in the event of
acquisitions. Holdings and we also agreed to indemnify Fenway under specific
circumstances. In addition, pursuant to the advisory agreement, upon the
consummation of the merger, Fenway received $5.1 million and approximately
379,000 shares of Holdings' Class B common stock. For a description of the Class
B common stock, see "Principal Stockholders".
60
61
PART IV
ITEM 14. 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 Balance Sheets at December 25, 1999 and December
26, 1998
Consolidated Statements of Operations for years ended December
25, 1999, December 26, 1998 and December 27, 1997
Consolidated Statement of Changes in Common Stockholders'
Equity for the years ended December 25, 1999, December 26,
1998 and December 27, 1997
Consolidated Statements of Cash Flows for the years ended
December 25, 1999, December 26, 1998 and December 27, 1997
Notes to consolidated financial statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation Account
(a)(3) The exhibits to this report are listed in section (c) of Item 14 below.
(b) The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended December 25, 1999.
(c) Exhibits:
Exhibit
Number Exhibit Description
- ------ -------------------
The following exhibits, except as specifically noted, are incorporated
by reference to the Company's Registration Statement on Form S-4 (File No.
333-76723) declared effective on September 9, 1999.
2.1 Agreement and Plan of Merger (the "Merger Agreement") dated July 16,
1998 by and among Simmons Company (the "Company"), Simmons Holdings,
Inc. ("Simmons Holdings") and REM.
2.2 Amendment No. 1 to Merger Agreement dated as of September 22, 1998.
2.3 Amendment No. 2 to Merger Agreement dated as of October 26, 1998.
3.1 Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
61
62
4.1 Indenture between the Company and SunTrust Bank, Atlanta, as Trustee,
dated as of March 16, 1999.
10.1 ESOP Stock Sale and Exchange Agreement (the "ESOP Purchase Agreement")
dated as of July 22, 1998 by and among Simmons Holdings, the Company,
State Street Bank & Trust Company ("State Street"), solely in its
capacity as trustee of the ESOP and REM.
10.2 Amendment No. 1 to ESOP Purchase Agreement dated as of September 25,
1998.
10.3 1998 Stockholders' Agreement (the "1998 Stockholders' Agreement") dated
as of October 29, 1998 among Simmons Holdings, the Company, Simmons
Holdings, LLC ("Simmons Holdings, LLC"), Investcorp, and State Street,
solely as trustee of the ESOP.
10.4 Joinder to 1998 Stockholders' Agreement dated as of October 29, 1998 by
SH Investment Limited.
10.5 1998 Stockholders' Agreement dated as of October 29, 1998 by and among
Simmons Holdings, Simmons Holdings, LLC and the Management Investors
listed therein.
10.6 Credit and Guaranty Agreement (the "Credit and Guaranty Agreement")
dated as of October 29, 1998, among the Company, Simmons Holdings and
Certain Subsidiaries of the Company, as Guarantors, the financial
institutions listed therein, as Lenders, Goldman Sachs Credit Partners
L.P., as a Joint Lead Arranger and as Syndication Agent, Warburg Dillon
Read LLC as a Joint Lead Arranger, and UBS A.G., Stamford Branch, as
Administrative Agent.
10.7 First Amendment to Credit and Guaranty Agreement dated as of March 1,
1999.
10.8 Advisory Agreement dated as of October 29, 1998 by and between Simmons
Holdings, the Company and Fenway Partners, Inc.
10.9* Simmons 1996 Management Stock Incentive Plan.
10.10* Form of Stock Option Agreement.
10.11* Form of Management Bonus Agreement.
10.12* 1999 Stock Option Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended September
25, 1999.)
10.13* 1999 Stockholders' Agreement (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the Quarterly Period ended
September 25, 1999.)
10.14 Labor Agreement between the Company and The United Steel Workers, Local
No. 425 for all employees at the Jacksonville, Florida plant of the
Company excluding executives, sales employees, office workers,
supervisors, inspectors, departmental coordinators or persons in any
way identified with management for the period from October 16, 1997 to
October 15, 2001.
10.15 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, 1997 to
October 15, 2001.
62
63
10.16 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, 1997 to October 15, 2001.
10.17 Labor Agreement between the Company and The United Steel Workers, Local
No. 173 for all employees at the Shawnee, Kansas plant of the Company
excluding executives, sales employees, office workers, supervisors,
foremen, time keepers, mechanics or machinist for the period from April
23, 1997 to April 22, 1999.
10.18 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, 1997 to October 15, 2001.
10.19 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, 1997 to October 15, 2001.
10.20 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, 1997 to October 15, 2001.
10.21 Lease Agreement Concourse at Landmark Center between Concourse I, Ltd.,
as Landlord, and the Company, as Tenant, dated February 7, 1992.
10.22 Lease between Beaver Ruin Business Center-Phase V between St. Paul
Properties, Inc., as Landlord, and the Company, as Tenant, dated
October 19, 1994, as amended by Addendum to Lease, dated September 1,
1995.
10.23 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.
10.24 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 December 1,
1996 relating to $5,000,000 Private Activity Revenue Bonds, Series
1996.
10.25 Loan Agreement dated December 12, 1997 between Simmons Caribbean
Bedding, Inc. and Banco Santander Puerto Rico.
10.25A English Language Summary of Appendix to Exhibit 10.25.
63
64
10.26 Securities Purchase Agreement, dated as of October 29, 1998 among the
Company, Simmons Holdings and the Purchasers listed on Schedule I
attached thereto.
10.27 Warrant to purchase 601,346.63 shares of common stock of Simmons
Holdings.
10.28 Warrant to purchase 2,104,713.22 shares of common stock of Simmons
Holdings dated October 29, 1998.
10.29 Escrow Agreement dated as of October 29, 1998 by and among Simmons
Holdings, the Company, Simmons Holdings, LLC and Ropes & Gray, as
Escrow agent.
10.30* Employment Agreement between the Company and Zenon S. Nie, dated as of
November 25, 1993, as amended.
10.31* Employment Agreement between the Company and Martin R. Passaglia, dated
as of June 29, 1998, as amended.
10.32* Employment Agreement between the Company and Jonathan C. Daiker, dated
as of June 29, 1998, as amended.
10.33* Employment Agreement between the Company and Robert K. Barton, dated as
of June 29, 1998, as amended.
10.34* Employment Agreement between the Company and Joseph Ulicny, dated as of
June 29, 1998, as amended.
The following are exhibits included in this Form 10-K:
10.35* Employment Agreement between Simmons Holdings, Inc., the Company and
Charles R. Eitel, dated as of January 4, 2000.
10.36* Employment Agreement between Simmons Holdings, Inc., the Company and
Peter Brink, dated as of February 8, 2000.
10.37* Separation Agreement dated as of February 22, 2000 by and among Simmons
Holdings, Inc., the Company and Zenon S. Nie.
10.38* Separation Agreement and General Release dated as of January 7, 2000 by
and between the Company and Martin R. Passaglia.
10.39 Second Amendment to Credit and Guaranty Agreement dated as of March 22,
2000.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
* Identifies each exhibit that is a "management contract or compensatory
plan or arrangement" required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14(c) of Form 10-K.
64
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Simmons Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIMMONS COMPANY
Signature Title
By /s/ Charles R. Eitel Chairman of the Board of Directors, Chief March 24, 2000
------------------------- Executive Officer and Director
Charles R. Eitel (Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE SIMMONS COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
By /s/ Charles R. Eitel Chairman of the Board of Directors, Chief March 24, 2000
------------------------- Executive Officer and Director
Charles R. Eitel (Principal Executive Officer)
/s/ Peter Brink Executive Vice President--Chief March 24, 2000
------------------------- Operations Officer and Director
Peter Brink
/s/ Roger W. Franklin Interim Chief Financial Officer March 24, 2000
------------------------- (Principal Financial and Accounting
Roger W. Franklin Officer)
/s/ Peter Lamm Director March 24, 2000
--------------------------
Peter Lamm
/s/ Richard C. Dresdale Director March 24, 2000
---------------------------
Richard C. Dresdale
/s/ Mark R. Genender Director March 24, 2000
---------------------------
Mark R. Genender
65
66
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE
YEAR ENDED DECEMBER 25, 1999, YEAR ENDED DECEMBER 26, 1998, AND
YEAR ENDED DECEMBER 27, 1997
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K
OF
SIMMONS COMPANY
66
67
SIMMONS COMPANY
SCHEDULE II - VALUATION ACCOUNT
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------- ------------------ ------------------ ----------------- ------------------
Balance at Balance at
Beginning of End of
Description Period Additions Deductions Period
- --------------------------------------------- ------------------ ------------------ ----------------- ------------------
(in thousands)
Fiscal year ended December 25, 1999 $4,177 $7,597 $8,325 $3,449
Allowance for doubtful accounts
Fiscal year ended December 26, 1998 $3,938 $ 75 $ (164) $4,177
Allowance for doubtful accounts
67