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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 27, 1997
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 333-04841
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 area 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 27, 1998 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
27, 1998 is 31,964,452.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
GENERAL
Simmons Company, a Delaware corporation (the "Company"), is the second
largest bedding manufacturer in the United States. The Company manufactures and
distributes a broad range of mattresses, box springs, bedding frames and sleep
accessories under well-recognized brand names, including Beautyrest(R),
Simmons(R), BackCare(R), Maxipedic(R), Beautysleep(R) and Connoisseur(R). Sales
of conventional bedding, which includes fully assembled mattresses and box
springs, accounted for substantially all of the Company's 1997 net sales.
The Company manufactures and supplies conventional bedding to over
5,500 retail outlets, representing more than 2,500 customers, including
furniture stores, department stores, specialty sleep shops and warehouse
showrooms. The Company operates 17 manufacturing facilities in 15 states, and
its subsidiary operates a manufacturing facility in Puerto Rico. These
facilities are strategically located in proximity to customers, thereby reducing
transportation costs, facilitating just-in-time delivery and enhancing the
Company's ability to service large national accounts. The Company believes that
operating its manufacturing facilities affords a number of advantages over
several of its national, brand-name competitors that operate as a group of
independent licensees, including (i) producing consistently high-quality
merchandise across all facilities; (ii) allowing the Company to share its best
practices among manufacturing facilities; (iii) ensuring consistency of local
marketing for national accounts; and (iv) permitting efficient allocation of
production among manufacturing facilities to accommodate variations in regional
demand.
HISTORY OF THE COMPANY
Founded in 1871, the Company was privately held by the Simmons family
for many years and later was publicly traded. Historically, the Company was a
worldwide mattress manufacturer; in 1977 over 20% of the Company's net sales
came from international sales. In 1978, Gulf & Western Industries, Inc. acquired
the Company via a tender offer. In September 1985, Gulf & Western Industries,
Inc. sold the Company to Wickes Companies, Inc., which in turn sold the stock to
a group of private investors led by Wesray Capital through a leveraged buyout in
October 1986. During 1987 and 1988, the Company sold its European and Asian
subsidiaries and several parcels of real estate in order to pay down debt
incurred to finance the leveraged buyout.
In January 1989, 100% of the Company's stock was acquired by the
newly-created Simmons ESOP for approximately $250.0 million. Between 1989 and
1991, the Company sold additional real estate as well as its Canadian and
Mexican subsidiaries, the proceeds of which were used to repay a portion of the
Company's debt. In conjunction with a financial restructuring completed in 1991,
Merrill Lynch Capital Partners, Inc. ("MLCP") provided the Company with a $32.2
million equity investment, the proceeds of which were used to reduce further the
Company's debt, giving MLCP an approximately 60% interest in the Company.
On March 22, 1996, Simmons Holdings, Inc., 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 MLCP, 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
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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 (the
"Senior Credit Facility") 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.
INDUSTRY AND COMPETITION
The domestic conventional bedding industry accounts for over 90% of
wholesale revenues for the entire domestic bedding market, according to the
International Sleep Products Association ("ISPA"). Non-conventional bedding
products, such as flotation bedding ("waterbeds"), futons and electric
adjustable beds, account for the remainder of industry wholesale revenues. The
domestic bedding industry consists of over 800 bedding manufacturers, ranging
from small, family-owned plants to large factory-direct producers. The Company's
management estimates that its share of the conventional bedding market has grown
to approximately 16.0% in 1997 from approximately 13.1% in 1992, based on
wholesale revenue data published by ISPA.
PRODUCTS
Overview. The Company's conventional bedding consists primarily of
brand name bedding that varies in price, design, material and size. Retail
prices for the Company's products range from under $200 for a twin-size
promotional bedding set to approximately $3,500 for a king-size luxury set. The
Company predominantly competes in the $499 and up retail price segment, which
accounts for the top 35% of the market in terms of units sold. The Company also
manufactures and sells waterbeds, licenses the Simmons name and manufacturing
processes to third-party manufacturers abroad to produce and distribute
conventional bedding products within their designated territories and licenses
the Simmons name to third-party manufacturers domestically for use on adjustable
beds, down comforters, pillows, bed sheets, bed pads, futons, air beds and
linens.
Pocketed Coil(TM). The Company is the primary national manufacturer
that produces conventional bedding using Pocketed Coil(TM) construction. The
Company's Beautyrest(R) and Connoisseur(R) lines, which employ Pocketed Coil(TM)
innersprings, are designed to be among the most comfortable and durable premium
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, thereby permitting the top and bottom of each coil to respond
independently to pressure applied to the surface of the mattress. With each coil
capable of moving independently, this design allows the mattress to contour to
the user's body, reducing excess movement.
Beautyrest(R) is the Company's flagship product utilizing the Pocketed
Coil(TM) innerspring line of bedding. In the fall of 1995, the Company's
Pocketed Coil(TM) construction was incorporated into the Connoisseur(R) line in
response to the increasing demand for top-of-the-line premium bedding. The
Connoisseur(R) line offers high-end customers a luxurious product that is
durable and that contains variable pressure foam for maximum comfort and
support.
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The BackCare(R) mattress line is a five zone open coil construction
designed to support the five zones of the anatomy. The BackCare(R) brand
leverages the unique five zone construction design into meaningful consumer
benefits by carrying the five zone construction through each element of the
sleep set including: the foundation, coil unit, upholstery and quilt design. The
five zones are comprised of two support zones for the lumbar and thighs and
three comfort zones for the upper back, hips and lower legs.
Conventional Coil. To provide a broad product offering, the Company
manufactures the Maxipedic(R), and Beautysleep(R) product lines, which use
enhanced conventional coil technology. The Maxipedic(R) product line is intended
to provide the Company's customers with a moderately priced conventional coil
product. Beautysleep(R) is an exclusive-label product line for customers
interested in a brand-name conventional coil product.
Specialty Sleep Products. The Company manufactures waterbeds, under the
name Simmons Beautyrest(R) Flotation, in a limited number of its traditional
bedding plants. The Company, the only major domestic bedding manufacturer that
produces waterbeds, sells waterbeds to specialty retailers and other customers
throughout the United States.
The Company introduced in 1997 a line of ready-to-assemble ("RTA")
bedding. This new product developed by the Company is vacuum packed so that it
can be shipped to the consumer in one box. This product is targeted for use by
the customer outside of the master bedroom and is intended to increase customer
and retailer convenience, require less retail and inventory floor space, and
allow access to non-traditional distribution channels such as home shopping
networks, catalogs and mass merchants.
CUSTOMERS
The Company manufactures and supplies conventional bedding to over
5,500 retail outlets, representing more than 2,500 customers including furniture
stores, department stores, specialty sleep shops and warehouse showrooms. The
Company's 10 largest customers accounted for approximately 38% of 1997 net
sales, while sales to Heilig Meyers entities represented approximately 10.7% of
net sales for 1997.
The majority of the Company's net sales are comprised of sales to
furniture stores, department stores, sleep shops and warehouse showrooms.
SALES, MARKETING AND ADVERTISING
The Company's products are sold by over 150 field sales representatives
and a national sales staff. Field sales representatives visit individual
retailers on a regular basis to assist showroom floor sales people with product
presentation, point-of-purchase signage and sales techniques, while the national
sales staff is responsible for national marketing and national accounts.
The Company's advertising program focuses on two areas: (i) cooperative
promotional advertising, which complements and is designed around individual
retailer's marketing programs; and (ii) national advertising, which is designed
to establish and build brand awareness with end users. The Company seeks to
build long-term brand awareness through regular national advertising and achieve
short-term sales objectives through individual commercials. One of the Company's
most successful campaigns, the "Do Not Disturb" campaign, was designed to build
awareness of the Company and of its competitive points of differentiation,
especially the advantages of the Company's use of Pocketed Coil(TM) technology,
and is conveyed by the Company's "Bowling Ball" commercial.
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The Company has developed and sponsors at Simmons' Institute of
Technology & Education, as well as, on-site at its retailers, programs that are
designed to teach retail floor salespeople how to match customers with their
mattress comfort preference by improving the retail floor salesperson's product
knowledge and sales skills. The Company's sales force is trained in advertising,
merchandising and salesmanship. Management believes that its attention and focus
on the training of its sales representatives and its customers' retail floor
salespeople is one area where the Company differentiates itself from most of its
largest competitors.
SUPPLIERS
The Company purchases substantially all of its conventional bedding raw
materials (i.e., spring components, wire, lumber, foam and ticking) centrally in
order to maximize economies of scale and volume discounts. The Company sourced
approximately 85% of its 1997 raw material needs from 10 suppliers, including
approximately one-third of the Company's total raw material needs from Leggett &
Platt ("L&P"). The Company has long-term supply agreements with each of L&P,
Foamex International, Inc. and Amoco Fabrics and Fiber Company for certain
components. The Company has not experienced any interruption in supply and does
not currently expect such an interruption to occur.
SEASONALITY
The volume of the Company's sales is somewhat seasonal with generally
lower sales occurring during the first quarter of each fiscal year when compared
to the remaining three quarters of the year. The Company also experiences a
seasonal fluctuation in its profitability, with a slightly lower gross profit
percentage occurring during the first quarter of each fiscal year when compared
to margin percentages obtained in the remaining part of the year. The Company
believes that seasonality of profitability is a factor that affects the
conventional bedding industry generally and 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, which
together result in lower profit margins.
ENGINEERING AND DEVELOPMENT
The Company seeks to maintain close contact with bedding industry
developments through sleep research conducted by industry groups and by the
Company's engineering department, as well as through participation in the Better
Sleep Council, an industry association that promotes awareness of sleep issues,
and ISPA. The Company's marketing and manufacturing departments work closely
with the engineering staff, as well as, outside physicians and engineers to
develop and to test new products for marketability and durability.
In 1995, the Company completed the construction of the Simmons
Institute of Technology and Education ("SITE"), a state-of-the-art 38,000 square
foot research center in Atlanta, Georgia. Approximately 24 engineers and
technicians are employed full-time at SITE. These employees conduct product and
materials testing, design manufacturing facilities and equipment, improve
process engineering and development, and ensure high-quality products.
Management believes that the Company's engineering staff gives the Company a
competitive advantage over certain of its competitors who do not have
significant in-house engineering departments.
WARRANTIES
The Company's conventional bedding products generally offer limited
warranties of 10 years against
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manufacturing defects, with certain bedding manufactured to dealer
specifications for promotional purposes carrying warranties of one year.
Management believes that its warranty terms are generally consistent with those
of its primary national competitors. The Company's historic costs of honoring
warranty claims have been an immaterial percentage of net sales.
PATENTS, TRADEMARKS AND LICENSES
The Company owns many registered trademarks, including BackCare(R),
Beautyrest(R), Beautysleep(R), Connoisseur(R), Maxipedic(R) and Simmons(R), and
patents, most of which are registered in the United States and in many foreign
countries, as well as certain unregistered trademarks, including POCKETED
COIL(TM). The Company considers its trademarks, particularly Simmons(R) and
Beautyrest(R), to be of material importance to the business of the Company since
they have the effect of developing brand identification and maintaining consumer
loyalty. Management is not aware of any fact that would negatively impact the
continuing use of any of the Company's material patents, licenses, trademarks or
trade names. As a result of the disposition of certain of the Company's foreign
operations through the early 1990s, the Company now licenses the Simmons name
and many of its trademarks, processes and patents to third party manufacturers
abroad to produce and distribute conventional bedding products within their
designated territories. In addition, the Company has licensed the Simmons name
and certain trademarks, generally for limited terms, to domestic third party
manufacturers of adjustable beds, down comforters, pillows, bedsheets, bed pads,
futons, airbeds and linens.
EMPLOYEES
As of December 27, 1997, the Company had approximately 2,800 employees,
of which approximately 1,100 were represented by labor unions. Employees at nine
of the Company's manufacturing facilities are represented by unions.
Manufacturing employees of the unionized plants have negotiated various
contracts with the Upholstery Division of the United Steelworkers, the
Teamsters, United Furniture Workers, Longshoremen and International Association
of Machinists. Labor relations historically have been good, with no
labor-related work stoppages in over 20 years. Since 1980, the Company has
opened eight new plants, none of which is unionized. Approximately 1,700 of the
Company's current employees are participants in the ESOP.
REGULATORY MATTERS
As a manufacturer of bedding and related products, the Company uses and
disposes of a number of substances, such as glue, lubricating oil, solvents, and
other petroleum products, that may cause the Company to be subject to regulation
under numerous federal and state statutes governing the environment. Among other
statutes, the Company is 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. The Company believes that it is in material compliance
with all applicable federal and state environmental statutes and regulations.
Compliance with all such provisions which have been enacted relating to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not expected to have any material adverse
effect upon the Company's business, financial condition or results of
operations. The Company is not aware of any pending federal environmental
legislation which would have a material adverse effect on the Company's
financial condition or results of operations.
The Company's conventional bedding and other product lines are subject
to various federal and state laws and regulations relating to flammability,
sanitation and other standards. The Company believes that it is in material
compliance with all such laws and regulations.
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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 the Company's actual future
experience involving any one or more of such matters and subject areas. The
Company has attempted to identify, in context, certain of the factors that it
currently believes may cause actual future experience and results to differ from
the Company's current expectations regarding the relevant matter or subject
area. The operation and results of the Company's 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 the Company operates, the ability to achieve further market penetration,
additional customers and distribution channels, aggressive promotional and
discounting tactics by certain of the Company's national competitors, and other
risks and uncertainties described from time to time in the Company's reports
filed with the Commission.
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ITEM 2. DESCRIPTION OF PROPERTIES
The offices of the Company are located at One Concourse Parkway,
Atlanta, Georgia 30328.
The following table sets forth certain information regarding
manufacturing and certain other facilities operated by the Company as of March
27, 1998:
Approximate
Square
Location Footage
-------- -----------
Manufacturing Facilities
Atlanta, Georgia 148,300
Atlanta, Georgia 30,960
Charlotte, North Carolina 144,180
Columbus, Ohio 190,000
Dallas, Texas 140,981
Denver, Colorado 98,090
Fredericksburg, Virginia 128,500
Honolulu, Hawaii 58,530
Jacksonville, Florida 205,729
Janesville, Wisconsin 288,700
Shawnee, Kansas 130,000
Los Angeles, California 223,382
Phoenix, Arizona 103,408
Piscataway, New Jersey 264,908
San Leandro, California 260,500
Seattle, Washington 133,610
Springfield, Massachusetts 129,000
Toa Baja, Puerto Rico 24,500
---------
Subtotal 2,703,278
Other Facilities
Corporate Headquarters (Atlanta, Georgia) 37,500
SITE (Atlanta, Georgia) 38,000
---------
Total 2,778,778
=========
The Company leases all of its facilities with the exception of its
Janesville, Wisconsin and Shawnee, Kansas manufacturing facilities, which the
Company owns. The Company's manufacturing facilities yield a combined practical
capacity of over 20,000 units per day, assuming two eight hour shifts daily.
Management believes that the Company's facilities, taken as a whole, have
adequate productive capacity and sufficient manufacturing equipment to conduct
business at levels meeting current demand.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of common
equity of the Company. As of December 27, 1997 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.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary historical financial and other
data of the Company for the five years ended December 27, 1997. The Company's
capital structure changed significantly as a result of the March 22, 1996
acquisition and the concurrent and subsequent refinancings of debt. Due to
required purchase accounting adjustments relating to such transaction, the
consolidated financial and other data for the period subsequent to the
acquisition (the "Successor" period) is not comparable to such data for the
periods prior to the acquisition (the "Predecessor" periods). The data for the
combined year ended December 28, 1996 represents the mathematical addition of
the two short Predecessor and Successor periods in that year.
The selected consolidated financial and other data set forth in the
following table, other than the combined 1996 data, has been derived from the
Company's audited consolidated financial statements. This table (in thousands)
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere herein.
Successor Predecessor
---------------------------- ----------------------------
Period from Period from
March 22, Combined December 31,
Year 1996 Year 1995 Year
Ended through Ended through Ended
December 27, December 28, December 28, March 21, December 30,
1997 1996 1996 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net sales $550,085 $ 423,870 $ 530,301 $ 106,431 $489,815
Income (loss) before
extraordinary item and change
in accounting principle 6,362 3,018 2,579 (439) 9,411
Extraordinary item -- (1,706) (1,706) -- --
Cumulative effect of change in
accounting principle (a) -- -- -- -- --
-------- --------- --------- --------- --------
Net income (loss) $ 6,362 $ 1,312 $ 873 $ (439) $ 9,411
======== ========= ========= ========= ========
OTHER DATA:
Depreciation $ 5,870 $ 3,468 $ 4,342 $ 874 $ 4,027
EBITDA (b) 52,635 41,644 46,414 4,770 39,577
Capital expenditures:
Normal recurring 7,616 4,203 4,726 523 3,021
SWIFT and UNITE 3,786 6,531 7,575 1,044 2,813
New plant facilities (c) 4,299 2,612 2,612 -- --
BALANCE SHEET DATA (as of end of Periods):
Cash and cash equivalents $ 9,108 $ 4,573 -- -- $ 9,185
Total assets 375,125 367,849 -- -- 254,492
Total long-term obligations,
including current maturities 184,443 196,815 -- -- 93,768
Redeemable preferred
stock, net (d) 11,230 5,000 -- -- 680
Redeemable common
stock, net (e) -- -- -- -- 32,272
Predecessor
----------------------------
Year Year
Ended Ended
December 31, December 25,
1994 1993
------------ ------------
STATEMENT OF OPERATIONS DATA:
Net sales $439,689 $ 391,382
Income (loss) before
extraordinary item and change
in accounting principle 7,994 (2,827)
Extraordinary item -- --
Cumulative effect of change in
accounting principle (a) -- (492)
-------- ---------
Net income (loss) $ 7,994 $ (3,319)
======== =========
OTHER DATA:
Depreciation $ 3,496 $ 3,141
EBITDA (b) 33,981 29,236
Capital expenditures:
Normal recurring 4,496 4,972
SWIFT and UNITE -- --
New plant facilities (c) -- --
BALANCE SHEET DATA (as of end of Periods):
Cash and cash equivalents $ 8,477 $ 11,280
Total assets 249,891 272,533
Total long-term obligations,
including current maturities 109,435 141,976
Redeemable preferred
stock, net (d) 641 592
Redeemable common
stock, net (e) 23,238 11,418
See Notes to Selected Consolidated Financial and Other Data
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NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
(a) Results from the adoption of Statement of Financial Accounting
Standards No. 109 in 1993 relating to income taxes.
(b) EBITDA represents earnings before interest expense, income tax expense,
non-cash ESOP expense, depreciation and amortization, cumulative effect
of change in accounting principle and extraordinary item, and, for the
year ended December 27, 1997 and the combined year ended December 28,
1996 and the period from March 22, 1996 through December 28, 1996,
excludes amortization of the prepaid management fee of $1,000, $833 and
$833, respectively, in connection with the Acquisition. EBITDA for the
combined year ended December 28, 1996 excludes the effect of the
purchase accounting inventory write-up of $1,000, the compensation
charge of $3,735 for amounts payable to management, and the charge of
$350 for non-recurring fees. EBITDA for the year ended December 27,
1997 and the combined year ended December 26, 1996 also excludes a
credit of $375 and $281, respectively, for the amortization of the
reserve for unfavorable lease commitments. Management believes that
EBITDA is generally accepted as providing useful information regarding
a company's ability to service and/or incur debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
or other consolidated net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
(c) For the year ended December 27, 1997 and the period from March 22, 1996
through December 28, 1996, $2,388 and $2,612, respectively, of the
amount spent for new plant facilities was refinanced with the proceeds
from the issuance of an industrial revenue bond in the first quarter of
1997. The remaining amount in 1997 of $1,911 was financed with the
proceeds from a construction loan facility.
(d) For the Successor period, the amount consists of the Series A Preferred
Stock that was issued to the Simmons ESOP in connection with the
Acquisition net of the related unearned compensation. For the
Predecessor periods, the amounts consist of preferred stock that was
issued in connection with the recapitalization of the Company in 1991
and was called for redemption in connection with the Acquisition.
(e) Historically, under the terms of the Simmons ESOP, the participants had
the right to put their common stock to the Company under certain
circumstances. Accordingly, for the Predecessor periods the fair market
value of the common stock that could have been put to the Company,
along with the related amount of unearned compensation, are classified
outside of common stockholders' equity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the
"Selected Financial Data" and the Financial Statements of the Company and the
notes thereto included elsewhere herein.
GENERAL
On March 22, 1996, Simmons Holdings, Inc., a company organized on
behalf of Investcorp, management and certain other investors, acquired 100% of
the outstanding common stock of the Company from the Sellers. The Company
employed the purchase method of accounting for the Acquisition effective March
22, 1996. As a result of the required purchase accounting adjustments, the
post-Acquisition financial statements for the period from March 22, 1996 to
December 28, 1996 (the "Successor Financials") are not comparable to the
financial statements for the periods prior to the Acquisition (the "Predecessor
Financials").
RESULTS OF OPERATIONS
For purposes of the discussion below, the results of operations for the
year ended December 28, 1996 represent the mathematical addition of the
historical amounts for the Predecessor period (December 31, 1995 through March
21, 1996) and the Successor period (March 22, 1996 through December 28, 1996)
and are not indicative of the results that would actually have been obtained if
the Acquisition had occurred on December 30, 1995.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Net Sales. Net sales increased 3.7%, or $19.8 million, from $530.3
million in 1996 to $550.1 million in 1997. This increase was due primarily to a
4.4%, or $22.8 million increase in bedding average unit selling price and a
relatively slight increase in unit sales volume. The strong improvement in
bedding average unit selling price is attributable to a higher mix of
Beautyrest(R) sales and sales of higher priced BackCare(R) products. Unit sales
volume increased only slightly in 1997 due to the following: (i) the Company's
decision to discontinue its supply relationship with Mattress Discounters when
the terms of the relationship did not meet management's account profitability
expectations; (ii) the repositioning of the BackCare(R) product line to be
consistent with the Company's overall marketing strategy; and (iii) lost sales
volumes during the bankruptcy proceedings of Montgomery Ward & Co. and Levitz
Furniture, Inc. However, due to the breadth of penetration and continued
consumer acceptance of the Company's Beautyrest(R) and BackCare(R) product
lines, the Company was able to replace revenues lost as a result of its decision
to discontinue its relationship with Mattress Discounters. The bankruptcy
filings and the Mattress Discounters' decision have not had, nor are they
expected to have, any material adverse effect on the Company's financial
condition.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the year ended December 27, 1997 decreased 2.5 percentage points from 60.5%
in 1996 to 58% in 1997. The improvement is attributable to the following: (i) a
higher product mix concentration of Beautyrest(R) products; (ii) relatively
stable raw material costs; (iii) improved operating efficiencies due to the
effect of the completed implementation of the Company's UNITE reengineering
program; and (iv) the cost of goods sold in 1996 reflecting the sale of finished
goods inventory which had been written up, as required by generally accepted
accounting principles, to net realizable value as of the date of the
Acquisition.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
27, 1997 increased 1.0 percentage point from 32.4% in 1996 to 33.4% in 1997. The
increase is attributable to the following: (i) an increase in selling expenses
related to competitive sales promotion programs and additional sales personnel;
(ii) higher outside consulting fees associated with special projects undertaken
by the Company; (iii) additional expenses, as well as, a partial year of
amortization expense related to the rollout of SWIFT, the Company's systems
upgrade project; (iv) an increase in distribution costs due to contractual
increases and expansion into outlying territories; and (v) a higher provision
for uncollectible accounts.
13
14
ESOP Expense. ESOP expense in 1997 increased from approximately $5.0
million in 1996 to $6.2 million due primarily to an increase in the number of
eligible participants in 1997.
Amortization of Intangible Assets. Amortization of intangible assets
for the year ended December 27, 1997 increased $0.7 million due primarily to a
full year of amortization relating to the increase in goodwill resulting from
purchase accounting adjustments made in connection with the Acquisition.
Interest Expense, Net. Interest expense, net for the year ended
December 27, 1997 increased $2.3 million to $19.1 million due primarily to a
full year of interest expense which resulted from the March 1996 issuance of
senior subordinated notes and a new senior credit facility as financing for the
Acquisition. (See "Notes to Condensed Consolidated Financial Statements.")
Provision for Income Taxes. The Company's effective tax rates for the
years ended December 27, 1997 and December 28, 1996 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
Net Income. For the reasons set forth above, the year ended December
27, 1997 resulted in net income of $6.4 million as compared to net income of
$0.9 million for the year ended December 28, 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Net Sales. Net sales increased 8.3%, or $40.5 million, from $489.8
million in 1995 to $530.3 million in 1996. This increase was due primarily to a
8.1% or $39.9 million increase in bedding unit sales volume, offset, in part, by
a decline in bedding average unit selling price aggregating 0.1% or $0.6
million. The growth in bedding unit sales volume resulted from increased
contract and Beautyrest(R) bedding sales and the continued growth of the
BackCare(R) product line due to incremental product placements and retailer
acceptance. The decline in average unit selling price is predominantly
attributable to a higher mix of contract bedding and the full year effect of the
introduced BackCare(R) line, which have lower average unit sales prices than the
Company's 1995 mix.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the year ended December 28, 1996 increased 0.7 percentage point from 59.8%
in 1995 to 60.5% in 1996. The increase was primarily attributable to: (i)
introductory selling prices associated with the introduction of the Company's
new BackCare(R) product line; (ii) a higher product mix concentration of
contract bedding; (iii) costs resulting from temporary inefficiencies due to the
redesigned layout of certain plant facilities pursuant to the Company's
reengineering project; and (iv) the sale of finished goods inventory which had
been written up, as required by generally accepted accounting principles, to
fair market value as of the date of the Acquisition. Offsetting these cost
increases, in part, was a reduction in the Company's provision for warranty
claims due to the favorable impact of expanded outlets for resale of units
returned due to minor defects.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
28, 1996 improved 0.5 percentage point from 32.9% in 1995 to 32.4% in 1996. The
improvement reflects management's efforts to contain costs in these areas and
the Company's fixed expenses being spread over a larger revenue base. Also
contributing to the improvement were lower bad debt and bonus provisions
compared to 1995, lower expenses due to higher early retirement and worker
compensation amounts recorded in 1995. Offsetting these improvements, in part,
were an increase in expenditures related to the Company's UNITE reengineering
project and an increase in distribution costs due to higher volume and increased
fuel costs.
ESOP Expense. Non-cash ESOP expense in 1996 increased from
approximately $4.5 million to $5.0 million due primarily to an increase in the
fair value of shares allocated to participant accounts.
Amortization of Intangible Assets. Amortization of intangible assets
for the year ended December 28, 1996 increased $1.2 million due in part to the
effect of an increase in goodwill resulting from purchase accounting adjustments
made in connection with the Acquisition in March 1996.
14
15
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Interest Expense, Net. Interest expense, net, increased $8.6 million to
$16.8 million due primarily to interest expense on increased total indebtedness,
which resulted from the new senior credit and subordinated loan facilities as
financing for the Acquisition, and from the issuance of senior subordinated
notes which refinanced the subordinated loan. ("See Notes to Consolidated
Financial Statements.")
Other Expense, Net. Other expense, net for the year ended December 28,
1996 increased $1.3 million to $1.7 million due primarily to non-recurring
expenses of $4.4 million incurred following the Acquisition, of which,
approximately $3.8 million was attributable to special compensation arrangements
entered into by the Company with certain members of management of the Company.
Total recurring expenses totaling $1.2 million were comprised of fees for
management advisory, consulting services and certain other fees. These expenses
were offset, in part, by a $4.0 million gain on the sale of minority interests
in certain foreign affiliates. ("See Notes to Consolidated Financial
Statements.")
Provision for Income Taxes. The Company's effective tax rates for the
years ended December 28, 1996 and December 30, 1995 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill
and the utilization, in 1995, of net operating loss carryforwards.
Extraordinary Item. The Company recorded an extraordinary charge, net
of related income taxes, for the write-off of debt issuance costs associated
with the long-term subordinated loan facility which was refinanced with the
proceeds of the issuance of the Senior Subordinated Notes due 2006.
Net Income. For the reasons set forth above, the year ended December
28, 1996 resulted in net income of $0.9 million as compared to $9.4 million at
December 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its revolving
credit facility. Net cash provided by operating activities was $32.3 million for
the year ended December 27, 1997 compared to $4.1 million used in the combined
periods ended December 28, 1996, due primarily to (i) higher net income in 1997
as described above; (ii) the timing of accounts receivable collections; and
(iii) the timing of payments of accounts payable and accrued liabilities. The
Company's principal uses of funds provided by operating activities consist of
payments of principal, interest, and capital expenditures. Capital expenditures
totaled $15.7 million for the year ended December 27, 1997. These capital
expenditures consisted primarily of normal recurring capital expenditures in the
amount of $7.6 million, capital expenditures relating to the construction of new
manufacturing facilities in the amount of $4.3 million and capitalized
expenditures related to the Company's systems upgrade project in the amount of
$3.8 million. The Company estimates that total normal recurring capital
expenditures will be approximately $7.0 million in 1998. In addition, total
expenditures for completing SWIFT, the Company's systems upgrade project, are
expected to be approximately $2.3 million in 1998. Management believes that
annual capital expenditure limitations in its Senior Credit Facility will not
significantly inhibit the Company from meeting its ongoing capital needs.
The Company may seek to make selective acquisitions in the bedding
industry. Although the Company has discussions from time to time with potential
candidates, the Company currently has no commitments with respect to any such
acquisitions.
In connection with the Acquisition, the Company entered into the Senior
Credit Facility which provides for a $40.0 million revolving credit facility.
The revolving credit facility will expire on the earlier of (a) March 31, 2001
or (b) such other date as the revolving credit commitments thereunder shall
terminate in accordance with the terms of the Senior Credit Facility. The
15
16
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Senior Credit Facility also provides for a $75.0 million term loan facility,
which is divided into two tranches, Tranche A and Tranche B term loans. The
Tranche A term loan has a final scheduled maturity date of March 31, 2001, and
the Tranche B term loan has a final scheduled maturity date of March 31, 2003.
The interest rates per annum in effect at December 27, 1997 for the Tranche A
term and Tranche B term loans were 8.25% and 8.75%, respectively.
On June 11, 1996, the Company entered into two interest rate swap
agreements to effectively convert $40.0 million of the variable Tranche A and
Tranche B debt to fixed rate debt with effective interest rates of 8.8% - 9.3%.
The interest rate swap agreements have a duration of two years. At December 27,
1997, the fair value of the interest rate swap agreements was not significant.
At December 27, 1997, the Company's weighted average borrowing cost was 9.7%.
At December 27, 1997, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$36.1 million, after giving effect to $3.9 million that was reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit. Amounts available under the revolving credit portion of the Senior
Credit Facility may be used for working capital and general corporate purposes,
including acquisitions and capital expenditures, subject to certain limitations
under the Senior Credit Facility. Pursuant to the terms of the Senior Credit
Facility: (i) the Company may make capital expenditures in an amount not to
exceed, prior to any carryover provisions, $7.0 million in each of 1998 and
1999, and escalating thereafter; and (ii) to the extent that acquisitions are
not permitted as capital expenditures under the Senior Credit Facility, the
Company may make acquisitions in an amount that is the lesser of (A) $30.0
million or (B) $15.0 million plus 50% of cumulative Excess Cash Flow (as defined
in the Senior Credit Facility).
The Senior Credit Facility contains certain covenants and restrictions
on actions by the Company and its subsidiaries. In addition, the Senior Credit
Facility requires that the Company comply with specified financial ratios and
tests, including minimum cash flow, a maximum ratio of indebtedness to cash flow
and a minimum interest coverage ratio. As of December 27, 1997, the Company was
in compliance with respect to all covenants under the Senior Credit Facility.
On April 18, 1996, the Company completed a refinancing, which consisted
of the sale of $100.0 million in Notes pursuant to a private offering, the
proceeds of which were used to repay the outstanding indebtedness under the
Company's Subordinated Loan Facility. The Notes mature on April 15, 2006 and
bear interest at the rate of 10.75% per annum payable semiannually on April 15th
and October 15th of each year. The Notes may be redeemed at the option of the
Company on or after April 15, 2001, under the conditions and at the redemption
price as specified in the Note Indenture, dated as of April 18, 1996, under
which the Notes were issued. The Notes are subordinated to all existing and
future Senior Indebtedness (as defined) of the Company and will be effectively
subordinated to all obligations of any subsidiaries of the Company.
On September 4, 1996, the Company issued 10.75% Series A Senior
Subordinated Notes due 2006 (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.
In December 1997, Simmons Caribbean Bedding Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and equipment installation. As of December 27,
1997, approximately $1.3 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
Management believes that the Company will have the necessary liquidity
for the foreseeable future from cash flow from operations, and amounts available
under its revolving credit facility in the Senior Credit Facility to fund: (i)
its obligations under the Senior Credit Facility and the New Notes; (ii)
expected capital expenditures; (iii) selective acquisitions in the bedding
industry;
16
17
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
and (iv) other needs required to manage and operate its business.
SEASONALITY
The volume of the Company's sales is somewhat seasonal with generally
lower sales occurring during the first quarter of each fiscal year when compared
to the remaining three quarters of the year. The Company also experiences a
seasonal fluctuation in its profitability, with a slightly lower gross profit
percentage occurring during the first quarter of each fiscal year when compared
to margin percentages obtained in the remaining part of the year. The Company
believes that seasonality of profitability is a factor that affects the
conventional bedding industry generally and 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, which
together result in lower profit margins.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for the Company's fiscal year beginning December 28,
1997. Reclassification of financial statements for earlier periods presented for
comparative purposes is required. The adoption of SFAS No. 130 is not expected
to have a material impact on the Company's consolidated results of operations,
financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for public business enterprises to report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services and geographic areas. SFAS No.
131 is required to be applied beginning with the Company's annual financial
statements for the 1998 fiscal year. Financial statement disclosures for prior
periods are required to be restated. The Company has evaluated the disclosure
requirements and has concluded that the Company operates in only one segment.
The adoption of SFAS No. 131 will have no material impact on the Company's
consolidated results of operations, financial position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other post retirement benefits to
the extent practicable. This standard is effective beginning with the Company's
annual financial statements for the 1998 fiscal year, and prior period
disclosures are required to be restated. Management is currently reviewing the
provisions of SFAS No. 132 and does not believe that the adoption of SFAS No.
132 will have a material impact on the Company's financial statements.
SIGNIFICANT CUSTOMER DEVELOPMENTS
During the year ended December 27, 1997, Montgomery Ward & Co.
("Wards") and Levitz Furniture Inc. ("Levitz"), two of the Company's larger
customers, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As
of December 27, 1997 and the date of each of the bankruptcy filings, the Company
had the reserves necessary to cover its estimated exposure. For a period prior
to the filings under the bankruptcy code, the Company halted shipments to Wards
and Levitz to minimize its exposure. Subsequent to the filing, the Company
recommenced shipments to the retailers. The Company's management will continue
to monitor the reorganization progress of Wards and Levitz and will attempt to
limit exposure as deemed prudent under the circumstances. Management believes
that these situations will not have a material adverse effect on the Company's
financial position or results of operations.
17
18
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
IMPACT OF THE YEAR 2000 ISSUE
Issues relating to the Year 2000 are the result of computer programs
being written using two digits rather than four to define the applicable year.
When computer systems either reach or calculate a date greater than December 31,
1999, the computers may process the date as 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
In order to mitigate the risks associated with this situation, Simmons
has formed a committee consisting of personnel from all major disciplines within
the Company to address the year 2000 issue. The committee has developed a list
of all information systems and is investigating each system to determine its
year 2000 readiness. No major equipment, facilities or service issues have been
identified, nor are any anticipated at this time. Communications with all major
vendors and customers are anticipated to be completed by the end of 1998.
In the last few years, Simmons has undergone a major initiative to
replace all of its major enterprise systems. The systems replace all major order
cycle business applications as well as all financial applications. The last
plant system to be converted to the new system will be completed in June 1998.
While the new systems are largely compliant, there are some areas within them
that are not fully year 2000 capable. Therefore, once the last plant system is
converted, Simmons will initiate a project to upgrade these systems to year 2000
compliant versions of the software. It is anticipated that this project will be
completed by the end of 1998. Simmons is covered under maintenance agreements
with all of its major software suppliers; therefore, no incremental software
costs will be incurred with this initiative. Costs to complete this exercise are
currently expected to relate to internal data processing resources, as well as,
some external consultant fees to assist in the effort. The incremental costs are
anticipated to be under $250 thousand.
In addition, the Simmons human resource system is not year 2000
compliant. Simmons has undertaken a software selection process to replace this
system. It is anticipated that this project will be completed by the end of
1998.
Simmons' main system hardware and operating systems, networking
operating systems, office productivity software and communications equipment are
all believed to be compliant in their current state.
The costs of these initiatives and their completion dates are based
upon management's best estimates, which were derived using various assumptions
of future events including the continued availability of certain resources,
third party statements of compliance and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from these plans.
18
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
SIMMONS COMPANY
We have audited the accompanying consolidated financial statements and
the financial statement schedule listed in Item 14 of this Form 10-K of Simmons
Company. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simmons Company and subsidiaries as of December 27, 1997 and December 28, 1996,
and the consolidated results of their operations and their cash flows for the
periods ended December 27, 1997, December 28, 1996, March 21, 1996 and December
30, 1995 in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 27, 1998
19
20
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
December 27, December 28,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,108 $ 4,573
Accounts receivable, less allowance for
doubtful accounts of $3,938 and $5,644 65,488 66,634
Inventories 19,970 18,833
Deferred income taxes 3,229 9,980
Other current assets 13,808 7,768
-------- --------
Total current assets 111,603 107,788
Property, plant and equipment, net 47,564 38,079
Patents, net of accumulated amortization of
$4,870 and $2,071 12,162 14,961
Goodwill, net of accumulated amortization of
$8,457 and $3,577 184,850 187,070
Deferred income taxes 8,453 8,040
Other assets 10,493 11,911
-------- --------
$375,125 $367,849
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
20
21
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
December 27, December 28,
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,847 $ 24,800
Accrued wages and benefits 8,830 7,807
Accrued advertising and incentives 15,457 17,124
Accrued interest 3,793 2,734
Other accrued expenses 9,435 8,336
Current maturities of long-term obligations 10,873 2,701
--------- ---------
Total current liabilities 76,235 63,502
Noncurrent liabilities:
Long-term obligations 173,570 194,114
Postretirement benefit obligations other than pensions 7,612 7,642
Other 13,864 11,300
--------- ---------
Total liabilities 271,281 276,558
--------- ---------
Commitments and contingencies
Redeemable Series A Preferred Stock under ESOP, net of
related unearned compensation of $17,122 and $23,352 11,230 5,000
Common stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized,
31,964,452 shares issued 320 320
Additional paid-in capital 84,680 84,680
Retained earnings 7,674 1,312
Foreign currency translation adjustment (55) (21)
Treasury stock, 974 shares in 1997 at cost (5) --
--------- ---------
Total common stockholders' equity 92,614 86,291
--------- ---------
$ 375,125 $ 367,849
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
21
22
Simmons Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Successor Predecessor
-------------------------- ------------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------- ------------
Net sales $550,085 $423,870 $ 106,431 $489,815
Costs and expenses:
Cost of products sold 319,074 254,127 66,630 292,825
Selling, general and administrative 183,556 135,762 35,846 161,202
ESOP expense 6,230 3,797 1,203 4,533
Amortization of intangibles 7,679 5,650 1,324 5,753
-------- -------- --------- --------
516,539 399,336 105,003 464,313
-------- -------- --------- --------
Income from operations 33,546 24,534 1,428 25,502
Interest expense, net 19,088 15,277 1,489 8,185
Other expense, net 1,571 1,557 96 400
-------- -------- --------- --------
Income (loss) before income taxes and
extraordinary item 12,887 7,700 (157) 16,917
Provision for income taxes 6,525 4,682 282 7,506
-------- -------- --------- --------
Income (loss) before extraordinary item 6,362 3,018 (439) 9,411
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,137 -- 1,706 -- --
-------- -------- --------- --------
Net income (loss) $ 6,362 $ 1,312 $ (439) $ 9,411
======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
22
23
Simmons Company and Subsidiaries
Consolidated Statements of Common Stockholders' Equity
(in thousands, except common share amounts)
Retained Foreign
Additional Unearned Earnings Currency
Common Common Paid-In Compensation (Accumulated Translation
Shares Stock Capital Under ESOP Deficit) Adjustment
------ ------ ---------- ------------ ----------- -----------
PREDECESSOR
December 31, 1994 36,311,967 $363 $ 190,560 ($60,169) ($88,305) ($347)
ESOP share allocations -- -- (8,065) 12,598 -- --
Income tax benefit on ESOP -- -- 3,145 -- -- --
Net income -- -- -- -- 9,411 --
Dividends paid or accrued on
redeemable preferred stock -- -- (65) -- -- --
Change in foreign currency
translation -- -- -- -- -- 59
Change in fair value of ESOP
shares -- -- (9,074) 40 -- --
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- -------- -------- -----
December 30, 1995 36,311,967 363 176,501 (47,531) (78,894) (288)
ESOP share allocations -- -- (2,298) 3,501 -- --
Income tax benefit on ESOP -- -- 896 -- -- --
Net income -- -- -- -- (439) --
Change in foreign currency
translation -- -- -- -- -- 9
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- -------- -------- -----
March 21, 1996 36,311,967 $363 $ 175,099 $(44,030) $(79,333) $(279)
========== ==== ========= ======== ======== =====
SUCCESSOR
March 22, 1996 (reflects the
new basis of 31,964,452
common shares in
connection with the
Acquisition) 31,964,452 $320 $84,680$ -- $ -- $ (2)
Net income -- -- -- -- 1,312 --
Change in foreign currency
translation -- -- -- -- -- (19)
---------- ---- --------- ------ -------- -----
December 28, 1996 31,964,452 320 84,680 -- 1,312 (21)
Net income -- -- -- -- 6,362 --
Change in foreign currency
translation -- -- -- -- -- (34)
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- ------ -------- -----
December 27, 1997 31,964,452 $320 $ 84,680 $ -- $ 7,674 $ (55)
========== ==== ========= ======== ======== =====
Total
Treasury Stockholders'
Stock Equity
-------- -------------
PREDECESSOR
December 31, 1994 $ (166) $ 41,936
ESOP share allocations -- 4,533
Income tax benefit on ESOP -- 3,145
Net income -- 9,411
Dividends paid or accrued on
redeemable preferred stock -- (65)
Change in foreign currency
translation -- 59
Change in fair value of ESOP
shares -- (9,034)
Purchase of treasury stock (5,613) (5,613)
------- --------
December 30, 1995 (5,779) 44,372
ESOP share allocations -- 1,203
Income tax benefit on ESOP -- 896
Net income -- (439)
Change in foreign currency
translation -- 9
Purchase of treasury stock (660) (660)
------- --------
March 21, 1996 $(6,439) $ 45,381
======= ========
SUCCESSOR
March 22, 1996 (reflects the
new basis of 31,964,452
common shares in
connection with the
Acquisition) $ -- $ 84,998
Net income -- 1,312
Change in foreign currency
translation -- (19)
------- --------
December 28, 1996 -- 86,291
Net income -- 6,362
Change in foreign currency
translation -- (34)
Purchase of treasury stock (5) (5)
------- --------
December 27, 1997 $ (5) $ 92,614
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
24
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Successor Predecessor
---------------------------- ----------------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 6,362 $ 1,312 $ (439) $ 9,411
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 13,549 9,118 2,198 9,780
Amortization of deferred debt issuance costs 613 521 84 679
ESOP expense 6,230 3,797 1,203 4,533
Extraordinary loss -- 1,706 -- --
Gain from sale of investment -- (4,011) -- --
Provision for bad debts 2,750 1,273 566 3,500
Provision for deferred income taxes 6,226 4,420 282 1,006
Other, net -- (475) 388 736
Net changes in operating assets and liabilities:
Accounts receivable (1,604) (17,288) (1,732) (10,092)
Inventories (1,137) (769) 1,229 (2,533)
Other assets (5,235) (3,724) (531) 2,029
Accounts payable 3,047 9,117 (7,250) 4,400
Accrued liabilities 1,500 (11,443) 6,341 5,064
-------- --------- ------- --------
Cash provided by (used in) operating activities 32,301 (6,446) 2,339 28,513
-------- --------- ------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (15,355) (13,546) (1,567) (5,834)
Proceeds from sale of investment -- 4,700 -- --
Payment to the seller for the acquisition -- (151,625) -- --
Payments to option holders -- (6,950) -- --
Payments of acquisition costs -- (16,040) -- --
-------- --------- ------- --------
Net cash used in investing activities (15,355) (183,461) (1,567) (5,834)
-------- --------- ------- --------
Cash flows from financing activities:
Proceeds from Predecessor revolving line of credit
and long-term borrowings -- -- 3,334 15,842
Predecessor principal payments on revolving line
of credit, long-term debt and capital lease
obligations -- -- (3,490) (32,259)
Payments of Predecessor debt -- (76,134) -- --
Proceeds of Successor long-term borrowings 34,329 317,700 -- --
Payments of Successor long-term borrowings (46,701) (131,473) -- --
Payments of financing costs -- (9,744) -- --
Proceeds from issuance of Successor
common stock -- 85,000 -- --
Treasury stock purchases (5) -- (660) (5,613)
-------- --------- ------- --------
Net cash from (used in) financing activities (12,377) 185,349 (816) (22,030)
-------- --------- ------- --------
Net effect of exchange rate changes on cash (34) (19) 9 59
-------- --------- ------- --------
Increase (decrease) in cash and cash equivalents 4,535 (4,577) (35) 708
Cash and cash equivalents, beginning of period 4,573 9,150 9,185 8,477
-------- --------- ------- --------
Cash and cash equivalents, end of period $ 9,108 $ 4,573 $ 9,150 $ 9,185
======== ========= ======= ========
The accompanying notes are an integral part of these consolidated statements.
24
25
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
(in thousands)
Successor Predecessor
----------------------------- ---------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------- ------------ ------------ ------------
Supplemental cash flow information:
Cash paid for interest $17,526 $ 11,798 $ 803 $ 5,458
======= ========= ========= ========
Cash paid for income taxes $ 60 $ 93 $ 2,315 $ 3,047
======= ========= ======== ========
The accompanying notes are an integral part of these consolidated statements.
25
26
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 also sells bedding products to certain institutional customers, such as
schools and government entities, and to the lodging industry. The Company also
licenses its patents and trademarks to various domestic and foreign
manufacturers.
On March 22, 1996, Simmons Holdings, Inc. ("Holdings"), through its
subsidiary formed for this purpose, Simmons Acquisition Corp. ("SAC"), acquired
100% of the outstanding common stock of the Company (the "Acquisition").
Holdings was formed to consummate the Acquisition on behalf of affiliates of
INVESTCORP S.A. ("Investcorp"), management and certain other investors.
Immediately following the completion of the Acquisition, SAC merged into the
Company, as a result of which 100% of the common stock of the Company became
owned by Holdings. For purposes of identification and description, Simmons
Company is referred to as the "Predecessor" for the period prior to the
Acquisition, the "Successor" for the period subsequent to the Acquisition, and
the "Company" for both periods. For purposes of financial reporting, the period
from December 31, 1995 through March 21, 1996 is referred to as "Predecessor
'96" and the period from March 22, 1996 through December 28, 1996 is referred to
as "Successor '96."
The purchase price for the Acquisition was approximately $269.6 million
(including approximately $94.6 million in refinancing or assumption of existing
indebtedness, purchase of certain stock options, and the payments of fees and
expenses) which was allocated to the assets and liabilities of the Company based
upon their estimated fair market value at the date of the Acquisition, under the
purchase method of accounting. The financing for the Acquisition (including the
refinancing of outstanding debt) was provided by (i) borrowings under a new
$115.0 million Senior Credit Facility, which refinanced the Company's existing
senior and subordinated loans, (ii) the $100.0 million proceeds under a new
Subordinated Loan Facility, and (iii) $85.0 million of capital provided by
affiliates of Investcorp, management and certain other investors from Holdings.
As part of the Acquisition, the Simmons Company Employee Stock
Ownership Plan (the "ESOP") sold 6,001,257 shares of the Company's common stock
(representing all of the allocated shares) to Holdings. The remaining 5,670,406
shares of common stock of the Company (unallocated shares) were converted into
5,670,406 shares of Series A Preferred Stock.
On April 18, 1996, the Company issued $100.0 million in 10.75% Senior
Subordinated Notes, pursuant to an offering (the "Offering") (See Note 8). The
proceeds of the offering were used to retire loans under the Subordinated Loan
Facility mentioned above.
The following condensed pro forma disclosure for net sales and net
income are based on the consolidated financial statements included elsewhere
herein, adjusted to give effect to (i) the Acquisition and (ii) the Offering of
the Notes and the application of the net proceeds therefrom to repay the
Subordinated Loan Facility (collectively, the "Transactions"). This pro forma
disclosure assumes that the Transactions were consummated as of December 31,
1995 and does not purport to be indicative of the results that would actually
have been obtained if the Transactions had occurred on the date indicated or of
the results that may be obtained in the future.
Combined
Pro Forma (in thousands): 1996
--------
Net sales $530,301
========
Net income (loss) $ 4,657
========
26
27
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
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.
Basis of Accounting
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. Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the current year presentation.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 1997, 1996 (Successor '96 and Predecessor
'96, combined) and 1995 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
Patents and Goodwill
The Acquisition resulted in a new basis of the value of the Company's
intangible assets. Accordingly, patents were adjusted to their estimated fair
value. For all periods, the cost of patents acquired are being amortized using
the straight-line method over the estimated remaining economic lives of the
respective patents, principally over seven years. Amortization expense was
approximately $2,799, $2,071, $438 and $1,929 for 1997, Successor '96,
Predecessor '96 and 1995, respectively.
Goodwill is being amortized on a straight-line basis, over the
estimated periods benefited (principally 40 years). In 1996 goodwill increased
as a result of accounting for the Acquisition. Amortization expense was $4,880,
$3,577, $886 and $3,824 for 1997, Successor '96, Predecessor '96 and 1995,
respectively.
27
28
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
At each balance sheet date, 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.
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 allocated 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.
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 $1,185, $862, $270 and $1,245 for 1997, Successor '96, Predecessor
'96 and 1995, respectively, and are included in cost of products sold in the
accompanying consolidated statements of operations.
Advertising Costs
The Company records the cost of advertising as an expense when
incurred. Advertising expense was $54,802, $43,652, $9,861 and $49,510 for 1997,
Successor '96, Predecessor '96 and 1995, 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, box springs, and flotation mattresses 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 21%,
21% and 23% of total sales for 1997, Successor '96 and Predecessor '96,
combined, and 1995, respectively. Accounts receivable from one customer was
approximately 9% and 5% of total accounts receivable at December 27, 1997 and
December 28, 1996, respectively. Sales to Heilig Meyers entities represented
approximately 10.7% of net sales for 1997, however, sales to no one customer
represented more than 10% of net sales for Successor '96 and Predecessor '96,
combined, or 1995.
Purchases of raw materials from one vendor represented approximately
24%, 23% and 20% of cost of products sold for 1997, Successor '96 and
Predecessor '96, combined, and 1995, 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.
28
29
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company is structured so that the employees of the Company have a
beneficial ownership of the Company's stock through their participation in the
ESOP. At December 30, 1995, the ESOP owned 11,690,115 shares of the Company's
common stock. The funds used to purchase the common stock were borrowed by the
ESOP pursuant to various loan agreements with the Company.
In connection with the Acquisition, the ESOP sold 6,001,257 shares of
common stock of the Company to Holdings (representing all the shares held by the
ESOP that had been allocated to plan participants as of such date) for $31.2
million in the aggregate, which amount was reinvested in diversified investments
in the respective accounts of such participants in the ESOP. Each of the
remaining 5,670,406 shares of common stock of the Company was converted into one
share of Series A Preferred Stock. Each share of Series A Preferred Stock is
entitled to one vote, is convertible into one share of common stock of the
Company at any time at the option of the holders thereof and is entitled to a
liquidation preference of $5.00 per share. Upon the occurrence of certain
events, Holdings or the Company may cause the Series A Preferred Stock to be
converted into common stock of the Company and, following such conversion, to be
exchanged for shares of Holdings' capital stock.
The ESOP pledged all of its shares of the Company's common and
preferred stock as collateral for the ESOP loans. 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. As of
December 30, 1995, 6,019,709 shares of common stock had been allocated to
participants' accounts. The remaining unallocated shares of common stock held in
the ESOP had an estimated fair value of approximately $29,664 ($5.30 per share)
at December 30, 1995. As of December 28, 1996, no shares of Series A Preferred
Stock had been allocated to participants' accounts, although 1,000,000 shares of
such stock had been committed to be released. In 1997, 1,096,000 shares were
released to participant's accounts for the 1996 ESOP allocation. In addition, as
of December 27, 1997, 1,150,000 additional shares of such stock have been
committed to be released. The remaining unallocated shares of Series A Preferred
Stock held in the ESOP had an estimated fair value of approximately $17,122
($5.00 per share) at December 27, 1997.
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 60% 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 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 58,700 shares from
ESOP participants in 1995 at prices ranging from $3.30 to $4.50 per share,
18,452 shares from ESOP participants in 1996 (prior to the Acquisition) at a
price of $4.50 per share and 974 shares from ESOP participants in 1997 at a
price of $5.00 per share. These shares are reflected as treasury stock in the
common stockholders' equity section of the balance sheet.
Because of the Company's 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 Redeemable Series A Preferred Stock under ESOP as
of December 27, 1997 and December 28, 1996, and as Redeemable Common Stock under
ESOP as of December 30, 1995. Additionally, pursuant to generally accepted
accounting principles, the Company has classified a proportional amount of
unearned compensation under ESOP in the same manner.
The Company also repurchased 1,608,019 shares at $3.30 to $4.50 per
share from non-ESOP stockholders
29
30
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
during 1995, which is also reflected as treasury stock in 1995.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 27, 1997 and
December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Accounts receivable $ 73,239 $ 77,335
Allowance for doubtful accounts (3,938) (5,644)
Allowance for cash discounts and other (3,813) (5,057)
-------- --------
$ 65,488 $ 66,634
======== ========
5. INVENTORIES
Inventories consisted of the following at December 27, 1997 and
December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Raw materials $12,209 $12,044
Work-in-progress 1,531 1,888
Finished goods 6,230 4,901
------- -------
$19,970 $18,833
======= =======
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
27, 1997 and December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Land, buildings and improvements $ 11,945 $ 6,716
Machinery and equipment 39,309 28,824
Construction in progress 3,713 4,299
-------- --------
54,967 39,839
Less accumulated depreciation (7,403) (1,760)
-------- --------
$ 47,564 $ 38,079
======== ========
Depreciation expense for 1997, Successor '96, Predecessor '96 and 1995
was $5,870, $3,468, $874 and $4,027, respectively.
7. OTHER ASSETS
Other assets consisted of the following at December 27, 1997 and
December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Long-term note receivable $ 2,200 $ 2,200
Debt issuance costs, net of accumulated amortization
of $1,165 and $552, respectively 7,259 7,670
Other 1,034 2,041
------- -------
$10,493 $11,911
======= =======
Debt issuance costs are amortized using the effective interest method
and are included in interest expense.
30
31
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Amortization of $613, $521, $84 and $679 for 1997, Successor '96, Predecessor
'96 and 1995, 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 27, 1997
and December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Senior loans:
Tranche A term loan $ 33,000 $ 35,516
Tranche B term loan 34,700 34,784
Revolving loan -- 16,000
10.75% Series A Senior Subordinated
Notes due 2006 100,000 100,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 4.30%, due 2016 5,000 --
Construction loan 1,329 --
Other, including capital lease obligations 714 815
--------- ---------
184,443 196,815
Less current portion (10,873) (2,701)
--------- ---------
$ 173,570 $ 194,114
========= =========
In connection with the Acquisition on March 22, 1996, the Company
entered into a new Senior Credit Facility (the "Senior Credit Facility") the
proceeds of which refinanced the outstanding amounts under the old senior loan
facility and the adjustable rate senior and junior subordinated notes. The
Senior Credit Facility provides for a $40.0 million revolving credit facility.
The revolving credit facility will expire on the earlier of (a) March 31, 2001
or (b) such other date as the revolving credit commitments thereunder shall
terminate in accordance with the terms of the Senior Credit Facility. The Senior
Credit Facility also provides for a $75.0 million term loan facility, which is
divided into two tranches, Tranche A and Tranche B term loans. The Tranche A
term loan has a final scheduled maturity date of March 31, 2001, and the Tranche
B term loan has a final scheduled maturity date of March 31, 2003.
The interest rate under the Senior Credit Facility is based, at the
Company's option, on an Alternate Base Rate or a Eurodollar Rate (both as
defined), plus margins as follows:
Revolving Tranche A Tranche B
Credit Loan Term Loan Term Loan
----------- --------- ---------
Alternate base rate 1.25% 1.25% 1.75%
Eurodollar rate (LIBOR-based) 2.50% 2.50% 3.00%
The interest rates per annum in effect at December 27, 1997 for the
Tranche A and Tranche B term loans were 8.25% and 8.75%, respectively.
Management of the Company has developed and implemented a policy to
maintain the percentage of fixed and variable rate debt within certain
parameters. The Company enters into interest rate swap agreements whereby the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount linked to LIBOR. Any differences paid or received on the
interest rate swap agreement are recognized as adjustments to interest expense
over the life of the swap, thereby adjusting the effective interest rate on the
underlying obligation. On June 11, 1996, the Company entered into two interest
rate swap agreements to effectively convert $40.0 million of the variable
Tranche A and Tranche B debt to fixed rate debt with effective interest rates of
8.8% - 9.3%. The interest rate swap agreements have a duration of two years and
have an option to extend for a one year period. At December 27, 1997, the fair
31
32
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
value of the interest rate swap agreements was not significant.
At December 27, 1997, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$36.1 million, after giving effect to $3.9 million that was reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit. The remaining availability under the revolving credit facility may be
utilized to meet the Company's current working capital requirements, including
issuance of stand-by and trade letters of credit. The Company also may utilize
the remaining availability under the revolving credit facility to fund
acquisitions and capital expenditures.
The Senior Credit Facility contains certain covenants and restrictions
on actions by the Company and its subsidiaries. In addition, the Senior Credit
Facility requires that the Company comply with specified financial ratios and
tests, including minimum cash flow, a maximum ratio of indebtedness to cash flow
and a minimum interest coverage ratio. During the third quarter of 1996, the
Company recorded a $4.0 million gain on the sale of minority interests in
certain foreign affiliates. The net proceeds from the sale were used to prepay
term loan payments as required by the Senior Credit Facility. As of December 27,
1997, the Company was in compliance with respect to all covenants under the
Senior Credit Facility.
On April 18, 1996, the Company completed a refinancing, which consisted
of (i) the sale of $100.0 million of 10.75% Senior Subordinated Notes due 2006
("the "Notes") pursuant to a private offering, (ii) the application of
approximately $96.0 million (after deduction of discounts to the Initial
Purchaser and other expenses of the Offering), together with other available
funds, to repay the outstanding indebtedness under the Company's Subordinated
Loan Facility. The Notes mature on April 15, 2006 and bear interest at the rate
of 10.75% per annum from April 15, 1996 payable semiannually on April 15th and
October 15th of each year, commencing October 15, 1996. The Notes may be
redeemed at the option of the Company on or after April 15, 2001, under the
conditions and at the redemption price as specified in the Note Indenture, dated
as of April 18, 1996, under which the Notes were issued. The Notes are
subordinated to all existing and future Senior Indebtedness (as defined) of the
Company and will be effectively subordinated to all obligations of any
subsidiaries of the Company. On September 4, 1996, the Company issued 10.75%
Series A Senior Subordinated Notes due 2006 (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.
In December 1997, Simmons Caribbean Bedding, Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and new equipment installation. As of December 27,
1997, approximately $1.3 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
Future maturities of long-term obligations as of December 27, 1997 are
as follows:
1998 $ 10,873
1999 8,777
2000 10,669
2001 13,879
2002 16,150
Thereafter 124,095
--------
$184,443
========
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 10.75% Series A Senior Subordinated Notes due 2006
which are measured at quoted market rate. The fair value of the Company's 10.75%
Series A Senior Subordinated Notes due 2006 was $105,250 at December 27, 1997.
All other long-term debt approximates the carrying value at December 27, 1997.
32
33
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
9. OTHER EXPENSE, NET
Other expense, net is comprised of the following:
Successor Predecessor
---------------------------- ---------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
Acquisition related:
Management compensation $ -- $ 3,735 $ -- $ --
Other acquisition related expense -- 648 -- --
Management advisory fee 1,000 833 -- --
Gain on sale of investment -- (4,011) -- --
Other non-operating expenses 571 352 96 400
------ ------- ---- ----
$1,571 $ 1,557 $ 96 $400
====== ======= ==== ====
The gain on sale of investment was related to the Company's
minority interests in Simmons Asia, Ltd. (10.0%), Simmons Bedding & Furniture
(HK) Ltd. (8.1%) and Simmons Company, Ltd. (6.8%).
10. EXTRAORDINARY ITEM
In April 1996, the Company recorded a $1,706 charge, net of income
tax benefit of $1,137 representing the remaining unamortized debt issuance costs
related to long-term obligations repaid as a result of the refinancing of
certain Acquisition debt.
11. LEASES
The Company leases certain facilities and equipment under
operating leases. Rent expense was $11,258, $9,709, $2,388 and $10,626 for 1997,
Successor '96, Predecessor '96 and 1995, respectively.
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 27, 1997:
1998 $ 9,266
1999 9,249
2000 8,384
2001 8,210
2002 7,923
Thereafter 16,484
-------
$59,516
=======
12. SERIES A PREFERRED STOCK
The Company is authorized to issue 6,000,000 shares of preferred
stock, par value $.01 per share, 5,950,000 of which have been designated as
"Series A Preferred Stock." The remaining 50,000 shares are designated "Series C
Cumulative Redeemable Exchangeable Preferred Stock," none of which are
outstanding. At December 27, 1997, there were 5,670,406 shares outstanding of
the Series A Preferred Stock, 5,669,432 shares of which were held by the ESOP
and 974 shares held by the Company as treasury stock.
Each share of Series A Preferred Stock is convertible, at the
option of the holder, into the number of shares
33
34
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
of common stock of the Company that results from multiplying the number of
shares of Series A Preferred Stock by the "Conversion Factor" in effect at the
time of the conversion. At December 27, 1997 the Conversion Factor was one.
However, the Conversion Factor will be (i) proportionately increased if (A) the
outstanding shares of common stock of the Company are subdivided into a greater
number of shares or a dividend convertible into or exchangeable for common stock
is paid or (B) the Investcorp Option is exercised, and (ii) proportionately
decreased if the outstanding shares of common stock of the Company are combined
into a smaller number of shares. Shares of Series A Preferred Stock also are
exchangeable for shares of Class C Stock of Holdings upon the occurrence of
certain events.
Shares of Series A Preferred Stock are redeemable for cash at the
option of the holder at a redemption price of $5.00 per share upon the
occurrence of one of the following events: (i) a sale of Holdings pursuant to
(A) a sale of 50% or more of the outstanding shares of Holdings' voting capital
stock, (B) a sale of all or substantially all of the assets of Holdings, or (C)
a merger, consolidation or recapitalization of Holdings as a result of which the
ownership of the surviving corporation's voting capital changes more than 50%;
or (ii) an initial public offering of common stock of the Company or Holdings
pursuant to an effective registration statement under the Securities Act of
1933.
In addition, holders of shares of Series A Preferred Stock have
certain "tag-along rights" and are subject to certain "drag-along rights"
pursuant to the terms of the Stockholders' Agreement following certain sales by
Holdings of shares of common stock of the Company.
Each share of Series A Preferred Stock entitles the holder thereof
to a number of votes equal to the number of votes carried by the number of
shares of common stock of the Company that would be issuable if such share of
Series A Preferred Stock were converted to common stock. In most circumstances
the ESOP Trustee votes such shares as directed by a committee appointed under
the ESOP. However, upon the occurrence of a corporate merger, consolidation,
recapitalization, liquidation, dissolution, sale of substantially all of the
assets of the Company or other similar transaction, participants in the ESOP may
direct the committee as to the manner in which such participants' allocated
shares shall be voted. Holders of Series A Preferred Stock are entitled to
receive equal per share dividends on an as-converted basis when dividends or
distributions are declared upon shares of common stock of the Company.
In the event of any involuntary or voluntary liquidation,
dissolution or winding-up of the affairs of the Company, holders of Series A
Preferred Stock are entitled to receive out of the assets of the Company
available for distribution to the shareholders, before any payments are made or
assets distributed on any common stock or on any other class or series of
capital stock of the Company, the amount of $5.00 per share. If the assets of
the Company are insufficient to permit such distribution, the entire assets of
the Company distributable to stockholders of the Company will be distributed
ratably among the holders of Series A Preferred Stock in proportion to the sum
of their respective per share liquidation values.
13. 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.
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. The Company has adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123").
At the time of the Acquisition, Holdings purchased all outstanding
vested options to acquire common stock of the Company from certain members of
management of the Company for an aggregate purchase price of approximately $6.9
million, of which $4.3 million was used by certain members of management to
purchase stock of Holdings. Therefore, SFAS 123 disclosure of 1995 information
is omitted, as this information is not meaningful in light of the aforementioned
transaction.
34
35
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
At the time of the Acquisition, the board of directors established
a Management Stock Incentive Plan (the "1996 Plan"), which provides for the
granting of nonqualified options for Class C common stock of Holdings to members
of management and certain key employees. Generally, the options outstanding
under the 1996 Plan: (i) are granted at prices which equate to or are above the
market value of the Class C stock on the date of grant, (ii) vest ratably over a
five year period based upon the achievement of an annual EBITDA amount, as
defined in the plan, or immediately upon the tenth (10th) anniversary of the
grant date and (iii) expire upon the thirtieth (30th) day following the tenth
(10th) anniversary of the grant date or other date(s) based upon certain
conditions as defined in the plan.
In connection with the Acquisition, 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 under the 1996 Plan pertain to
the Holdings options which have been attributed to the Company for disclosure
purposes. Information relating to stock options during 1997 and 1996 is as
follows:
Weighted
Average
Number Exercise
of Shares Price
----------- ----------
Shares under option
at December 28, 1996 2,911,561 $ 2.66
Granted 50,000 $ 2.95
Forfeited (39,728) $ 2.66
---------- --------
Shares under option
at December 27, 1997 2,921,833 $ 2.66
========== ========
Shares exercisable
at December 27, 1997 574,369 $ 2.66
========== ========
Shares exercisable
at December 28, 1996 0 $ 2.66
========== ========
All outstanding options were nonqualified options. No compensation expense
related to stock option grants was recorded in 1997 or 1996 as the option
exercise prices were equal to fair market value on the date of grant.
Pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its 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 1997 and 1996:
1997 1996
------- -------
Risk-free interest rate 6.08% 6.32%
Expected life 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:
1997 1996
------ ------
Net earnings - as reported $6,362 $1,312
Net earnings - proforma 6,133 1,155
Weighted average fair value of options
granted during the year $ 1.00 $ 0.93
35
36
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
The effects of applying SFAS 123 in this proforma disclosure are not indicative
of future amounts.
Prior to 1996, the Board of Directors had established a
performance stock option plan and a separate executive stock option plan ("the
Old Plans"). The option price per share was equal to the estimated fair value on
the date of the grant. The Company had reserved shares in an amount sufficient
for issuance upon exercise of the options under the Old Plans.
14. INCOME TAXES
The components of the provision for income taxes are as follows:
Successor Predecessor
----------------------------- ----------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
Ended through through Ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
Current tax provision:
Federal $ -- $ -- $ -- $5,398
State -- -- -- 1,102
Foreign 299 262 -- --
------ ------ ------ ------
299 262 -- 6,500
------ ------ ------ ------
Deferred tax provision:
Federal 5,230 3,627 231 903
State 996 793 51 103
------ ------ ------ ------
6,226 4,420 282 1,006
------ ------ ------ ------
$6,525 $4,682 $ 282 $7,506
====== ====== ====== ======
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 1997, Successor '96, Predecessor '96, and 1995
provision for income taxes is as follows:
Successor Predecessor
-------------------------- -------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
Ended through through Ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------ ------------
Income taxes at federal statutory rate $4,382 $2,618 $ (53) $5,921
State income taxes, net of federal benefit 657 556 (18) 889
Goodwill amortization 1,393 1,216 301 1,491
Reduction of valuation allowance -- -- -- (1,914)
Other, net 93 292 52 1,119
------ ------ ------- ------
$6,525 $4,682 $ 282 $7,506
====== ====== ======= ======
36
37
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Components of the net deferred income tax asset (liability) at December
27, 1997 and December 28, 1996 are as follows:
December 27, December 28,
1997 1996
------------ ------------
Current deferred income taxes:
Accounts receivable and inventory reserves $ 3,378 $ 4,054
Accrued liabilities not currently deductible 521 3,739
Net operating loss carryforwards 82 2,505
Prepaids and other assets, net currently taxable (752) (318)
-------- --------
3,229 9,980
Noncurrent deferred income taxes:
Property basis differences (2,896) (2,960)
Patents basis differences (4,214) (5,205)
ESOP liability basis differences 8,710 10,844
Net operating loss carryforwards 2,638 1,688
Valuation allowance (2,638) (1,688)
Other noncurrent accrued liabilities, not currently
deductible 6,853 5,361
-------- --------
8,453 8,040
-------- --------
Net deferred tax asset $ 11,682 $ 18,020
======== ========
At December 27, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,782, all of which is limited
to its 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 benefit
of the loss carryforwards and has provided a valuation allowance of
approximately $2,638 to fully reserve such amounts as of December 27, 1997. The
Company carried back its unlimited net operating loss generated in the 1996 tax
year. These carryforwards expire through 2011. Undistributed earnings to be
permanently reinvested by the international subsidiaries totaled approximately
$1,500 at December 27, 1997. Because these earnings are to be permanently
reinvested, no U.S. deferred income tax has been recorded for them.
15. RETIREMENT PLANS
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.
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 1997,
Successor '96 and Predecessor '96, combined, and 1995 were $1,439, $1,495 and
$1,366, respectively.
The Company had accrued $2,679 and $2,709 at December 27, 1997 and
December 28, 1996, 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.
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 $64, $128 and $405 to expense for 1997, Successor '96 and
Predecessor '96, combined, and 1995, respectively. The accrued benefits under
the nonqualified plan were $189 and $156 at December 27, 1997 and December 28,
1996, respectively, and are included in other long-term liabilities in the
accompanying consolidated balance sheets. Vested interests of current
participants in the plan were distributed upon consummation of the Acquisition.
37
38
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
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 thousand 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.
The following table presents a reconciliation of the Plan's status at
December 27, 1997 and December 28, 1996:
December 27, December 28,
1997 1996
------------ ------------
Accumulated postretirement benefit obligation:
Retirees $2,809 $ 3,177
Fully eligible active plan participants 849 996
Other active participants 1,480 1,378
------ -------
5,138 5,551
Unrecognized prior service cost 243 273
Unrecognized net gain/(loss) 748 (51)
------ -------
Accrued postretirement benefit obligation $6,129 $ 5,773
====== =======
The components of the net periodic postretirement benefit cost for 1997,
Successor '96 and Predecessor '96, combined, and 1995 are as follows:
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
Service cost $ 187 $ 156 $ 163
Interest cost on accumulated benefit
obligation 338 375 387
Amortization of:
Unrecognized prior service cost (30) (30) (30)
Gain (22) -- --
----- ----- -----
Net periodic postretirement benefit cost $ 473 $ 501 $ 520
===== ===== =====
Assumptions used in the computation of the accumulated postretirement
benefit obligation at December 27, 1997 and December 28, 1996 are as follows:
December 27, December 28,
1997 1996
------------ ------------
Discount rate 7.00% 7.25%
Initial health care cost trend rate 10.50% 11.00%
Ultimate health care cost trend rate 5.50% 5.50%
Year ultimate health care cost trend rate reached 2007 2007
If the health care cost trend rate were increased by 1% for all future
years, the accumulated postretirement benefit obligation as of December 27, 1997
would have increased 8.8%. The effect of this change on the aggregate of service
and interest cost for 1997 would have been an increase of 13.0%.
38
39
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
16. CONTINGENCIES
From time to time, the Company has been involved in various legal
proceedings. Management believes that all such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
17. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Management
Agreement") with Investcorp International Inc. ("International") pursuant to
which the Company agreed to pay International $1.0 million per annum for a
five-year term. At the closing of the Acquisition, the Company paid
International $3.0 million for the first three years of the term of the
Management Agreement in accordance with its terms. As of December 27, 1997,
approximately $1.2 million of this payment remained unamortized and a portion of
the balance is reflected in the other current asset and other asset sections of
the accompanying consolidated balance sheet, as appropriate.
In connection with the Acquisition, 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 $250 thousand 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
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 $2,500 per year or $7,500, in the aggregate, permitted under the Senior
Credit Facility and the indenture relating to the Series A Senior Subordinated
Notes due 2006; and registration expenses incurred by Holdings incident to a
registration of any capital stock of Holdings under the Securities Act.
39
40
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
40
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and principal occupation
or position of each of the directors and executive officers of the Company. Each
director of the Company will hold office until the next annual meeting of
shareholders of the Company or until his successor has been elected and
qualified. Officers of the Company are elected by the Board of Directors of the
Company and serve at the discretion of the Board of Directors.
Name Age Positions
- ---- --- ---------
Zenon S. Nie 47 Chairman of the Board of Directors, Chief
Executive Officer and Director.
Jonathan C. Daiker 50 Executive Vice President - Finance and Administration,
Chief Financial Officer and Director.
Martin R. Passaglia 49 Senior Executive Vice President and Director.
Jon P. Hedley 37 Director.
Christopher J. O'Brien 39 Director.
Charles J. Philippin 47 Director.
Savio W. Tung 46 Director.
William L. Ayers, IV 52 Executive Vice President - Marketing and Sales.
Joseph Ulicny 55 Executive Vice President - Market Development.
Robert K. Barton 57 Senior Vice President - Human Resources.
Leo T. Brennan 62 Vice President-Materials Management.
Roger W. Franklin 42 Vice President-Finance and Treasurer.
James P. Maher 62 Divisional President.
Cleve B. Murphy 47 Divisional President.
Gary G. Pleasant 55 Divisional President.
DIRECTORS
The following sets forth the name, principal occupation and employment
and business experience during the last five years for each of the Company's
directors:
Zenon S. Nie joined the Company in 1993 as Chief Executive Officer and
was appointed Chairman in January 1994. Prior to joining the Company, Mr. Nie
served as President of the Consumer Home Fashions Division of The Bibb Company,
a textile manufacturer, from 1991 to 1993. From 1981 through 1991, Mr. Nie held
several senior management positions at Serta, Inc., a bedding manufacturer,
including President, Executive Vice President, Chief Operating Officer, Senior
Vice President-Manufacturing, Finance and Administrative and Vice
President-Strategic Planning. Mr. Nie's previous experience includes several
marketing positions at Sealy Corporation, a bedding manufacturer. Mr. Nie is a
director of Ladd Furniture, Inc.
Jonathan C. Daiker joined the Company in April 1995 as Executive Vice
President-Finance and Administration, Chief Financial Officer. Prior to joining
the Company, Mr. Daiker held a number of directorships in the corporate offices
of Philips Electronics North America Corporation, a consumer electronics
manufacturer, as well as operating positions within its divisional structure
from 1981 to 1995. Most recently, he was Senior Vice President and Chief
Financial Officer for Philips Lighting Company, a manufacturer of commercial and
residential electrical lighting products. Prior to Philips, he was a senior
manager with Price Waterhouse, an accounting firm, from 1971 to 1981, and is a
Certified Public Accountant.
Martin R. Passaglia joined the Company in 1973 as a Sales
Representative. He has held various positions during his tenure including
Regional Sales Manager, Vice President and General Manager-Hawaii, Executive
Vice President-Account Development and Executive Vice President-Marketing and
was promoted to Senior Executive Vice President in January 1994.
41
42
Jon P. Hedley became a director of the Company upon its creation in
March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly owned subsidiaries since April 1990. Mr. Hedley is a director
of CSK Auto Corp. and Saks Holdings, Inc.
Christopher J. O'Brien became a director of the Company upon its
creation in March 1996. He has been an executive of Investcorp, its predecessor
or one or more of its wholly owned subsidiaries since December 1993. Prior to
joining Investcorp, Mr. O'Brien was a Managing Director of Mancuso & Company
for four years. Mr. O'Brien is a director of CSK Auto Corp., Falcon Building
Products, Inc. and Star Markets, Inc.
Charles J. Philippin became a director of the Company upon its creation
in March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly owned subsidiaries since July 1994. Prior to joining
Investcorp, Mr. Philippin was a partner of Coopers & Lybrand L.L.P., an
accounting firm. Mr. Philippin is a director of CSK Auto Corp., Falcon Building
Products, Inc. and Saks Holdings, Inc.
Savio W. Tung became a director of the Company upon its creation in
March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since September 1984. Mr. Tung is a
director of CSK Auto Corp., Saks Holdings, Inc. and Star Markets, Inc.
EXECUTIVE OFFICERS
The following sets forth the name, position and certain other
information with respect to the executive and certain other appointed officers
of the Company:
William L. Ayers, IV joined the Company in 1973. He has held several
sales management positions including Vice President and General Manager-Los
Angeles and Divisional Executive Vice President, and was promoted to Executive
Vice President-Sales and Marketing in February 1994.
Joseph Ulicny joined the Company in 1992 as Executive Vice
President-Finance and Chief Financial Officer. In 1995, he assumed his current
position as Executive Vice President - Market Development. Prior to joining the
Company, Mr. Ulicny served in financial executive positions with Dannon Company,
a yogurt wholesaler, for over seven years from 1985 to 1992.
Robert K. Barton joined the Company in February 1982 as Director of
Dealer Financial Services. He served as Vice President-Dealer Financial
Services, Vice President-Administration and Vice President-Human Resources prior
to assuming his current position as Senior Vice President-Human Resources in
March 1989.
Leo T. Brennan joined the Company in 1978 as Director of Purchasing and
was promoted to his current position as Vice President-Materials Management in
1985.
Roger W. Franklin joined the Company in November 1986 as Director of
Taxes. He served as Vice President-Controller prior to assuming his current
position as Vice President-Finance and Treasurer in October 1990. Prior to
joining the Company, Mr. Franklin spent almost nine years with Price Waterhouse,
an accounting firm, in both the audit and tax areas from 1978 to 1986 and is a
Certified Public Accountant.
James P. Maher joined the Company in 1989 and has served as Vice
President and General Manager-Jacksonville, Vice President and General
Manager-San Leandro and Divisional Executive Vice President. He was promoted to
his current position of Divisional President in January 1997. Before joining the
Company, Mr. Maher held senior management positions with Nachman Corporation, a
wire and bedding components manufacturer, Leggett & Platt, Inc., a manufacturer
of bedding components, and May & Company, a bedding manufacturer.
Cleve B. Murphy joined the Company in May 1995 as Divisional Executive
Vice President. He was promoted to his current position of Divisional President
in January 1997. Mr. Murphy's background includes twelve years at Sealy
Corporation., a bedding manufacturer, where he started as Sales Manager and
became one of four Regional Vice Presidents, from 1983 to 1995. Prior to his
employment with Sealy, Mr. Murphy served eight years as General Manager for
Englander, a bedding manufacturer, from 1975 to 1983 and two years with Serta,
Inc. from 1973 to 1975.
42
43
Gary G. Pleasant rejoined the Company in 1991 as Vice President and
General Manager-Seattle and was promoted to Divisional Executive Vice President,
in January 1995. He was promoted to his current position of Divisional President
in January 1997. Mr. Pleasant had been previously employed by the Company from
1966 to 1985 in various sales management positions. From 1985 to 1991, Mr.
Pleasant worked for Sealy Corporation, first as Vice President-Sales -
Ohio-Sealy and then as National Vice President-Marketing and Sales.
DIRECTOR COMPENSATION
The Company pays no additional remuneration to its employees or to
executives of Investcorp for serving as directors. See "--Executive
Compensation." There are no family relationships among any of the directors or
executive officers.
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44
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in the
previous three years by the Company's Chief Executive Officer and each of the
other four most highly compensated executive officers whose remuneration
exceeded $100,000. The current compensation arrangements for each of these
officers are described in "Employment Arrangements" below.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation-
Awards
-------------
Securities
Underlying
Annual Compensation Options / All Other
----------------------
Salary Bonus (a) SARs (b) Compensation (c)
Name and Principal Position Year ($) ($) (#) ($)
--------------------------- ---- ------ --------- ---------- ----------------
Zenon S. Nie 1997 517,500 586,366 -- 14,282
Chairman & Chief Executive Officer 1996 501,458 876,823 1,800,000 31,551
1995 404,167 474,896 300,000 23,142
Martin R. Passaglia 1997 267,500 211,325 -- 10,519
Senior Executive Vice President 1996 267,500 234,063 64,237 161,721
1995 250,000 262,500 71,306 20,459
Jonathan C. Daiker 1997 213,000 169,060 -- 8,437
Executive Vice President - Finance & 1996 205,750 230,031 156,338 30,741
Administration, Chief Financial 1995 150,000 182,500 150,500 24,144
Officer
Robert K. Barton 1997 180,000 143,517 -- 10,715
Senior Vice President - Human 1996 171,750 150,281 63,667 147,447
Resources 1995 165,500 173,775 70,500 19,801
Joseph Ulicny 1997 180,000 142,793 -- 10,029
Executive Vice President - Market 1996 172,483 150,923 30,000 27,028
Development 1995 167,200 175,962 -- 19,996
- ---------------
(a) Earned in year shown but paid in subsequent year.
(b) The amounts shown are the number of shares underlying options granted in the
respective years. In connection with the Acquisition, all outstanding options
issued prior to the Acquisition were purchased for an aggregate of $6,950,000,
representing the value of such options based on their exercise prices. Messrs.
Nie, Passaglia, Daiker, Ulicny and Barton received $1,812,800, $364,496,
$117,435, $308,856 and $363,867, respectively, for their options, which amounts
were invested in Class C Stock of Holdings. The 1996 amounts represent Class C
common shares of Simmons Holdings, Inc., issued in connection with the
Acquisition which are attributed to the Company through Parent Option agreement
between Holdings and the Company.
(c) Consists of (i) contributions to defined contribution plans in 1996 and
1995, respectively, in the amounts of $17,192 and $15,368 for Mr. Nie, $17,192
and $15,740 for Mr. Passaglia, $17,192 and $0 for Mr. Daiker, $17,192 and
$15,740 for Mr. Barton, and $17,192 and $15,368 for Mr. Ulicny (1997
contributions have not been established as of this date); (ii) premiums for term
life insurance and long-term disability insurance in 1997, 1996 and 1995,
respectively, in the amounts of $14,282, $14,359 and $7,774 for Mr. Nie,
$10,519, $11,185 and $4,719 for Mr. Passaglia, $8,437, $8,231 and $5,334 for Mr.
Daiker, $10,715, $11,908 and $4,061 for Mr. Barton, $10,029, $9,836 and $4,628
for Mr. Ulicny, respectively; (iii) payments of benefit under non-qualified ESOP
in 1996, in the amount
44
45
of $133,344 and $118,347 for Mr. Passaglia and Mr. Barton, respectively; and
(iii) relocation assistance in 1996 and 1995 in the amounts of $5,228 and
$18,810 for Mr. Daiker.
AGGREGATE OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
Number of Shares Of
Common Stock
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 27, 1997 at December 27, 1997
----------------------------- ---------------------------------
Name Vested Unvested Vested Unvested
Zenon S. Nie 360,000 1,440,000 $104,688 $418,752
Martin R. Passaglia 12,847 51,390 3,736 14,944
Jonathan C. Daiker 31,268 125,070 9,093 36,370
Robert K. Barton 12,733 50,934 3,703 14,811
Joseph Ulicny 6,000 24,000 1,745 6,979
RETIREMENT PLANS
Qualified Retirement Plans.
The Company maintains several single employer retirement plans
including a single employer defined benefit plan and two single employer defined
contribution plans (the Simmons ESOP ("ESOP") and a 401(K) plan) which are
intended to be qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The Company also participates in a number of
multi-employer pension plans, from which it has no present intention to
withdraw. In the aggregate, these plans cover substantially all permanent
employees.
Defined Contribution Plans.
The Company sponsors two single employer defined contribution pension
plans; the Simmons Retirement Savings Plan and the ESOP.
Simmons Retirement Savings Plan. The Simmons Retirement Savings Plan
contains a cash or deferred arrangement under Section 401(K) of the Code.
Employees with 12 weeks of employment who have reached age 21 are permitted to
participate in the plan, and generally employees covered by collective
bargaining agreements are not permitted to participate, unless the agreement
expressly provides for participation.
As a result of forming the ESOP in January 1989, the Company suspended
all employer and employee contributions to this defined contribution plan during
1989 and 1990. Effective during the 1991 plan year, eligible participants could
again make limited contributions to this defined benefit plan; however, no
employer contributions were allowed. The status of plan participants was not
affected.
Presently, there are approximately 505 participants in this plan, and
participants have the ability to direct the investment of their account
balances. Eligible employees may defer the receipt of a portion of their covered
compensation up to 6% of compensation on a pre-tax basis, subject to various
limitations. Participants are fully vested in their contributions at all times.
The Company did not make any contributions to the plan during plan year 1997
(other than the pre-tax deferrals mentioned above).
ESOP. The ESOP 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 Code. Assets of the ESOP are held in a
trust with respect to which State Street Bank and Trust Company (the "ESOP
Trustee") serves as trustee. The ESOP covers otherwise eligible employees of the
Company who have completed at least one year of service for the Company, and
have reached age 21. As of December 27, 1997, approximately 1,700 employees
participated in the ESOP.
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The ESOP provides benefits to each participating employee based on the
value of the Company's Series A Preferred 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.
Leveraged ESOPs differ from other defined contribution employee pension
benefit plans due to their ability to 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, company stock acquired by the ESOP is held by
the trustee in a suspense account. In connection with the establishment of the
ESOP in 1989, the ESOP borrowed funds from the Company for the purpose of
acquiring Company stock. As of December 27, 1997, the ESOP was indebted to the
Company in the approximate principal amount of $51.2 million. Prior to March 22,
1996, the date of the Acquisition, the ESOP held 11,671,663 shares of common
stock of the Company. On the Acquisition Closing Date, the ESOP sold 6,001,257
shares, representing all shares theretofore 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 Merger, the remaining
5,670,406 shares, representing all unallocated shares held in the suspense
account, were converted into Series A Preferred Stock. If converted into common
stock of the Company or capital stock of Holdings, the Series A Preferred Stock
would represent direct or indirect ownership of 15.1% of the common stock of the
Company, after giving effect to such conversion (exclusive of stock options
granted under the Company's management stock incentive plan) or the Investcorp
Option.
The Company will make annual cash contributions to the ESOP in an
amount up to 25% of eligible participant compensation, subject to certain
limitations and conditions. The ESOP will then use all such cash to repay the
internal ESOP Loan to the Company. As a result, there is no cash cost to the
Company associated with the contribution to the ESOP. As the internal ESOP Loan
is repaid, a portion of the Series A Preferred Stock will be allocated to
participant accounts and non-cash ESOP expense equal to the fair value of the
allocated shares is charged to non-cash ESOP expense. At such time as the
internal ESOP Loan is repaid in full (expected to be in approximately four
years), all shares of Series A Preferred Stock held by the ESOP will have been
allocated to plan participants.
With certain limited exceptions (such as an exception required by law
permitting certain retirement age individuals with at least 10 years of plan
participation to liquidate, over a six-year period, 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 (age 65), early retirement (age 55 with at
least 10 years of service), 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. Such shares are
deemed to have a value of not less than the redemption price for such shares. A
participant entitled to a distribution is entitled under law to have Company
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 the
Company to purchase such shares at fair market value over an approximately two
year period, with such value to be not less than the redemption price, in the
case of shares of Series A Preferred Stock.
Defined Benefit Plan. The Company also sponsors 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 certain collective bargaining agreements, and has approximately 113
participants. The monthly benefit for such participants upon normal retirement
is generally determined as the sum of (i) 0.75% of monthly earnings as of
January 1, 1963 multiplied by specified credited service as of May 1, 1963, (ii)
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
(iii) 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 certain employees who are
represented by IAM Local 315 in New Jersey and UFWA Local 262 in California.
This plan is fully funded and accruals have been frozen. None of the named
executive officers benefits under the plan.
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Multi-employer 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 the year ended December 27,1997, the periods ended March 21,
1996 and December 28, 1996 combined, and the year ended December 30, 1995 were
$1,439, $1,495, and $1,366, respectively.
Nonqualified Plans.
Simmons Company Nonqualified Employee Stock Ownership Plan. In 1989,
the Company instituted this nonqualified plan to provide benefits to eligible
employees similar to those benefits provided under the ESOP, described above.
This plan covers certain 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 1402 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 ESOP. Participants are entitled to receive accrued
benefits upon termination of employment with the Company, 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. The Company charged approximately $64, $128, and $405 to
expense for the year ended December 27, 1997, the periods ended March 21, 1996
and December 28, 1996 combined, and the year ended December 30, 1995,
respectively. The accrued benefits under the nonqualified plan were $189 and
$156 at December 27, 1997 and December 28, 1996, respectively, and are included
in other long term liabilities in the accompanying balance sheets. Vested
interests of current participants in the plan were distributed upon consummation
of the Acquisition, resulting in payments in 1996 to Messrs. Barton and
Passaglia of $118,347 and $133,344, respectively.
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 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. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.
EMPLOYMENT ARRANGEMENTS
Zenon Nie, Chairman of the Board of Directors and Chief Executive
Officer, and the Company have entered into a three-year employment agreement
(which renews automatically on a daily basis, subject to termination upon three
years' notice). Pursuant to that agreement, Mr. Nie is entitled to receive (i) a
base salary, currently $575,000 per year, subject to further increases approved
by the Company's Board of Directors, (ii) an annual cash bonus based upon
achieving specified levels of operating income (the "Annual Incentive Plan") and
(iii) specified fringe benefits, including reimbursement of country club dues
and provision of an automobile.
Martin R. Passaglia, Senior Executive Vice President, and Jonathan C.
Daiker, Executive Vice President-Finance and Administration and Chief Financial
Officer, have entered into employment agreements with the Company, expiring on
January 1, 1997 and March 22, 1998, respectively. Mr. Passaglia's employment
agreement renews automatically for successive one-year terms, subject to
termination upon notice. Pursuant to these agreements, Messrs. Passaglia and
Daiker are entitled to receive a base salary, currently $267,500 and $225,000
per year, respectively (subject to further increases approved by the Company's
Board of Directors), and to participate in all Company incentive and fringe
benefit programs, including the Annual Incentive Plan.
Certain additional executive officers, including named executive
officers Robert K. Barton, Jonathan C. Daiker and Martin R. Passaglia, have
entered into employment agreements pursuant to which such executive officers
will be entitled to continue to receive base salary for up to twelve months plus
pro rata payments under the Annual Incentive Plan in the event that their
employment is terminated other than for cause, death or disability, following a
Change of Control, as defined therein. In the case of Messrs. Daiker and
Passaglia, the agreements specify that payments due
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upon a termination following a Change in Control will be the greater of amounts
owing pursuant to either these agreements or the agreements referenced in the
preceding paragraph. All executive officers are eligible to participate in the
Annual Incentive Plan, payments under which are based upon the Company's
achievement of targeted levels of operating income, as defined in the plan.
MANAGEMENT STOCK INCENTIVE PLAN
Upon the consummation of the Acquisition, Holdings adopted a Management
Stock Incentive Plan (the "Plan"), in order to provide incentives to employees
and directors of Holdings and the Company by granting them awards tied to the
Class C Stock of Holdings. The Plan is administered by a committee of the Board
of Directors of Holdings (the "Compensation Committee"), which has broad
authority in administering and interpreting the 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 (collectively, "Awards"). Options granted under the Plan may
be options intended to qualify as incentive stock options under Section 422 of
the Code or options not intended to so qualify. An Award granted under the Plan
to an employee may include a provision terminating the Award upon termination of
employment under certain circumstances or accelerating the receipt of benefits
upon the occurrence of specified events, including, at the discretion of the
Compensation Committee, any change of control of the Company.
Holdings has granted options to purchase up to 2,440,750 shares of its
Class C Stock to certain members of the Company's senior management and has
granted additional options to purchase an aggregate of up to approximately
481,083 shares of its Class C Stock to other officers and employees of the
Company including 50,000 shares granted during 1997 at an exercise price of
$2.95. The exercise price of each option granted in connection with the
Acquisition is $2.66 per share, which is the same price per share paid by
existing holders of Class C Stock of Holdings to acquire such Class C Stock
while options issued subsequent have an exercise price equal to fair market
value at the time of grant. In addition, Holdings has granted options to
purchase up to an additional 211,744 shares of its Class C Stock to certain
members of the Company's senior management at an exercise price of $3.57 per
share, which are exercisable if an option that has been granted to an affiliate
of Investcorp (the "Investcorp Option") is exercised. Holdings has granted
options to acquire up to an additional 35,926 shares of its Class C Stock to
officers and employees of the Company, at an exercise price of $3.57 per share,
which are also exercisable if the Investcorp Option is exercised. Except as
noted in the preceding sentence, the exercise price of each option granted in
the future will be equal to the fair market value of the Company's common stock
at the time of the grant. Each option will be subject to certain vesting
provisions. To the extent not earlier vested or terminated, all options will
vest on the tenth anniversary of the date of grant and will expire 30 days
thereafter if not exercised.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
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 Board
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
non-employee members of the Board.
The objective of the Board is to establish policies and programs to
attract and retain key executives, and to reward performance by these executives
which benefit the stockholders. 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 established annually by the Board,
and on individual performance. Stock option awards are intended to align the
executive officer's interests with those of the 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.
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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 non-employee members of the
Board for their review and final approval.
With respect to the CEO, the Board reviews and fixes his base salary
primarily on the Board'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 Board's review takes place annually.
ANNUAL CASH BONUSES
For fiscal year 1997, annual cash bonuses were governed by the
Company's Management Incentive Plan which is heavily dependent on the financial
performance of the Company, and less so on individual performance. The Board of
Directors of the Company reviewed the business plan developed by management and
then approved the objectives for the year, capital expenditure plans and other
factors, and set a target amount of earnings. The Board then incorporated this
target into the Management Incentive Plan as a threshold below which no bonus
would be paid. With respect to the CEO's bonus, the Board reviewed this
separately, with the amount allocated by salary ratio as a base. Performance
factors were then considered, such as attainment of objectives in product
development, market share, representation of the Company at investor meetings,
development of management personnel, and other considerations, including in
particular for 1996, the successful completion of the Investcorp transaction.
STOCK OPTION AWARDS
Stock options are an integral part of each executives officer's
compensation and are intended to provide an incentive to continue as employees
of the Company over a long term, and to align the interests of the executive
with those of the stockholders by providing a stake in the Company. The Company
originally granted stock options in connection with the Acquisition. In making
grants the Board 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 Board 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 Board continually reviews the Company's compensation programs to
ensure the overall package is competitive, balanced, and that proper incentives
and rewards are provided. The Board has not formulated a policy on qualifying
executive officer compensation under new Section 162 (m) of the Code (adopted
under the Omnibus Budget and Reconciliation Act of 1993).
Board of Directors
Zenon S. Nie
Jonathan C. Daiker
Martin R. Passaglia
Jon P. Hedley
Christopher J. O'Brien
Charles J. Philippin
Savio W. Tung
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL")
authorizes a corporation to indemnify and advance reasonable expenses to any
person who was a party, is a party, or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The Company's Amended and Restated Articles of Incorporation and Bylaws
each include indemnification provisions that mirror the language of the statute.
In addition, the Company's Bylaws provide that, subject to any limitation in the
Company's Articles of Incorporation, the Company may indemnify a director or
officer to the fullest extent permitted by law, including, without limitation,
DGCL Sec.145. Consequently, a director or officer of the Company or a person
serving at the request of the Company in the above-named capacities will be
fully indemnified against such judgments, penalties, fines, settlements and
reasonable expenses actually incurred, except if: (1) the person did not conduct
himself in good faith and did not reasonably believe his conduct was in the
corporation's best interests; or (2) in the case of any criminal action or
proceeding, the person had reasonable cause to believe his conduct was unlawful.
No indemnification may be made in respect of any claim, issue or matter as to
which such person is adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
The Company's Amended and Restated Articles of Incorporation also
contain a provision eliminating liability to the Company or its shareholders for
monetary damages from breach of fiduciary duty as a director. The inclusion of
these indemnification provisions in the Company's Amended and Restated Articles
of Organization and Bylaws is intended to enable the Company to attract
qualified persons to serve as directors and officers who might otherwise be
reluctant to do so.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has two classes of issued and outstanding stock (common
stock and Series A Preferred Stock), both of which possess voting rights. At
December 27, 1997, there were 31,964,452 shares of the Company's common stock
issued and outstanding, representing 84.9% of the outstanding voting securities
of the Company, and 5,670,406 shares of Series A Preferred Stock issued and
outstanding, representing 15.1% of the outstanding voting securities of the
Company. All of the Company's common stock is owned by Holdings and all of the
Series A Preferred Stock is owned by the Simmons ESOP. The address of the
Simmons ESOP is c /o State Street Bank and Trust Company, as Trustee, 200
Newport Avenue, North Quincy, MA 02171.
Of the three classes of issued and outstanding stock of Holdings (Class
A, Class C and Class D stock), only shares of Class D stock currently possess
voting rights. At December 27, 1997, there were 200,000 shares of Holdings'
Class D stock issued and outstanding. Certain of the investors in the equity of
Holdings intend to offer certain members of the Company's management an
opportunity to purchase shares of Class C stock of Holdings, which stock has no
voting rights except in certain limited circumstances. The following table sets
forth the beneficial ownership of each class of issued and outstanding voting
securities of Holdings which currently possess voting rights, as of the date
hereof, by each director of the Company, each of the executive officers of the
Company as a group and each person who beneficially owns more than 5% of the
outstanding shares of any class of voting securities of Holdings.
Class D Voting Stock:
Number of Percent of
Name Shares (a) Class (a)
---- ---------- ---------
INVESTCORP S.A. (b)(c) 200,000 100.0%
37 rue Notre-Dame,
Luxembourg
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Number of Percent of
Name Shares (a) Class (a)
---- ---------- ----------
SIPCO Limited (d) 200,000 100.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
CIP Limited (e)(f) 184,000 92.0%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Ballet Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Denary Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Gleam Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Highlands Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Noble Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Outrigger Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Quill Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Radial Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Shoreline Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
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Number of Percent of
Name Shares (a) Class (a)
---- ---------- ----------
Zinnia Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
INVESTCORP Investment Equity Limited(c) 16,000 8.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power to
dispose, or direct the disposition of, a security.
(b) Investcorp does not directly own any stock in Holdings. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (c) below). Investcorp owns no stock in Ballet
Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited,
Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia
Limited, or in the beneficial owners of these entities (see (f) below).
Investcorp may be deemed to share beneficial ownership of the shares of voting
stock held by these entities because the entities have entered into revocable
management services or similar agreements with an affiliate of Investcorp,
pursuant to which each of such entities has granted such affiliate the authority
to direct the voting and disposition of the Holdings voting stock owned by such
entity for so long as such agreement is in effect. Investcorp is a Luxembourg
corporation.
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp.
(d) SIPCO Limited may be deemed to control Investcorp through its ownership of a
majority of a company's stock that indirectly owns a majority of Investcorp's
shares.
(e) CIP Limited ("CIP") owns no stock in Holdings. CIP indirectly owns less than
0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be deemed
to share beneficial ownership of the shares of voting stock of Holdings held by
such entities because CIP acts as a director of such entities and the ultimate
beneficial shareholders of each of those entities have granted to CIP revocable
proxies in companies that own those entities' stock. None of the ultimate
beneficial owners of such entities beneficially owns individually more than 5%
of Holdings' voting stock.
(f) CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands
Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited,
Shoreline Limited and Zinnia Limited each is a Cayman Islands corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holdings was formed to consummate the Acquisition on behalf of
affiliates of Investcorp, management and certain other investors. Financing for
the Acquisition was provided by (i) $85.0 million of capital provided by
affiliates of Investcorp, management and other investors, and (ii) borrowings in
an aggregate principal amount equal to $180.4 million, consisting of $80.4
million under the Senior Credit Facility and all the proceeds of the $100.0
million Subordinated Loan Facility. Invifin S.A., an affiliate of Investcorp
("Invifin"), provided $25.0 million of the $100.0 million Subordinated Loan
Facility. In connection with the Acquisition, the Company paid Investcorp
International Inc. ("International") advisory fees of $5.7 million. The Company
also paid $3.5 million to International for arranging the Senior Credit Facility
and $687,500 to Invifin in commitment fees in connection with the Subordinated
Loan Facility.
In connection with the Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Management
Agreement") with International pursuant to which the Company agreed to pay
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International $1.0 million per annum for a five-year term. At the closing of the
Acquisition, the Company paid International $3.0 million for the first three
years of the term of the Management Agreement in accordance with its terms.
In connection with the Acquisition, 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 $250,000 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 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 the
amount permitted under the Senior Credit Facility and the Indenture relating to
the notes; and registration expenses incurred by Holdings incident to a
registration of any capital stock of Holdings under the Securities Act.
In connection with the Acquisition, Holdings purchased options to
acquire common stock of the Company from certain members of management of the
Company for an aggregate purchase price of approximately $6.9 million, of which
approximately $4.3 million was used by certain members of management to purchase
stock of Holdings. In addition, the Company entered into agreements with certain
members of management of the Company, pursuant to which the Company agreed to
pay an aggregate of $3,735,000 of additional compensation in connection with
their investment in Holdings. Of this amount, $2,360,000 was paid at the
Acquisition Closing Date and the balance was paid in late 1996. Of this amount,
$1,575,609, $316,803, $102,070, $264,444 and $316,257 has been received by
Messrs. Nie, Passaglia, Daiker, Ulicny and Barton, respectively.
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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:
Reports of Independent Accountants
Consolidated Balance Sheets at December 27, 1997 and December 28,
1996
Consolidated Statements of Operations for the year ended
December 27, 1997, the period from March 22, 1996 through
December 28, 1996 (Successor Period), period from December 31,
1995 through March 21, 1996 and the year ended December 30,
1995 (Predecessor Periods)
Consolidated Statements of Common Stockholders' Equity for the
year ended December 27, 1997, the period from March 22, 1996
through December 28, 1996 (Successor Period), period from
December 31, 1995 through March 21, 1996 and the year ended
December 30, 1995 (Predecessor Periods).
Consolidated Statements of Cash Flows for the year ended
December 27, 1997, the period from March 22, 1996 through
December 28, 1996 (Successor Period), period from December 31,
1995 through March 21, 1996 and the year ended December 30,
1995 (Predecessor Periods).
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 27, 1997.
(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.
333-4841), declared effective on August 1, 1996.
2 Agreement of Merger between Simmons Acquisition Corp. and the
Company, dated March 22, 1996
3(i) Amended and Restated Certificate of Incorporation of the Company
3(ii) By-laws of the Company
10.1 Stock Purchase Agreement among certain management stockholders,
Merrill Lynch Capital Appreciation Partnership No. B-XI, L.P., MLCP
Associates L.P. No. II, ML IBK Position Inc., Offshore LBO
Partnership No. B-XI, Merrill Lynch KECALP L.P. 1987, Merrill Lynch
KECALP L.P. 1989, Merchant Banking L.P. No. IV and the Company,
Simmons Holdings, Inc., Simmons Acquisition Corp. and NationsBank
N.A. (South), solely as Trustee for the Simmons Employee Stock
Ownership Trust, dated March 22, 1996.
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10.2 Consolidated ESOP Loan Agreement between the Company and the
Employee Stock Ownership Trust dated March 22, 1996.
10.3 Consolidated Pledge Agreement between the Company and the Employee
Stock Ownership Trust dated March 22, 1996.
10.4 Amended Agreement of Trust between the Company and NationsBank N.A.
(South) dated as of March 22, 1996.
10.5 Second Amendment to the ESOP dated March 22, 1996.
10.6 1996 Stockholders' Agreement among the Company, the Simmons Company
Employee Stock Ownership Trust and Simmons Holdings, Inc. dated as
of March 22, 1996.
10.7 Purchase Agreement between the Company and Chase Securities Inc.
dated as of April 15, 1996.
10.8 Credit Agreement among the Company, Chemical Bank, as
Administrative Agent, and lenders party thereto, dated as of March
22, 1996.
10.9 Security Agreement made by the Company in favor of Chemical Bank,
as Administrative Agent, dated March 22, 1996.
10.10 Services and Expenses Agreement between the Company and Holdings,
dated as of March 22, 1996.
10.11 Parent Option Agreement between the Company and Holdings, dated as
of March 22, 1996.
10.12 Agreement for Management Advisory and Consulting Services between
Investcorp International, Inc. and the Company, dated as of March
22, 1996.
10.13* The Management Stock Incentive Plan of Simmons Holdings, Inc.
established as of March 22, 1996.
10.14* Form of Stock Purchase Agreement
10.15* Form of Stock Option Agreement
10.16* Form of Bonus Stock Purchase Agreement
10.17 Form of Anti-Dilution Stock Option Agreement
10.18* Form of Bonus Agreement
10.19* Form of Stock Acquisition Agreement
10.20 Labor Agreement between the Company and the Miscellaneous
Warehousemen, Drivers and Helpers Union, Local No. 986 affiliated
with the International Brotherhood of Teamsters covering warehouse
employees, truck drivers and shipping and receiving clerks for the
period August 1, 1995 to August 1, 1998.
10.21 Labor Agreement between the Company and the United Furniture
Workers of America, Local #262, A.F.L.-C.I.O. covering production
and maintenance employees working at the San Leandro, California
plant for the period August 1, 1995 to August 1, 1998.
10.22 Labor Agreement between the Company and ILWU Local 142 covering all
full-time production and maintenance employees for the period from
January 15, 1996 to January 14, 1999.
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10.23 Labor Agreement between the Company and Buckeye Local Lodge #55 of
the International Association of Machinists and Aerospace Workers,
Columbus, Ohio covering maintenance technicians for the period from
December 31, 1995 to December 31, 1997.
10.24 Labor Agreement between the Company and The International
Association of Machinists and Aerospace Workers, Local no. 315 of
District No. 15, A.F.L.-C.I.O. covering all mechanics at the
Piscataway, New Jersey plant of the Company for the period from
December 10, 1995 to December 10, 1998.
10.25 Master Multi-Plan Working Agreement between the Company and The
United Steel Workers of America, A.F.L., C.I.O., C.L.C. (Upholstery
Industries Division) through its Locals 63, 424, 422, 420, 425, 173
and 515 covering various employees in the Atlanta, Georgia;
Columbus, Ohio; Dallas, Texas; Piscataway, New Jersey;
Jacksonville, Florida; Kansas City, Missouri; and Los Angeles,
California plants of the Company for the period from October 15,
1994 to October 15, 1997.
10.26 Loan Finance and Advisory Services Agreement dated as of March 22,
1996 between Investcorp International Inc. and the Company.
10.27 Mergers and Acquisitions Advisory Agreement dated as of March 22,
1996 between Investcorp International Inc. and the Company.
10.28 Lease between the Company, as tenant, and Leadership Group, Inc. as
landlord, dated November 4, 1987, for premises in Grove City, Ohio
(i) Amendment dated April 1, 1988.
10.29 Lease between the Company, as tenant, and Security Capital
Industrial Trust, as landlord, dated December 16, 1988, for
premises in Aurora, Colorado.
10.30 Lease between the Company, as tenant, and 365 South Randolphville,
L.P., as assignee of 287 Industrial park, as landlord, dated
September 16, 1988, for premises in Piscataway, New Jersey.
10.31 Lease between the Company, as tenant, and The Prudential Insurance
Company of America, as landlord, dated June 19, 1973, for premises
in Jacksonville, Florida.
10.33 Lease between the Company, as tenant, and 20100 S. Alameda Property
Co. (assignee of Overton, Moore & Associates), as landlord, dated
March 12, 1974 for premises in Compton, California. (i) First
Amendment dated October 2, 1974 (ii) Second Amendment dated as of
September 17, 1984 (iii) Third Amendment dated as of September 18,
1984 (iv) Fourth Amendment dated as of June 28, 1993
10.35 Lease between the Company, as tenant, and Bluefin Associates, as
landlord, dated December 4, 1987, for premises in Agawam,
Massachusetts. (i) First Amendment dated October 5, 1993
10.36 Lease between the Company, as tenant, and Concourse I, Ltd., as
landlord, dated August 1, 1992, for premises in Atlanta, Georgia.
10.37 Lease between the Company, as tenant, and John W. Rooker, as
landlord, dated October 23, 1991, for premises in Mableton,
Georgia. (i) First Amendment dated as of December 10, 1991 (ii)
Second Amendment dated as of July 14, 1992
10.38 Lease between the Company, as tenant, and CK-Childress Klein #8
Limited Partnership, as landlord, dated May 5, 1993, for premises
in Charlotte, North Carolina. (i) First Amendment dated February 6,
1994
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10.39 Lease between the Company, as tenant, and St. Paul Properties,
Inc., as landlord, dated February 5, 1993, for premises in
Carrollton, Texas.
10.40 Lease between the Company, as tenant, and Moon & Hart, as landlord,
dated November 30, 1992, for premises in Ewa Beach, Hawaii.
10.41 Lease between the Company, as tenant, and 1700 Fairway Drive
Associates, as landlord, dated September 30, 1992, for premises in
San Leandro, California. (i) Amendment to Lease dated July 1, 1993
10.42 Lease between the Company, as tenant, and Hill-Raaum investment
Company, as landlord, dated December 19, 1991, for premises in
Bellevue, Washington.
10.43 Lease between Simmons Caribbean Bedding, Inc., as tenant, and ALFA
Casting Corporation, as landlord, dated May 25, 1989, for premises
in Toa Baja, Puerto Rico. (i) Modification of Lease Agreement dated
April 7, 1994
10.44 Lease between the Company, as tenant, and St. Paul Properties,
Inc., as landlord, dated October 19, 1994 for premises in Gwinnett
County, Georgia.
10.45 Lease between the Company, as tenant, and Liberty Property Limited
Partnership (assignee of Simmons Associates, L.P.), as landlord,
dated as of October 7, 1994 for premises in Spotsylvania County,
Virginia. (i) First Amendment dated as of October 28, 1994
10.46 Lease between the Company and Eagle Warren Properties, successors
to B.F. Saul Real Estate Investment Trust, dated July 15, 1977 for
premises in Norcross, Georgia. (i) Amendment dated August 6, 1992
10.47 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 (Simmons
Manufacturing Company, Inc. Project) Series 1982.
10.48 Down Products Trademark License Agreement, dated January 4, 1991
between Simmons, as Licensor, and Louisville Bedding Co., as
Licensee.
10.49 Down Products Trademark License Agreement, dated January 1, 1995
between Simmons, as Licensor, and Louisville Bedding Co., as
Licensee.
10.50 Amended and Restated Trademark License Agreement dated as of April
14, 1986 (as restated November 28, 1990) between Simmons, as
Licensor, and Louisville Bedding Co., as Licensee.
10.51 Trademark License Agreement, dated as of July 13, 1990 between
Simmons, as Licensor, and Simmon Upholstered Furniture Inc., as
Licensee
10.52 Patent and Technology License Agreement, dated as of July 13, 1990
between Simmons, as Licensor and Simmons Upholstered Furniture
Inc., as Licensee
10.53 Agreement dated as of October 30, 1986 between Simmons, as
Licensor, and Simmons Universal Corporation, as Licensee.
10.54 Woolmark License Agreement, dated as of October 21, 1988 between
the Wool Bureau Incorporated and Simmons.
10.55 Licensee Agreement, dated as of June 29, 1990 between Simmons I.P.
Inc., as Licensor, and Simmons Canada Inc., as Licensee.
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10.56 Industrial Property License Agreement, Area 1-5, dated as of April
9, 1987 between Simmons, and INFO Establishment, as Licensor and
Christie-Tyler PLC, as Licensee.
10.57 Existing Territory License Agreement, dated as of June 30, 1987
between Simmons and SJL Investments Limited.
10.58 Trademark License Agreement, dated as of May 21, 1990 as between
Simmons, as Licensor, and Compania Simmons S.A. de C.V. as
Licensee.
10.59 Master Agreement, dated as of December 7, 1993 between Simmons and
N.V. B Linea.
10.60 Assignment, dated as of December 7, 1993 between Simmons and N.V. B
Linea.
10.61 Security Agreement, dated as of December 7, 1993 between Simmons
and N.V. B Linea.
10.62 Software License Agreement, undated, between Simmons and J.D.
Edwards & Company.
10.63* Employment Agreement dated November 5, 1993 between the Company and
Zenon S. Nie as amended October 5, 1995.
10.64* Employment Agreement dated January 1, 1995 between the Company and
Martin R. Passaglia.
10.65* Employment Agreement dated April 1, 1995 between the Company and
Jonathan C. Daiker.
10.66 Loan Agreement, dated as of December 1, 1996, between the City of
Shawnee, Kansas and the Company, relating to $5,000,000 Private
Activity Revenue Bonds of the City of Shawnee, Kansas (Simmons
Company Project) Series 1996. (Incorporated herein by reference,
Exhibit 10.66, to the Form 10-Q filed May 13, 1997 (File No.
333-04841).)
21 Subsidiaries of the Company
The following exhibits are included in this Form 10-K:
10.34 Form of Lease Agreement between the Company, as tenant, and CP
Reprop Phoenix III Corp., as landlord, for premises in Phoenix,
Arizona dated March 1997.
10.4 Employee Stock Ownership Plan Trust Agreement between the Company
and State Street Bank and Trust Company dated as of September 2,
1997.
10.73 Form of Industrial Lease Agreement between the Company, as tenant,
and DFW Trade Center I Limited Partnership, as landlord, for
premises in Coppell, Texas dated June 1997.
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.
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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/Zenon S. Nie Chairman of the Board of Directors, Chief Executive
--------------------------------------------
Zenon S. Nie Officer and Director
(Principal Executive Officer)
Dated: March 27, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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.
/Zenon S. Nie Chairman of the Board of Directors, Chief March 27,1998
- --------------------------------------------
Zenon S. Nie Executive Officer and Director
(Principal Executive Officer)
/s/ Jonathan C. Daiker Executive Vice President - Finance and March 27, 1998
- --------------------------------------------
Jonathan C. Daiker Administration, Chief Financial Officer
and Director.
(Principal Financial and Accounting Officer)
/s/ Martin R. Passaglia Senior Executive Vice President and Director March 27, 1998
- --------------------------------------------
Martin R. Passaglia
/s/ Jon P. Hedley Director March 27, 1998
- --------------------------------------------
Jon P. Hedley
/s/ Christopher J. O'Brien Director March 27, 1998
- --------------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director March 27, 1998
- --------------------------------------------
Charles J. Philippin
/s/ Savio W. Tung Director March 27, 1998
- --------------------------------------------
Savio W. Tung
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE
YEAR ENDED DECEMBER 27, 1997,
PERIOD FROM MARCH 22, 1996 THROUGH DECEMBER 28, 1996,
PERIOD FROM DECEMBER 31, 1995 THROUGH MARCH 21, 1996
AND YEAR ENDED DECEMBER 30, 1995
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K
OF
SIMMONS COMPANY
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SIMMONS COMPANY
SCHEDULE II - VALUATION ACCOUNT
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Balance at
Beginning End of
Description of Period Additions Deductions Period
----------- ---------- --------- ---------- ----------
(in thousands)
SUCCESSOR
Fiscal Year Ended December 27, 1997
Allowance for doubtful accounts receivable $5,644 $2,750 $4,456 $3,938
Period from March 22, 1996 through
December 28, 1996
Allowance for doubtful accounts receivable $5,063 $1,273 $692 $5,644
PREDECESSOR
Period from December 31, 1995 through
March 21, 1996
Allowance for doubtful accounts receivable $4,600 $566 $103 $5,063
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SUBSIDIARIES
A. DOMESTIC SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- ---------------
(1) Simmons International Holding Company, Inc. New York
B. FOREIGN SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- ---------------
(1) Simmons Caribbean Bedding, Inc. Puerto Rico
(2) INFO Establishment Liechtenstein
(3) Simmons I.P., Inc. Ontario
(4) 688363 Ontario Limited Ontario
(5) 897701 Ontario Limited Ontario
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