AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1996
REGISTRATION NO. 333-04841
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
SIMMONS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2515 06-1007444
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
-------------------
ONE CONCOURSE PARKWAY, SUITE 600
ATLANTA, GEORGIA 30328
(770) 512-7700
(Address, including zip code, and telephone number,
including area code, of registrant's and co-registrant's principal executive
offices)
-------------------
JONATHAN C. DAIKER
EXECUTIVE VICE PRESIDENT-FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
SIMMONS COMPANY
ONE CONCOURSE PARKWAY, SUITE 600
ATLANTA, GEORGIA 30328
(770) 512-7700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
WITH COPIES TO:
CHARLES K. MARQUIS, ESQ.
J. KEITH MORGAN, ESQ.
GIBSON, DUNN & CRUTCHER
200 PARK AVENUE
NEW YORK, NEW YORK 10166
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE><CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
10 3/4% Series A Senior
Subordinated Notes due
2006......................... $100,000,000 100% $100,000,000 $34,485.00
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for the purposes of calculating the
registration fee.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SIMMONS COMPANY
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE><CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
A. INFORMATION ABOUT THE TRANSACTION
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Forepart of the Registration Statement;
Outside Front Cover Page of the
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Summary; Risk Factors; Selected Historical
and Pro Forma Financial Data
4. Terms of the Transaction.................. The Exchange Offer; Description of Notes;
Certain Federal Income Tax
Considerations; Plan of Distribution
5. Pro Forma Financial Information........... Selected Historical and Pro Forma
Financial Data; Financial Statements
6. Material Contacts with the Company Being
Acquired.................................. Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable
8. Interests of Named Experts and Counsel.... Not Applicable
9. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants............................... Not Applicable
11. Incorporation of Certain Information by
Reference................................. Not Applicable
12. Information With Respect to S-2 or S-3
Registrants............................... Not Applicable
13. Incorporation of Certain Information by
Reference................................. Not Applicable
14. Information with Respect to Registrants
Other Than S-2 or S-3 Registrants......... Summary; Risk Factors; The Acquisition;
The Simmons ESOP; Capitalization;
Selected Historical and Pro Forma
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Managment; Ownership of Voting
Securities; Certain Transactions;
Capital Structure; Financial Statements
</TABLE>
<PAGE>
<TABLE><CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
<C> <S> <C>
15. Information with Respect to S-3
Companies................................. Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................. Not Applicable
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies........... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited........ Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited,
or in an Exchange Offer................. The Exchange Offer; Management; Ownership
of Voting Securities; Certain
Transactions
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 23, 1996
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 3/4% SENIOR SUBORDINATED NOTES DUE 2006
IN EXCHANGE FOR 10 3/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2006 OF
SIMMONS COMPANY
The Exchange Offer will expire at 5:00 p.m.,
New York City time on , 1996, unless extended
Simmons Company, a Delaware corporation (the "Company"), hereby offers to
exchange an aggregate principal amount of up to $100,000,000 of its 10 3/4%
Series A Senior Subordinated Notes due 2006 (the "New Notes") for a like
principal amount of its 10 3/4% Senior Subordinated Notes due 2006 (the "Old
Notes") outstanding on the date hereof upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"). The New Notes and
the Old Notes are collectively hereinafter referred to as the "Notes." The terms
of the New Notes are identical in all material respects to those of the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. The New Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture (as defined) governing the Old Notes.
The New Notes will be unsecured, will be 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 as may exist
from time to time. The New Notes will rank pari passu with all future Senior
Subordinated Indebtedness (as defined) of the Company and will rank senior to
all other subordinated indebtedness of the Company. The Indenture permits the
Company to incur additional indebtedness, including Senior Indebtedness under
its $115.0 million Senior Credit Facility (as defined), subject to certain
limitations. See "Description of Notes." As of March 30, 1996, on an adjusted
basis after giving effect to the issuance of the Old Notes and the application
of the net proceeds therefrom, the aggregate amount of the Company's Senior
Indebtedness would have been $95.2 million (exclusive of unused commitments),
and the Company would have had no Senior Subordinated Indebtedness outstanding
other than the Notes.
The New Notes will bear interest from and including the date of consummation of
the Exchange Offer. Interest on the New Notes will be payable semi-annually on
April 15 and October 15 of each year, commencing October 15, 1996. Additionally,
interest on the New Notes will accrue from the last interest payment date on
which interest was paid on the Old Notes surrendered in exchange therefor or, if
no interest has been paid on the Old Notes, from the date of original issue of
the Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement dated April 18, 1996 (the "Registration Rights Agreement"), between
the Company and the Initial Purchaser (as defined), with respect to the initial
sale of the Old Notes.
The Company will not receive any proceeds from the Exchange Offer. The Company
will pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date (as defined) for the Exchange Offer. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes
with respect to the Exchange Offer, the Company will promptly return such Old
Notes to the Holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivery of a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
----------------------------------------------------------------
Prior to the Exchange Offer, there has been no public market for the Old Notes.
If a market for the New Notes should develop, such New Notes could trade at a
discount from their principal amount. The Company currently does not intend to
list the New Notes on any securities exchange or to seek approval for quotation
through any automated quotation system and no active public market for the New
Notes is currently anticipated. There can be no assurance that an active public
market for the New Notes will develop.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange pursuant to the Exchange Offer.
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
----------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
INFORMATION HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE NEW NOTES OR OLD NOTES BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN
OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
EXCHANGE PROPOSED TO BE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. Pursuant to the Indenture, the
Company has agreed to file with the Securities and Exchange Commission (the
"Commission") and provide to the holders of the Notes annual reports and the
information, documents and other reports that are specified in Sections 13 and
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Commission a Registration Statement (which
term includes any amendments thereto) on Form S-4 under the Securities Act with
respect to the New Notes offered by this Prospectus. This Prospectus does not
contain all information set forth in the Registration Statement and the exhibits
thereto, to which reference is hereby made. Statements made in this Prospectus
as to the contents of any contract, agreement, or other document are not
necessarily complete. With respect to each such contract, agreement, or other
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matter involved.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. For purposes of this Prospectus, the "Company" shall refer to
Simmons Company and all of its consolidated subsidiaries, unless the context
otherwise requires. The fiscal year of the Company ends on the last Saturday of
the calendar year.
THE COMPANY
The Company, founded in 1871, 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), Maxipedic(R),
Beautysleep(R) and three newly introduced lines, Connoisseur(R), BackCare(R) and
Equation of Sleep(R). Sales of conventional bedding, which includes fully
assembled mattresses and box springs, accounted for approximately 98% of the
Company's 1995 net sales. Beautyrest(R), the Company's premier brand, accounted
for approximately 72% of net sales and approximately 58% of unit volume in 1995.
The Company's net sales and EBITDA (as defined elsewhere herein) increased to
$489.8 million and $39.6 million, respectively, in 1995 from $313.2 million and
$18.3 million, respectively, in 1991. Net sales for the combined first quarter
of 1996 have increased $10.7 million or 9.8% from the first quarter of 1995.
EBITDA for the pro forma first quarter of 1996 remained constant with EBITDA for
the first quarter of 1995.
The Company manufactures and supplies conventional bedding to over 5,000
retail outlets, representing more than 2,500 customers, including furniture
stores, department stores, specialty sleep shops and warehouse showrooms. The
Company operates 18 manufacturing facilities, which are strategically located in
15 states and Puerto Rico in proximity to its 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 each of 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.
Wholesale revenues for the domestic conventional bedding industry have grown
at a compound annual rate of 6.8% to approximately $3.2 billion in 1995 from
approximately $860.4 million in 1975, according to industry wholesale revenue
data compiled by the International Sleep Products Association ("ISPA"), a
bedding industry trade group. During this 20-year period, wholesale revenues
increased each year, with the exception of 1982, when such revenues declined by
1.9%. The Company estimates that its share of the domestic conventional bedding
market has grown to approximately 15.1% in 1995 from approximately 13.1% in
1992, based on industry wholesale revenue data published by ISPA. The Company
believes that its recent performance is primarily attributable to five key
elements, including its (i) experienced management team, (ii) well-known brand
names, (iii) strong and extensive customer relationships, (iv) recently launched
national advertising campaign and (v) new product innovations and enhancements.
The Company's primary strategic objectives are to maximize profitability and
cash flow by continuing to increase its market share and by improving its
operating efficiency. To achieve these objectives, the Company has implemented a
strategy that includes: (i) increasing penetration of existing and new accounts,
primarily by emphasizing higher-end and more profitable products and by
continuing to introduce new and innovative products; and (ii) improving
operating performance
3
<PAGE>
and profitability by re-engineering the Company's manufacturing facilities and
upgrading the Company's information systems.
THE ACQUISITION
On March 22, 1996 (the "Acquisition Closing Date"), Simmons Holdings, Inc.
("Holdings"), a company organized on behalf of INVESTCORP S.A. ("Investcorp"),
management and certain other investors, acquired 100% of the outstanding common
stock of the Company from affiliates of Merrill Lynch Capital Partners Inc.
("MLCP"), the Simmons Company Employee Stock Ownership Plan (together with a
trust forming a part thereof, the "Simmons 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
Simmons 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 (the
"Series A Preferred Stock") (together with the financing thereof, the
"Acquisition"). Financing for the Acquisition was provided by (i) $85.0 million
of capital provided by affiliates of Investcorp, management and certain other
investors, (ii) $80.4 million of borrowings under a $115.0 million Senior Credit
Facility among the Company, certain lenders and Chemical Bank, 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 Chemical Bank, 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 the Old Notes, together
with borrowings under the Senior Credit Facility. See "Risk Factors--Substantial
Leverage and Debt Service Obligations," "The Acquisition" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Series A Preferred Stock issued to the Simmons ESOP in connection with
the Acquisition may be converted into common stock of the Company on a
one-for-one basis and, under certain circumstances, may be redeemed for cash or
exchanged for shares of Holdings' capital stock. If so converted into common
stock of the Company or Holdings, the common stock received by the Simmons ESOP
upon conversion 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).
See "Management--Retirement Plans--Simmons ESOP," "Ownership of Voting
Securities--Stockholders' Agreement" and "Capital Structure--Preferred Stock."
Immediately prior to the Acquisition, the Simmons ESOP owned 11,671,663 shares
of common stock of the Company, of which 6,001,257 were allocated to participant
accounts as of the Acquisition Closing Date and 5,670,406 were unallocated as of
such date. The Simmons ESOP acquired such shares in January 1989 in connection
with its purchase of all of the Company's then outstanding common stock. See
"The Simmons ESOP."
The Company and Holdings are Delaware corporations. The principal executive
offices of the Company and Holdings are located at One Concourse Parkway, Suite
600, Atlanta, Georgia 30328, and their telephone number is (770) 512-7700.
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered......... Up to $100,000,000 aggregate principal amount of 10 3/4% Series
A Senior Subordinated Notes due 2006 (the "New Notes"). The
terms of the New Notes and Old Notes are identical in all
material respects, except for certain transfer restrictions and
registration rights relating to the Old Notes.
The Exchange Offer......... The New Notes are being offered in exchange for a like principal
amount of Old Notes. Old Notes may be exchanged only in integral
multiples of $1,000. The issuance of the New Notes is intended
to satisfy obligations of the Company contained in the
Registration Rights Agreement.
Expiration Date; With-
drawal of Tender........... The Exchange Offer will expire 5:00 p.m. New York City time, on
1996, or such later date and time to which it is extended by the
Company. The tender of Old Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date. Any
Old Notes not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of
the Exchange Offer.
Certain Conditions to the
Exchange Offer............. The Company's obligation to accept for exchange, or to issue New
Notes in exchange for, any Old Notes is subject to certain
customary conditions relating to compliance with any applicable
law, order of any governmental agency or any applicable
interpretation by any staff of the Commission, which may be
waived by the Company in its reasonable discretion. The Company
currently expects that each of the conditions will be satisfied
and that no waivers will be necessary. See "The Exchange
Offer--Certain Conditions to the Exchange Offer."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such Old Notes and
any other required documentation, to the Exchange Agent (as
defined) at the address set forth herein. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Use of Proceeds............ There will be no proceeds to the Company from the exchange of
Notes pursuant to the Exchange Offer.
Exchange Agent............. SunTrust Bank, Atlanta is serving as the Exchange Agent in
connection with the Exchange Offer.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Federal Income Tax
Consequences............... The exchange of Notes pursuant to the Exchange Offer will not be
a taxable event for federal income tax purposes. See "Certain
Federal Income Tax Considerations."
</TABLE>
CONSEQUENCES OF EXCHANGING OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, holders of Old Notes (other than any
holder who is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) who exchange their Old Notes for New Notes pursuant to the
Exchange Offer generally may offer such New Notes for resale, resell such New
Notes, and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
such New Notes are acquired in the ordinary course of the holder's business and
such holders have no arrangement with any person to participate in a
distribution of such New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied with.
The Company has agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the New
Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Notes reasonably requests in writing. If a
holder of Old Notes does not exchange such Old Notes for New Notes pursuant to
the Exchange Offer, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Holders of Old Notes do not
have any appraisal or dissenters' rights under Delaware General Corporation Law
in connection with the Exchange Offer. See "The Exchange Offer--Consequences of
Failure to Exchange; Resales of New Notes."
The Old Notes are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") market. Following
commencement of the Exchange Offer but prior to its consummation, the Old Notes
may continue to be traded in the PORTAL market. Following consummation of the
Exchange Offer, the New Notes will not be eligible for PORTAL trading.
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. For purposes of this Prospectus, the term "Notes" shall refer
collectively to the New Notes and the Old Notes.
<TABLE>
<S> <C>
Issuer..................... Simmons Company.
Securities Offered......... $100,000,000 principal amount of 103/4% Series A Senior Subordi-
nated Notes due 2006 (the "New Notes").
Maturity................... April 15, 2006.
Interest Payment Dates..... April 15 and October 15 of each year, commencing on October 15,
1996.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Optional Redemption........ Except as described below, the Company may not redeem the New
Notes prior to April 15, 2001. On or after such date, the
Company may redeem the New Notes, in whole or in part, at the
redemption prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption. In addition,
at any time on or prior to April 15, 1999, the Company may
redeem up to 33 1/3% of the original aggregate principal amount
of the Notes with the net cash proceeds of one or more Public
Equity Offerings (as defined) by the Company or Holdings
following which there is a Public Market (as defined) at a
redemption price equal to 110.75% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to
the date of redemption, provided that at least 66 2/3% of the
original aggregate principal amount of the Notes remains
outstanding immediately after each such redemption. See
"Description of Notes-- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control (as defined), (i) the
Company will have the option, at any time on or prior to April
15, 2001, to redeem the New Notes in whole but not in part at a
redemption price equal to 100% of the principal amount thereof
plus the Applicable Premium as of, and accrued and unpaid
interest, if any, to, the date of redemption, and (ii) if the
Company does not so redeem the New Notes or if such Change of
Control occurs after April 15, 2001, the Company will be
required to make an offer to repurchase the New Notes at a price
equal to 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase.
The Senior Credit Facility prohibits the purchase of the New
Notes by the Company in the event of a Change of Control, unless
and until such time as the indebtedness under the Senior Credit
Facility is repaid in full, and there can be no assurance that
the Company would have sufficient assets to satisfy all of its
obligations under the Senior Credit Facility and the New Notes.
See "Description of Notes--Change of Control."
Ranking.................... The New Notes will be unsecured and will be subordinated to all
existing and future Senior Indebtedness (as defined) of the
Company, including indebtedness under the Senior Credit
Facility. The New Notes will rank pari passu with any future
Senior Subordinated Indebtedness (as defined) of the Company and
will rank senior to all other subordinated indebtedness of the
Company. The New Notes will be effectively subordinated to the
claims of creditors, including trade creditors and preferred
shareholders (if any), of the Company's existing subsidiaries
and any subsidiary formed by the Company in the future. See
"Description of Notes--Ranking."
Restrictive Covenants...... The indenture under which the New Notes will be issued (the
"Indenture") will limit (i) the incurrence of additional
indebtedness by the Company, (ii) the payment of dividends on,
and redemption of, capital stock of the Company and the
redemption of certain subordinated obligations of the Company,
(iii) investments, (iv) sales of assets and subsidiary stock,
(v) transactions with affiliates, (vi) the creation of liens,
(vii) the lines of business in which the Company may operate and
(viii) consolidations, mergers and transfers of all or
substantially
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
all of the Company's assets. The Indenture also will prohibit
certain restrictions on distributions from subsidiaries.
However, all of these limitations and prohibitions are subject
to a number of important qualifications and exceptions. See
"Description of Notes--Certain Covenants."
Absence of a
Public Market for the
New Notes................ The New Notes are new securities and there is currently no
established market for the New Notes. Accordingly, there can be
no assurance as to the development or liquidity of any market
for the New Notes. The Company does not intend to apply for
listing of the New Notes on a securities exchange.
</TABLE>
RISK FACTORS
Holders of Old Notes should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" in connection with the Exchange Offer.
8
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth summary historical financial and other data
of the Company for the five years ended December 30,1995 and for the quarters
ended April 1, 1995 and March 30, 1996 and certain pro forma financial and other
data for the year ended December 30, 1995 and quarter ended March 30, 1996. The
pro forma statement of operations data assume that the Acquisition and the
Offering of Notes (the "Offering") occurred on January 1, 1995. The pro forma
financial and other data do not purport to represent what the Company's results
of operations would actually have been had the Transactions (as defined in the
Pro Forma Condensed Consolidated Financial Data included elsewhere in this
Prospectus) in fact occurred on the assumed dates or to project the Company's
results of operations for any future date or period. For additional information,
see the Consolidated Financial Statements and Pro Forma Condensed Consolidated
Financial Data included elsewhere in this Prospectus. The following table should
also be read in conjunction with "Selected Historical and Pro Forma Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------------- QUARTER
ENDED
PREDECESSOR -----------
------------------------------------------------------------------------ PRO FORMA PREDECESSOR
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 30, APRIL 1,
1991 (A) 1992 (A) 1993 (A) 1994 (A) 1995 1995 (B) 1995
------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales.......... $313,180 $336,949 $391,382 $439,689 $489,815 $489,815 $ 108,653
Cost of products
sold............... ]198,904 209,189 240,125 269,741 292,825 292,750(c) 67,104
Gross profit....... 114,276 127,760 151,257 169,948 196,990 197,065 41,549
Selling, general
and administrative
expenses........... 98,531 102,943 124,452 137,791 161,202 161,202 37,518
Non-cash ESOP
expense(d)......... 12,541 14,007 14,000 4,463 4,533 4,625 1,133
Amortization of
intangible
assets............. 5,734 5,732 5,724 5,753 5,753 7,648 1,438
Interest expense,
net(e)............. 15,308 10,352 8,105 8,197 8,185 19,068 1,929
Income (loss)
before taxes,
extraordinary item
and change in
accounting
principle.......... (18,635) (6,786) (1,784) 11,227 16,917 2,952(f) (666)
Net income
(loss)............. (17,991) (12,469) (3,319) 7,994 9,411 636(g) (370)
OTHER DATA:
Gross margin....... 36.5% 37.9% 38.6% 38.7% 40.2% 40.2% 38.2%
EBITDA(h).......... $ 18,326 $ 26,720 $ 29,236 $ 33,981 $ 39,577 $ 39,407 $ 4,847
EBITDA margin...... 5.9% 7.9% 7.5% 7.7% 8.1% 8.0% 4.5%
Depreciation....... $ 3,168 $ 3,227 $ 3,141 $ 3,496 $ 4,027 $ 4,327 $ 973
Capital
expenditures....... 2,602 3,659 4,972 4,496 5,834 5,834 163
Cash interest
expense(i)......... 13,942 8,564 6,158 7,093 6,488 18,297 1,688
Ratio of EBITDA to
cash interest
expense(i)......... 1.3x 3.1x 4.7x 4.8x 6.1x 2.2x (i)
Ratio of EBITDA
less capital
expenditures to
cash interest
expense(i)......... 1.1x 2.7x 3.9x 4.2x 5.2x 1.8x (i)
Ratio of earnings
to fixed
charges(j)......... (j) (j) (j) 1.9x 2.4x 1.1x (j)
Inventory
turnover(k)........ 12.3x 15.5x 16.3x 16.8x 17.2x 17.2x 4.0x
STATEMENT OF CASH
FLOWS DATA(L):
Net cash provided
by (used in)
operating
activities......... $ 8,118 $ 13,559 $ 18,002 $ 34,380 $ 28,513 $ 13,471
Net cash provided
by (used in)
investing
activities......... (2,433) 2,628 (4,718) (4,195) (5,834) (163)
Net cash provided
by (used in)
financing
activities......... (4,045) (10,620) (9,508) (32,864) (22,030) (14,813)
<CAPTION>
COMBINED PRO FORMA
MARCH 30, MARCH 30,
1996(B) 1996(B)
--------- ------------
<S> <C> <C>
STATEMENT OF OPERAT
Net sales.......... $ 119,317 $119,317
Cost of products
sold............... 75,672 74,655(c)
Gross profit....... 43,645 44,662
Selling, general
and administrative
expenses........... 40,472 40,472
Non-cash ESOP
expense(d)......... 1,312 1,312
Amortization of
intangible
assets............. 1,442 1,897
Interest expense,
net(e)............. 1,950 4,761
Income (loss)
before taxes,
extraordinary item
and change in
accounting
principle.......... (5,936) (4,367)(f)
Net income
(loss)............. (3,907) (3,079)(g)
OTHER DATA:
Gross margin....... 36.6% 37.4%
EBITDA(h).......... $ 4,945 $ 4,845
EBITDA margin...... 4.1% 4.1%
Depreciation....... $ 970 $ 1,038
Capital
expenditures....... 1,567 1,567
Cash interest
expense(i)......... 1,583 4,566
Ratio of EBITDA to
cash interest
expense(i)......... (i) (i)
Ratio of EBITDA
less capital
expenditures to
cash interest
expense(i)......... (i) (i)
Ratio of earnings
to fixed
charges(j)......... (j) (j)
Inventory
turnover(k)........ 4.2x 4.2x
STATEMENT OF CASH
FLOWS DATA(L):
Net cash provided
by (used in)
operating
activities......... $ (7,848)
Net cash provided
by (used in)
investing
activities......... (176,182)
Net cash provided
by (used in)
financing
activities......... 182,947
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
AS OF
MARCH 30,
PREDECESSOR AS OF 1996
------------------------------------------------------------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30,
1991 1992 1993 1994 1995 ACTUAL
------------ ------------ ------------ ------------ ------------ ---------
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 2,205 $ 7,581 $ 11,280 $ 8,477 $ 9,185 $ 8,111
Working capital, excluding current
maturities of long-term debt and
capitalized lease obligations(m)...... 8,955 10,366 25,460 23,077 20,171 27,176
Total assets.......................... 246,634 245,158 272,533 249,891 254,492 349,706
Total debt, including current
maturities............................ 164,104 149,421 141,976 109,435 93,768 191,229
Redeemable preferred stock(n)......... 500 548 592 641 680 --
Series A Preferred Stock--ESOP(o)..... -- -- -- -- -- 28,352
Unearned compensation--ESOP(o)........ -- -- -- -- -- (28,243)
Redeemable common stock--ESOP, net of
related unearned compensation(p)..... 2,887 4,720 11,418 23,238 32,272 --
Total common stockholders' equity..... 32,714 34,042 37,878 41,936 44,372 81,530
<CAPTION>
<S> <C>
ADJUSTED FOR
THE OFFERING
------------
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 8,111
Working capital, excluding current
maturities of long-term debt and
capitalized lease obligations(m)...... 27,176
Total assets.......................... 350,925
Total debt, including current
maturities............................ 195,229
Redeemable preferred stock(n)......... --
Series A Preferred Stock--ESOP(o)..... 28,352
Unearned compensation--ESOP(o)........ (28,243)
Redeemable common stock--ESOP, net of
related unearned compensation(p)..... --
Total common stockholders' equity..... 79,863(q)
</TABLE>
See Notes to Summary Financial and Other Data.
9
<PAGE>
NOTES TO SUMMARY FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
(a) Certain amounts have been reclassified to be consistent with the Company's current reporting
format.
(b) As a result of the Acquisition, the Company's assets and liabilities were adjusted to reflect their
preliminary estimated fair values as of March 22, 1996. In addition, the Company entered into new
financing arrangements and has changed its capital structure. Accordingly, the results of future
periods will not be comparable to the prior historical periods presented. The pro forma financial
data reflects these changes as if the Transactions (as defined) had been consummated on January 1,
1995. The Combined period for 1996 represents the mathematical addition of the historical amounts
for the Predecessor period (December 31, 1995 to March 21, 1996) and the Successor period (March
22, 1996 to March 30, 1996) and are not indicative of results that would have been obtained had the
Acquisition occurred on December 31, 1995. For information regarding these periods separately, see
the Condensed Consolidated Financial Statements included elsewhere in this Prospectus.
(c) Excludes the charge of $1,000 related to the write-up of inventory to its estimated fair value as a
result of the Acquisition.
(d) Represents the non-cash charge resulting from the allocation of shares held by the Simmons ESOP to
participant accounts as they are earned. Amounts charged in 1991, 1992 and 1993 were based on the
1989 acquisition price. In 1994, the Company changed its method of accounting, resulting in the
fair value of the underlying stock becoming the basis for the annual expense as opposed to the
original cost. (See "The Simmons ESOP" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
(e) Interest expense, net includes the amortization of deferred debt issuance costs and is net of
interest income of $210, $188, $50, $845 and $162 for 1991, 1992, 1993, 1994 and 1995,
respectively, $162 for the pro forma year ended December 30, 1995, $40 and $39 for the first
quarter ended 1995 and 1996, respectively and $39 for the pro forma first quarter 1996.
(f) Excludes a compensation charge of $3,735 for amounts payable to management in connection with the
Acquisition. See "Certain Transactions."
(g) Excludes the following incurred in connection with the Acquisition: (i) the compensation charge of
$3,735 for amounts payable to management, (ii) the charge of $1,000 related to the write-up of
inventory to its estimated fair value, (iii) the charge of $350 for non-recurring fees, (iv) the
$2,781 write-off of the Subordinated Loan Facility financing fees as a result of the Offering and
(v) the related income tax benefits of $3,146.
(h) 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 pro forma year ended December 30, 1995 and for the combined and
pro forma quarters ended March 30, 1996, excludes amortization of the prepaid management fee of
$1,000, $83 and $250, respectively, in connection with the Acquisition, 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, and excludes the credit of
$375, $0 and $85, respectively, for the amortization of the reserve for unfavorable lease
commitments. The Company has included information concerning EBITDA as it is relevant for covenant
analysis under the Indenture, which defines EBITDA as set forth above for the periods shown. See
"Description of Notes--Certain Definitions." In addition, 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.
(i) Cash interest expense is defined as interest expense less amortization of debt issuance costs and
other non-cash interest expense for 1991, 1992, 1993, 1994, 1995 and for the first quarters ended
1995 and 1996. This calculation of interest expense differs from that specified for Consolidated
Interest Expense under the Indenture, which includes amortization of debt issuance costs and
non-cash interest expense. Similarly, the ratio of EBITDA to cash interest expense differs from the
Consolidated Coverage Ratio under the indenture, which utilizes Consolidated Interest Expense as
its denominator. See "Description of Notes--Certain Definitions." Management believes that the
ratio of EBITDA to cash interest expense and the ratio of EBITDA less capital expenditures to cash
interest expense are generally accepted as useful information regarding a company's ability to
service and/or incur debt. The ratio of EBITDA to cash interest expense and the ratio of EBITDA
less capital expenditures to cash interest expense are not applicable to the quarterly periods.
(j) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income
before income taxes and fixed charges. Fixed charges consist of interest expense, which includes
the amortization of deferred debt issuance costs and the interest portion of the Company's rent
expense (assumed to be one-third of total rent expense). Earnings were insufficient to cover fixed
charges for 1991, 1992, 1993, first quarter 1995, combined first quarter 1996 and pro forma first
quarter 1996 by $18,688, $6,856, $1,861, $666, $5,936 and $4,717, respectively.
(k) Inventory turnover is defined as cost of products sold divided by average inventory.
(l) For more information regarding the Statement of Cash Flows Data see the Consolidated Financial
Statements included elsewhere in this Prospectus.
(m) Represents total current assets (excluding cash and cash equivalents) less total current
liabilities, excluding current maturities of long-term debt and capital lease obligations.
(n) This stock was issued in connection with the recapitalization of the Company in 1991 and was called
for redemption in connection with the Acquisition.
(o) The Series A Preferred Stock was issued to the Simmons ESOP in connection with the Acquisition (See
"The Acquisition"). The Series A Preferred Stock is required to be recorded at the greater of
redemption value or fair value. The Series A Preferred Stock will be recorded at its redemption
value. In addition, unearned compensation was recorded on the Acquisition Closing Date in an amount
representing the redemption value of the Series A Preferred Stock that will be allocated to
participant accounts over future periods. The unearned compensation is classified outside of common
stockholder's equity since it is related to the Series A Preferred Stock. (See "Managment's
Discussion and Analysis of Financial Condition and Results of Operations.")
(p) 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, 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 in the predecessor financial
statements.
(q) Includes the following charges incurred in connection with the Transactions: (i) the compensation
charge of $3,735 for amounts payable to management, (ii) the charge of $350 for non-recurring fees,
(iii) the $2,781 write-off of the Subordinated Loan Facility financing fees as a result of the
Offering and (iv) the related tax benefits of $2,746.
</TABLE>
10
<PAGE>
RISK FACTORS
In evaluating an investment in the New Notes, prospective investors should
carefully consider the following risk factors as well as the other information
set forth elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company incurred substantial indebtedness in connection with the
Acquisition. As adjusted for the offering of the Notes (the "Offering") and the
application of the net proceeds therefrom, at March 30, 1996, the Company's
total indebtedness would have been $195.2 million (exclusive of unused
commitments), and the Company would have had common stockholder's equity of
$79.9 million. The degree to which the Company is leveraged could have important
consequences to holders of the New Notes, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on the New Notes and its other existing indebtedness,
thereby reducing the funds available to the Company for other purposes; (iii)
the agreements governing the Company's long-term indebtedness contain certain
restrictive financial and operating covenants; (iv) all of the indebtedness
outstanding under the Senior Credit Facility will be secured by substantially
all the assets of the Company and will become due prior to the time the
principal on the New Notes will become due; (v) the Company is substantially
more leveraged than certain of its competitors, which might place the Company at
a competitive disadvantage; (vi) the Company may be hindered in its ability to
adjust rapidly to changing market conditions; and (vii) the Company's
substantial degree of leverage could make it more vulnerable in the event of a
downturn in general economic conditions or in its business. In addition,
approximately $35.0 million of term loan indebtedness and all amounts
outstanding under the revolving credit facility under the Senior Credit Facility
currently bear interest at variable rates. The Company has effectively fixed the
interest rate on approximately $40.0 million of term loan indebtedness under the
Senior Credit Facility pursuant to interest rate swap agreements that expire in
approximately two years. As a result, the Company could be vulnerable to
increases in interest rates.
The Company may be required to refinance all or a portion of the Senior
Credit Facility at or prior to its maturity, which is prior to the maturity of
the New Notes. Potential measures to raise cash may include the sale of assets
or equity. However, the Company's ability to raise funds by selling assets is
restricted by the Senior Credit Facility, and its ability to effect equity
financings is dependent on results of operations and market conditions. In the
event that the Company is unable to refinance the Senior Credit Facility or
raise funds through asset sales, sales of equity or otherwise, its ability to
pay principal of and interest on the New Notes would be adversely affected.
SUBORDINATION OF NOTES; ASSET ENCUMBRANCE
At March 30, 1996, as adjusted for the Offering (including the application
of net proceeds therefrom), the Company would have had $95.2 million of Senior
Indebtedness outstanding (exclusive of unused commitments), including $84.4
million of Senior Indebtedness that will be incurred under the Senior Credit
Facility. The Indenture permits the Company to incur additional Senior
Indebtedness, provided certain financial or other conditions are met. The New
Notes will be subordinated in right of payment to all existing and future Senior
Indebtedness, including the principal, premium (if any) and interest with
respect to the Senior Indebtedness under the Senior Credit Facility. The New
Notes will rank pari passu with all future Senior Subordinated Indebtedness of
the Company and will rank senior to all other subordinated indebtedness (if any)
of the Company. However, the New Notes will be effectively subordinated to the
claims of creditors, including trade creditors and preferred shareholders (if
any), of the Company's existing subsidiaries and any subsidiary formed by the
Company in the future.
11
<PAGE>
The Company may not pay principal of, premium on (if any), or interest on,
the New Notes, make any deposit pursuant to defeasance provisions or repurchase
or redeem or otherwise retire any New Notes (i) if any Senior Indebtedness is
not paid when due or (ii) if any other default on Senior Indebtedness occurs and
the maturity of such Senior Indebtedness is accelerated in accordance with its
terms, unless, in either case, the default has been cured or waived, any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full, except that the Company may pay the New Notes upon the approval of the
Representative of the relevant Designated Senior Indebtedness (as defined in the
Indenture). In addition, if any other default exists with respect to the
Designated Senior Indebtedness and certain other conditions are satisfied, the
Company may not make any payments on the New Notes for up to 179 days. Upon any
payment or distribution of the assets of the Company in connection with a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Notes are entitled to receive
any payment. See "Description of Notes--Ranking."
The New Notes are also unsecured and thus, in effect, will rank junior to
any secured indebtedness of the Company. The indebtedness outstanding under the
Senior Credit Facility will be secured by liens on substantially all of the
assets of the Company. The ability of the Company to comply with the provisions
of the Senior Credit Facility may be affected by events beyond the Company's
control. The breach of any of these covenants could result in a default under
the Senior Credit Facility, in which case, depending on the actions taken by the
lenders thereunder or their successors or assignees, such lenders could elect to
declare all amounts borrowed under the Senior Credit Facility, together with
accrued interest, to be due and payable, and the Company could be prohibited
from making payments of interest and principal on the New Notes until the
default is cured or all Senior Indebtedness is paid or satisfied in full. If the
Company were unable to repay such borrowings, such lenders could proceed against
their collateral. If the indebtedness under the Senior Credit Facility were to
be accelerated, there can be no assurance that the assets of the Company would
be sufficient to repay in full such indebtedness and the other indebtedness of
the Company, including the New Notes. See "Capital Structure--Senior Credit
Facility" and "Description of Notes--Ranking."
RESTRICTIVE COVENANTS IN SENIOR CREDIT FACILITY; SUBORDINATION OF NOTES
The Senior Credit Facility includes certain covenants that, among other
things, restrict (i) the making of investments, loans and advances and the
paying of dividends and other restricted payments; (ii) the incurrence of
additional indebtedness; (iii) the granting of liens, other than liens created
pursuant to the Senior Credit Facility and certain permitted liens; (iv)
mergers, consolidations, and sales of all or a substantial part of the Company's
business or property; (v) the sale of assets; and (vi) the making of capital
expenditures. The Senior Credit Facility also requires the Company to maintain
certain financial ratios, including interest coverage and leverage ratios, and
to maintain a minimum level of consolidated cash flow. There can be no assurance
that these requirements will be met in the future. If they are not, the holders
of the indebtedness under the Senior Credit Facility would be entitled to
declare such indebtedness immediately due and payable. See "Capital
Structure--Senior Credit Facility."
CONTROL BY CIP LIMITED, INVESTCORP AND ITS AFFILIATES
The outstanding voting stock of Holdings is 92% controlled by CIP Limited
through revocable proxies with respect to companies that indirectly own Holdings
stock, and 8% controlled by SIPCO Limited through its control of Investcorp. CIP
Limited and SIPCO Limited are affiliates of Investcorp. Accordingly, CIP Limited
and its affiliates indirectly control the power to vote approximately 84.9% of
the outstanding voting stock of the Company and thereby, subject to certain
rights of the Simmons ESOP, are entitled to elect all directors of the Company,
approve all amendments to the
12
<PAGE>
Company's Certificate of Incorporation and effect fundamental corporate
transactions such as mergers and asset sales. In addition, Investcorp or its
affiliates have revocable management services or similar agreements with
Holdings and with entities controlled by CIP Limited that together control
Holdings, pursuant to which Investcorp or its affiliates may be deemed to share
control of the Company. See "Ownership of Voting Securities."
CHANGE OF CONTROL
A Change of Control (as defined in the Indenture) could require the Company
to refinance substantial amounts of indebtedness. Upon the occurrence of a
Change of Control, the holders of the New Notes would be entitled to require the
Company to repurchase the New Notes at a purchase price equal to 101% of the
principal amount of such New Notes, plus accrued and unpaid interest, if any, to
the date of purchase. However, the Senior Credit Facility prohibits the purchase
of the New Notes by the Company in the event of a Change of Control, unless and
until such time as the indebtedness under the Senior Credit Facility is repaid
in full. The Company's failure to purchase the New Notes would result in a
default under the Indenture and the Senior Credit Facility. The inability to
repay the indebtedness under the Senior Credit Facility, if accelerated, would
also constitute an event of default under the Indenture, which could have
adverse consequences to the Company and the holders of the New Notes. In the
event of a Change of Control, there can be no assurance that the Company would
have sufficient assets to satisfy all of its obligations under the Senior Credit
Facility and the New Notes. See "Capital Structure--Senior Credit Facility" and
"Description of Notes--Change of Control."
FRAUDULENT CONVEYANCE
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a
debtor-in-possession, were to find under relevant federal or state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for incurring certain of the indebtedness, including
the Old Notes and the New Notes exchanged therefore, incurred by the Company in
connection with the Acquisition, and that, at the time of such incurrence, the
Company (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence or grant, (iii) was engaged in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court, subject to applicable
statutes of limitation, could void the Company's obligations under the Notes,
subordinate the Notes to other indebtedness of the Company or take other action
detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could void an
incurrence of indebtedness, including the Notes, if it determined that such
transaction was made with intent to hinder, delay or defraud creditors, or a
court could subordinate the indebtedness, including the Notes, to the claims of
all existing and future creditors on similar grounds.
There can be no assurance as to what standard a court would apply in order
to determine whether the Company was "insolvent" upon consummation of the
Acquisition or the sale of the Old Notes or that, regardless of the method of
valuation, a court would not determine that the Company was insolvent upon
consummation of the Acquisition.
13
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its Chairman of the Board of Directors and Chief
Executive Officer, Zenon Nie. The loss of the services of Mr. Nie could have a
material adverse effect on the Company's business and future operations. The
Company and Mr. Nie have entered into a three-year employment agreement (which
renews automatically on a daily basis, subject to termination upon three years'
notice). In addition, the Company maintains a $10 million key man life insurance
policy with respect to Mr. Nie and is the beneficiary of this policy. See
"Management -- Employment Arrangements."
DEPENDENCE ON MAJOR SUPPLIER
The Company purchases certain components used in the manufacture of its
products from Leggett & Platt ("L&P"). L&P, which supplies spring components as
well as other metal and wood components used in the manufacturing of mattresses
by the Company, provided approximately one-third of the Company's total
estimated raw material requirements in 1995 and is expected to provide a
comparable portion of such requirements in 1996. For certain continuous wire and
foundation components, alternative sources may not be readily available and the
loss of this vendor as a supplier could result in an interruption of supply,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Suppliers."
IMPACT OF HIGHLY COMPETITIVE MARKET
The domestic conventional bedding market is highly competitive. Competition
in conventional bedding generally is based upon product quality, brand name
recognition, price, service and prompt delivery. The Company's principal
competitors include Sealy Corporation, Serta, Inc. and Spring Air Company. The
Company also competes with Restonic Sleep Products, King Koil Bedding,
Englander, Bassett and many small, local manufacturers. Certain of the Company's
competitors have greater financial resources than the Company, have larger
customer bases and are less leveraged. See "Business--Industry and Competition."
UNION NEGOTIATIONS
As of March 30, 1996, the Company had approximately 2,600 employees, of
which approximately 1,140 were represented by labor unions. Employees at nine of
the Company's 18 manufacturing facilities are represented by unions.
Manufacturing employees at seven of the unionized plants are covered by a master
collective bargaining agreement with the Upholstery Division of the United
Steelworkers. There are also agreements with other unions. A majority of the
Company's current labor contracts expire in 1997. Union contracts typically are
negotiated for three-year terms. Since 1980, the Company has opened eight new
plants, none of which is unionized. There can be no assurance, however, that any
labor union efforts to organize employees at facilities that are not currently
unionized might not be successful.
The Company is phasing in a re-engineering project at each of the Company's
conventional manufacturing facilities to increase overall efficiency and improve
the flow of production by changing the layout of the factory floor, changing
certain factory job descriptions and providing incentive compensation for
factory workers. The Company expects to complete the project by early 1998. The
implementation of the changes associated with this project will raise issues
regarding job descriptions and incentive compensation that will require
negotiation with the labor unions that represent employees at nine of the
Company's 18 manufacturing facilities. Although the Company's labor relations
historically have been good, there can be no assurance that the Company will
succeed in obtaining the labor unions' cooperation in implementing the
re-engineering project or that disagreements with unions in connection with the
re-engineering project or otherwise will not arise. See "Business--Manufacturing
and Facilities" and "--Employees."
14
<PAGE>
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The New Notes are new securities for which there currently is no market.
Although the Initial Purchaser has been making a market in the Old Notes and has
informed the Company that it currently intends to make a market in the New
Notes, it is not obligated to do so and any such market making may be
discontinued at any time without notice. In addition, such market making
activity may be limited during the pendency of the Exchange Offer. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the New Notes. The Old Notes currently are eligible for trading by qualified
buyers in the PORTAL market and the Company does not intend to apply for listing
of the New Notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation System.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
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 ACQUISITION
On the Acquisition Closing Date, Holdings, 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 for (i) a purchase
price of $253.2 (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 Simmons 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. 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 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, a portion of which was provided by an
affiliate of the Initial Purchaser and an affiliate of Investcorp. See "Certain
Transactions." Holdings has no assets or investments other than the shares of
common stock of the Company. The Subordinated Loan Facility was repaid on April
18, 1996 with the net proceeds of the issuance of the Old Notes, together with
borrowings under the Senior Credit Facility.
In connection with the Acquisition, the Simmons ESOP sold 6,001,257 shares
of common stock of the Company for $31.2 million in cash, and converted each of
the remaining 5,670,406 shares of common stock of the Company 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, the Series
A Preferred Stock, at the option of the holders thereof, may be redeemed for
$5.00 per share or, following conversion into common stock of the Company,
exchanged for shares of Holdings' capital stock. In addition, 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. If so
converted into common stock of the
15
<PAGE>
Company or Holdings, the common stock received by the Simmons ESOP upon
conversion 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). See
"Ownership of Voting Securities--Stockholders' Agreement" and "Capital
Structure--Preferred Stock." In certain circumstances and subject to certain
limitations, the Simmons ESOP also has a statutory right, upon termination of a
participant's employment, to require the Company to redeem stock that has been
allocated to such participant. See "Management--Retirement Plans--Simmons ESOP."
THE SIMMONS ESOP
In January 1989, the Simmons ESOP was established to purchase all of the
Company's then outstanding common stock (the "ESOP Purchase"). The ESOP Purchase
was funded through $249.0 million of debt and preferred stock issued by the
Company (the "Company ESOP Obligation"). Of this amount, the Company loaned the
Simmons ESOP $241.5 million for the purchase of all of the Company's common
stock then outstanding (the "ESOP Loan"). The $249.0 million Company ESOP
Obligation was an "external" obligation of the Company and the $241.5 million
ESOP Loan was an "internal" obligation that the Simmons ESOP owed to the
Company. As of the Acquisition Closing Date, the internal ESOP Loan had been
reduced to approximately $61.2 million, in part due to forgiveness in 1992 of a
substantial portion of the internal obligation. Any outstanding amounts with
respect to the external Company ESOP Obligation were repaid in connection with
the Acquisition.
The Company will make annual cash contributions to the Simmons ESOP in an
amount up to 25% of eligible participant compensation, subject to certain
limitations and conditions. The Simmons 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 contributions to the Simmons 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 compensation expense equal to the
fair value of the allocated shares will be charged to non-cash ESOP expense. At
such time as the internal ESOP Loan is repaid in full (in approximately six
years), all shares of Series A Preferred Stock held by the Simmons ESOP will
have been allocated to plan participants. See "Management--Retirement
Plans--Simmons ESOP."
Approximately 1,400 of the Company's current and former employees are
participants in the Simmons ESOP. On the Acquisition Closing Date, the Simmons
ESOP sold 6,001,257 of its shares to Holdings (representing all the shares held
by the Simmons 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 plan participants in
the Simmons ESOP. See "Management--Retirement Plans--Simmons ESOP."
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Notes pursuant
to the Exchange Offer.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
30, 1996 as reported in the unaudited condensed consolidated financial
statements and as adjusted to give effect to the Offering and the application of
the net proceeds therefrom, as described under "Use of Proceeds." This table
should be read in conjunction with the "Selected Historical and Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 30, 1996
-------------------------
<S> <C> <C>
ADJUSTED
FOR
ACTUAL THE OFFERING
-------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 8,111 $ 8,111
-------- ------------
-------- ------------
Debt:
Revolving credit facility (a)(b)................................. $ -- $ 9,408
Term loans, including current maturities (a)(b).................. 60,000 75,000
103/4% Series A Senior Subordinated Notes due 2006............... -- 100,000
Subordinated Loan Facility....................................... 100,000 --
Adjustable rate subordinated notes (a)........................... 20,408 --
Industrial revenue bonds due 2017 (c)............................ 9,700 9,700
Other, including capital lease obligations....................... 1,121 1,121
-------- ------------
Total debt..................................................... 191,229 195,229
-------- ------------
Series A Preferred Stock issued to the Simmons ESOP (d)............ 28,352 28,352
-------- ------------
Unearned compensation under ESOP (e)............................... (28,243) (28,243)
-------- ------------
Common stockholder's equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
31,964,452 outstanding............................................. 320 320
Additional paid-in capital....................................... 84,680 84,680
Accumulated deficit.............................................. (3,468) (5,137)(f)
Foreign currency translation adjustment.......................... (2) (2)
-------- ------------
Total common stockholder's equity.............................. 81,530 79,863
-------- ------------
Total capitalization........................................... $272,868 $275,207
-------- ------------
-------- ------------
</TABLE>
- ------------
<TABLE>
<S> <S>
(a) Reflects the redemption of the adjustable rate subordinated notes subsequent to March
30, 1996 with the proceeds of an additional $15 million in term loan borrowings under
the Senior Credit Facility and funds from the revolving credit facility under the
Senior Credit Facility.
(b) See "Capital Structure--Senior Credit Facility" for a description of the revolving
credit facility and term loans under the Senior Credit Facility.
(c) The industrial revenue bonds bear interest at a fixed rate of 7.0% per annum and mature
on October 1, 2017.
(d) See "Capital Structure--Preferred Stock" for a description of the Series A Preferred
Stock.
(e) Represents the redemption value of the unallocated shares of Series A Preferred Stock
issued in connection with the Acquisition held by the Simmons ESOP, which will be
recognized as compensation expense as such shares are earned and allocated to
participant accounts. See "The Simmons ESOP" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for further description.
(f) Reflects the write-off of $2,781,000 of deferred financing costs directly related to
the Subordinated Loan Facility that is being refinanced with the proceeds of the
Offering and the related income tax benefit of $1,112,000.
</TABLE>
17
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected historical financial and other data
of the Company for the five years ended December 30, 1995 and for the quarters
ended April 1, 1995 and March 30, 1996 and certain pro forma financial and other
data for the year ended December 30, 1995 and quarter ended March 30, 1996. The
pro forma statement of operations data assume that the Acquisition and the
Offering occurred on January 1, 1995.
The selected historical financial data for the five years ended December 30,
1995 and for the quarters ended April 1, 1995 and March 30, 1996 were derived
from the Company's Consolidated Financial Statements. The pro forma financial
and other data were derived from Pro Forma Condensed Consolidated Financial Data
included elsewhere in this Prospectus that give effect to the Transactions (as
defined in the Pro Forma Condensed Consolidated Financial Data included
elsewhere in this Prospectus). The pro forma adjustments were based upon
available information and certain assumptions that management believes are
reasonable. The pro forma financial information does not purport to represent
what the Company's results of operations would actually have been had the
Transactions in fact occurred on such date or to project the Company's results
of operations for any future date or period. The pro forma adjustments are based
on the purchase method of accounting and reflect a preliminary estimate of the
allocation of the purchase cost incurred in connection with the Acquisition to
the assets and liabilities of the Company.
For additional information, see the Pro Forma Condensed Consolidated
Financial Data included elsewhere in this Prospectus. The following table should
also be read in conjunction with "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." For the reports
by the Company's independent accountants with respect to historical financial
information, see "Index to Consolidated Financial Statements."
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED ENDED
--------------------------------------------------------------------------------------- -----------
PREDECESSOR
------------------------------------------------------------------------
PRO FORMA PREDECESSOR
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 30, APRIL 1,
1991 (A) 1992 (A) 1993 (A) 1994 (A) 1995 1995 (B) 1995
------------ ------------ ------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............. $313,180 $336,949 $391,382 $439,689 $489,815 $489,815 $ 108,653
Cost of products
sold................... 198,904 209,189 240,125 269,741 292,825 292,750(c) 67,104
------------ ------------ ------------ ------------ ------------ ------------ -----------
Gross profit........... 114,276 127,760 151,257 169,948 196,990 197,065 41,549
Selling, general and
administrative
expenses............... 98,531 102,943 124,452 137,791 161,202 161,202 37,518
Non-cash ESOP expense
(d).................... 12,541 14,007 14,000 4,463 4,533 4,625 1,133
Amortization of
intangible assets...... 5,734 5,732 5,724 5,753 5,753 7,648 1,438
Interest expense, net
(e).................... 15,308 10,352 8,105 8,197 8,185 19,068 1,929
Other deductions,
net.................... 797 1,512 760 2,517 400 1,570(f) 197
------------ ------------ ------------ ------------ ------------ ------------ -----------
Income (loss) before
taxes, extraordinary
item and change in
accounting principle... (18,635) (6,786) (1,784) 11,227 16,917 2,952 (666)
Provision for income
taxes (benefit)....... -- 483 1,043 3,233 7,506 2,316 (296)
------------ ------------ ------------ ------------ ------------ ------------ -----------
Income (loss) before
extraordinary item and
change in accounting
principle.............. (18,635) (7,269) (2,827) 7,994 9,411 636 (370)
Extraordinary item..... 644 -- -- -- -- -- --
Cumulative effect of
change in accounting
principle (g).......... -- (5,200) (492) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ -----------
Net income (loss)...... $(17,991) $(12,469) $ (3,319) $ 7,994 $ 9,411 $ 636(h) $ (370)
------------ ------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ ------------ -----------
OTHER DATA:
Gross margin........... 36.5% 37.9% 38.6% 38.7% 40.2% 40.2% 38.2%
EBITDA (i)............. $ 18,326 $ 26,720 $ 29,236 $ 33,981 $ 39,577 $ 39,407 $ 4,847
EBITDA margin.......... 5.9% 7.99% 7.5% 7.7% 8.1% 8.0% 4.5%
Depreciation........... $ 3,168 $ 3,227 $ 3,141 $ 3,496 $ 4,027 $ 4,327 $ 973
Capital expenditures... 2,602 3,659 4,972 4,496 5,834 5,834 163
Cash interest expense
(j).................... 13,942 8,564 6,158 7,093 6,488 18,297 1,688
Ratio of EBITDA to cash
interest expense
(j).................... 1.3x 3.1x 4.7x 4.8x 6.1x 2.2x (j)
Ratio of EBITDA less
capital expenditures
to cash interest
expense (j)............ 1.1x 2.7x 3.9x 4.2x 5.2x 1.8x (j)
Ratio of earnings to
fixed charges (k)..... (k) (k) (k) 1.9x 2.4x 1.1x (k)
Inventory turnover
(l).................... 12.3x 15.5x 16.3x 16.8x 17.2x 17.2x 4.0x
STATEMENT OF CASH FLOWS
DATA (M):
Net cash provided by
(used in) operating
activities............. $ 8,118 $ 13,559 $ 18,002 $ 34,380 $ 28,513 $ 13,471
Net cash provided by
(used in) investing
activities............. (2,433) 2,628 (4,718) (4,195) (5,834) (163)
Net cash provided by
(used in) financing
activities............. (4,045) (10,620) (9,508) (32,864) (22,030) (14,813)
<CAPTION>
COMBINED PRO FORMA
MARCH 30, MARCH 30,
1996 (B) 1996 (B)
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS
Net sales.............. $ 119,317 $119,317
Cost of products
sold................... 75,672 74,655 (c)
--------- ---------
Gross profit........... 43,645 44,662
Selling, general and
administrative
expenses............... 40,472 40,472
Non-cash ESOP expense
(d).................... 1,312 1,312
Amortization of
intangible assets...... 1,442 1,897
Interest expense, net
(e).................... 1,950 4,761
Other deductions,
net.................... 4,405 587 (f)
--------- ---------
Income (loss) before
taxes, extraordinary
item and change in
accounting principle... (5,936) (4,367 )
Provision for income
taxes (benefit)....... (2,029) (1,288 )
--------- ---------
Income (loss) before
extraordinary item and
change in accounting
principle.............. (3,907) (3,079 )
Extraordinary item..... -- --
Cumulative effect of
change in accounting
principle (g).......... -- --
--------- ---------
Net income (loss)...... $ (3,907) $ (3,079 )(h)
--------- ---------
--------- ---------
OTHER DATA:
Gross margin........... 36.6% 37.4 %
EBITDA (i)............. $ 4,945 $ 4,845
EBITDA margin.......... 4.1% 4.1 %
Depreciation........... $ 970 $ 1,038
Capital expenditures... 1,567 1,567
Cash interest expense
(j).................... 1,583 4,566
Ratio of EBITDA to cash
interest expense
(j).................... (j) (j )
Ratio of EBITDA less
capital expenditures
to cash interest
expense (j)............ (j) (j )
Ratio of earnings to
fixed charges (k)..... (k) (k )
Inventory turnover
(l).................... 4.2x 4.2x
STATEMENT OF CASH FLOWS
DATA (M):
Net cash provided by
(used in) operating
activities............. $ (7,848)
Net cash provided by
(used in) investing
activities............. (176,182)
Net cash provided by
(used in) financing
activities............. 182,947
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
AS OF
MARCH
PREDECESSOR AS OF 30, 1996
---------------------------------------------------------------------------- --------
DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30,
1991 1992 1993 1994 1995 ACTUAL
------------ ------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 2,205 $ 7,581 $ 11,280 $ 8,477 $ 9,185 $ 8,111
Working capital, excluding current
maturities of long-term debt and
capitalized lease obligations
(n)............................... 8,955 10,366 25,460 23,077 20,171 27,176
Total assets...................... 246,634 245,158 272,533 249,891 254,492 349,706
Total debt, including current
maturities........................ 164,104 149,421 141,976 109,435 93,768 191,229
Redeemable preferred stock (o).... 500 548 592 641 680 --
Series A Preferred Stock - ESOP
(p)............................... -- -- -- -- -- 28,352
Unearned compensation - ESOP
(p)............................... -- -- -- -- -- (28,243)
Redeemable common stock - ESOP,
net of related unearned
compensation (q).................. 2,887 4,720 11,418 23,238 32,272 --
Total common stockholders'
equity............................ 32,714 34,042 37,878 41,936 44,372 81,530
<CAPTION>
ADJUSTED FOR
THE OFFERING
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 8,111
Working capital, excluding current
maturities of long-term debt and
capitalized lease obligations
(n)............................... 27,176
Total assets...................... 350,925
Total debt, including current
maturities........................ 195,229
Redeemable preferred stock (o).... --
Series A Preferred Stock - ESOP
(p)............................... 28,352
Unearned compensation - ESOP
(p)............................... (28,243)
Redeemable common stock - ESOP,
net of related unearned
compensation (q).................. --
Total common stockholders'
equity............................ 79,863(r)
</TABLE>
See Notes to Selected Historical and Pro Forma Financial Data.
19
<PAGE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
(a) Certain amounts have been reclassified to be consistent with the Company's current reporting
format.
(b) As a result of the Acquisition, the Company's assets and liabilities were adjusted to reflect their
preliminary estimated fair values as of March 22, 1996. In addition, the Company entered into new
financing arrangements and has changed its capital structure. Accordingly, the results of future
periods will not be comparable to the prior historical periods presented. The pro forma financial
data reflects these changes as if the Transactions (as defined) had been consummated on January 1,
1995. The Combined period for 1996 represents the mathematical addition of the historical amounts
for the Predecessor period (December 31, 1995 to March 21, 1996) and the Successor period (March
22, 1996 to March 30, 1996) and are not indicative of results that would have been obtained had the
Acquisition occurred on December 31, 1995. For information regarding these periods separately, see
the Financial Statements included elsewhere in this Prospectus.
(c) Excludes the charge of $1,000 related to the write-up of inventory to its estimated fair value as a
result of the Acquisition.
(d) Represents the non-cash charge resulting from the allocation of shares held by the Simmons ESOP to
participant accounts as they are earned. Amounts charged in 1991, 1992 and 1993 were based on the
1989 acquisition price. In 1994, the Company changed its method of accounting, resulting in the
fair value of the underlying stock becoming the basis for the annual expense as opposed to the
original cost. (See "The Simmons ESOP" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
(e) Interest expense, net includes the amortization of deferred debt issuance costs and is net of
interest income of $210, $188, $50, $845 and $162, for 1991, 1992, 1993, 1994 and 1995,
respectively, $162 for the pro forma year ended December 30, 1995, $40 and $39 for the first
quarter ended 1995 and 1996, respectively and $39 for the pro forma first quarter 1996.
(f) Excludes a compensation charge of $3,735 for amounts payable to management in connection with the
Acquisition. See "Certain Transactions."
(g) Results from the adoption of Statement of Financial Accounting Standards No. 106 in 1992 relating
to post-retirement benefits, and Statement of Financial Accounting Standards No. 109 in 1993
relating to income taxes.
(h) Excludes the following incurred in connection with the Acquisition: (i) the compensation charge of
$3,735 for amounts payable to management, (ii) the charge of $1,000 related to the write-up of
inventory to its estimated fair value, (iii) the charge of $350 for non-recurring fees, (iv) the
$2,781 write-off of the Subordinated Loan Facility financing fees as a result of the Offering and
(v) the related income tax benefits of $3,146.
(i) 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 pro forma year ended December 30, 1995 and for the combined and
pro forma quarters ended March 30, 1996, excludes amortization of the prepaid management fee of
$1,000, $83 and $250, respectively, in connection with the Acquisition, 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, and excludes the credit of
$375, $0 and $85, respectively, for the amortization of the reserve for unfavorable lease
commitments. The Company has included information concerning EBITDA as it is relevant for covenant
analysis under the Indenture, which defines EBITDA as set forth above for the periods shown. See
"Description of Notes--Certain Definitions." In addition, 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.
(j) Cash interest expense is defined as interest expense less amortization of debt issuance costs and
other non-cash interest expense for 1991, 1992, 1993, 1994, 1995 and for the first quarters ended
1995 and 1996. This calculation of interest expense differs from that specified for Consolidated
Interest Expense under the Indenture, which includes amortization of debt issuance costs and
non-cash interest expense. Similarly, the ratio of EBITDA to cash interest expense differs from the
Consolidated Coverage Ratio under the indenture, which utilizes Consolidated Interest Expense as
its denominator. See "Description of Notes--Certain Definitions." Management believes that the
ratio of EBITDA to cash interest expense and the ratio of EBITDA less capital expenditures to cash
interest expense are generally accepted as useful information regarding a company's ability to
service and/or incur debt. The ratio of EBITDA to cash interest expense and the ratio of EBITDA
less capital expenditures to cash interest expense are not applicable to the quarterly periods.
(k) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income
before income taxes and fixed charges. Fixed charges consist of interest expense, which includes
the amortization of deferred debt issuance costs and the interest portion of the Company's rent
expense (assumed to be one-third of total rent expense). Earnings were insufficient to cover fixed
charges for 1991, 1992, 1993, first quarter 1995, combined first quarter 1996 and pro forma first
quarter 1996 by $18,688, $6,856, $1,861, $666, $5,936 and $4,717, respectively.
(l) Inventory turnover is defined as cost of products sold divided by average inventory.
(m) For more information regarding the Statement of Cash Flows Data, see the Consolidated Financial
Statements included elsewhere in this Prospectus.
(n) Represents total current assets (excluding cash and cash equivalents) less total current
liabilities, excluding current maturities of long-term debt and capital lease obligations.
(o) This stock was issued in connection with the recapitalization of the Company in 1991 and was called
for redemption in connection with the Acquisition.
(p) The Series A Preferred Stock was issued to the Simmons ESOP in connection with the Acquisition (see
"The Acquisition"). The Series A Preferred Stock is required to be recorded at the greater of
redemption value or fair value. The Series A Preferred Stock will be recorded at its redemption
value. In addition, unearned compensation was recorded on the Acquisition Closing Date in an amount
representing the redemption value of the Series A Preferred stock that will be allocated to
participant accounts over future periods. The unearned compensation is classified outside of common
stockholder's equity since it is related to the Series A Preferred Stock (See "The Simmons ESOP"
and "Management's Discussion and Analysis of Financial Condition and Results of Operations.")
(q) 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, 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 in the predecessor financial
statements.
(r) Includes the following charges incurred in connection with the Transactions: (i) the compensation
charge of $3,735 for amounts payable to management, (ii) the charge of $350 for non-recurring fees
(iii) the $2,781 write-off of the Subordinated Loan Facility financing fees as a result of the
Offering and (iv) the related tax benefits of $2,746.
</TABLE>
20
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Financial Data are
based on the consolidated financial statements included elsewhere in this
Prospectus, 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").
The unaudited Pro Forma Condensed Consolidated Statement of Operations for
the quarter ended March 30, 1996 is derived from the unaudited Condensed
Consolidated Statement of Operations for the periods December 31, 1995 to March
21, 1996 for the Predecessor and March 22, 1996 to March 30, 1996 for the
Successor included elsewhere in this Prospectus. The unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year ended December 30,
1995, is derived from the Consolidated Statement of Operations for the year
ended December 30, 1995, included elsewhere in this Prospectus. Both of these
Pro Forma Condensed Consolidated Statements of Operations assume that the
Transactions were consummated as of January 1, 1995. The unaudited Pro Forma
Condensed Consolidated Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company, included elsewhere in this
Prospectus.
The unaudited Pro Forma Condensed Consolidated Financial Data do not purport
to be indicative of the results that would actually have been obtained if the
Transactions had occurred on the date indicated or of the results that may be
obtained in the future. The unaudited Pro Forma Condensed Consolidated Financial
Data are presented for comparative purposes only. The pro forma adjustments, as
described in the accompanying data, are based on available information and
certain assumptions that management believes are reasonable.
The unaudited pro forma information with respect to the Acquisition is based
on the historical financial statements of the business acquired. The Acquisition
has been accounted for under the purchase method of accounting. The purchase
price for the Acquisition, including the related fees and expenses, has been
allocated to the tangible and identifiable intangible assets and liabilities of
the acquired business based upon the Company's preliminary estimates of their
fair value with the remainder allocated to goodwill. The allocation of purchase
price for the Acquisition is subject to revision when additional information
concerning asset and liability valuation becomes available. Such additional
information will include the finalized results of property appraisals and
certain lease analyses which are anticipated to be available during July or
August 1996. Management believes that the actual purchase price allocation will
not differ materially from the preliminary purchase price allocation. The pro
forma adjustments directly attributable to the Transactions include adjustments
to interest expense related to the financing, changes in amortization of
intangible assets relating to the allocation of the purchase price, management
fees, and the related tax effects.
21
<PAGE>
SIMMONS COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION OFFERING ADJUSTED
RESULTS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
-------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $489,815 -- $ 489,815 -- $ 489,815
Cost of products sold.................. 292,825 $ (75)(a) 292,750 -- 292,750
-------- ----------- --------- ----------- ---------
Gross profit........................... 196,990 75 197,065 -- 197,065
Selling, general and administrative
expenses.............................. 161,202 -- 161,202 -- 161,202
Non-cash ESOP expense.................. 4,533 92(b) 4,625 -- 4,625
Amortization of intangible assets...... 5,753 1,895(c) 7,648 -- 7,648
Interest expense, net.................. 8,185 12,701(d) 20,886 $(1,818)(e) 19,068
Other deductions, net.................. 400 1,170(f) 1,570 -- 1,570
-------- ----------- --------- ----------- ---------
Income before income taxes............. 16,917 (15,783) 1,134 1,818 2,952
Provision for income taxes............. 7,506 (5,917)(g) 1,589 727(g) 2,316
-------- ----------- --------- ----------- ---------
Net income (loss)...................... $ 9,411 $(9,866) $ (455)(h) $ 1,091 $ 636(i)
-------- ----------- --------- ----------- ---------
-------- ----------- --------- ----------- ---------
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations.
22
<PAGE>
SIMMONS COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED ACQUISITION OFFERING ADJUSTED
RESULTS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
-------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales.............................. $119,317 -- $ 119,317 -- $ 119,317
Cost of products sold.................. 75,672 $(1,017)(a) 74,655 -- 74,655
-------- ----------- --------- ----------- ---------
Gross profit........................... 43,645 1,017 44,662 -- 44,662
Selling, general and administrative
expenses............................... 40,472 -- 40,472 -- 40,472
Non-cash ESOP expense.................. 1,312 -- 1,312 -- 1,312
Amortization of intangible assets...... 1,442 455(c) 1,897 -- 1,897
Interest expense, net.................. 1,950 3,078(d) 5,028 $ (267)(e) 4,761
Other deductions, net.................. 4,405 (3,818)(f) 587 -- 587
-------- ----------- --------- ----------- ---------
Loss before income tax benefit......... (5,936) 1,302 (4,634) 267 (4,367)
Provision for income tax benefit....... (2,029) 634(g) (1,395) 107(g) (1,288)
-------- ----------- --------- ----------- ---------
Net loss............................... $ (3,907) $ 668 $ (3,239)(h) $ 160 $ (3,079)(i)
-------- ----------- --------- ----------- ---------
-------- ----------- --------- ----------- ---------
</TABLE>
- ------------
For purposes of the above analysis, the combined amounts represent the
mathematical addition of the historical amounts for the Predecessor period
(December 31, 1995 to March 21, 1996) and the Successor period (March 22, 1996
to March 30, 1996).
See Notes to Pro Forma Condensed Consolidated Statements of Operations.
23
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 30, 1995 and the quarter ended March 30, 1996 reflect the
Transactions as if they had occurred on January 1, 1995 as follows:
<TABLE>
<C> <S>
(a) The adjustment includes the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Elimination of non-recurring charge resulting from write-up
of inventory at Acquisition............................... $ -- ($1,000)
Increase in depreciation expense........................... 300 68
Decrease in rent expense resulting from the recording of
leases at market.......................................... (375) (85)
-------- -------
($ 75) ($1,017)
-------- -------
-------- -------
</TABLE>
<TABLE>
<C> <S>
(b) Increase in ESOP expense for 1995 is due to the pro forma effect of recording such
shares at their redemption value ($5.00 per share).
(c) The adjustment includes the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Increase in goodwill amortization.......................... $ 991 $ 282
Increase in patent amortization............................ 904 173
-------- -------
$ 1,895 $ 455
-------- -------
-------- -------
</TABLE>
<TABLE>
<C> <S>
(d) Net increase in interest expense, net, resulting from the Acquisition as follows:
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Elimination of historical interest expense................. ($ 8,347) ($1,980)
Interest resulting from Subordinated Loan Facility of $100
million at an assumed interest rate of 13% and 12.25%..... 13,000 3,063
Interest resulting from senior credit facility term loans:
Tranche A--$40,000 at 7.75%............................... 3,100 775
Tranche B--$35,000 at 8.25%............................... 2,888 722
Interest resulting from Senior Credit Facility revolving
loan with a maximum of $40 million at an assumed interest
rate of 7.75%.............................................. 453 113
Interest resulting from industrial revenue bonds and other
borrowings................................................. 796 181
Amortization of the $5,704 million estimated deferred
financing cost related to the above....................... 811 204
-------- -------
$ 12,701 $ 3,078
-------- -------
-------- -------
</TABLE>
<TABLE>
<C> <S>
(e) Net decrease in interest expense resulting from Offering of the $100.0 million Series A
Senior Subordinated Notes due 2006 and the application of the net proceeds therefrom of
$96 million, reflecting the following (dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Elimination of interest on the Subordinated Loan Facility
of $100 million............................................ $(13,000) $(3,063)
Interest resulting from additional borrowings under
revolving loan of $4 million required to repay a portion
of the Subordinated Loan Facility.......................... 310 78
Interest resulting from the $100 million Series A Senior
Subordinated Notes due 2006 at an assumed interest rate at
10.75%..................................................... 10,750 2,688
Elimination of amortization of Subordinated Loan Facility
deferred financing costs.................................. (278) (70)
Amortization of the $4 million deferred financing costs
related to the Series A Senior Subordinated Notes due
2006....................................................... 400 100
-------- -------
$ (1,818) $ (267)
-------- -------
-------- -------
</TABLE>
<TABLE>
<C> <S>
Management believes that a 1/8 percent variance in interest rates will not have any
material effect on the Company's operations.
(f) The adjustment includes the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Amortization of annual management fee, three years of which
was prepaid at Acquisition................................ $ 1,000 $ 225
Increase in annual agent's fee and unused revolver
commitment fee............................................. 170 42
Elimination of non-recurring compensation charge........... -- (3,735)
Elimination of non-recurring fees.......................... -- (350)
-------- -------
$ 1,170 ($3,818)
-------- -------
-------- -------
</TABLE>
<TABLE>
<C> <S>
(g) Net decrease in provision for income taxes as a result of all above items, except
goodwill amortization at an assumed tax rate of 40%.
(h) Excludes (i) the compensation charge of $3,735 for amounts payable to management in
connection with the Acquisition, (ii) the charge of $1,000 related to the write-up of
inventory to its estimated fair value (iii) the charge of $350 for non-recurring fees
and (iv) the related income tax benefits of $2,034.
(i) Excludes the $2,781 write-off of the Subordinated Loan Facility financing fees and
expenses as a result of the offering and the related income benefit of $1,112.
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical and Pro Forma Financial Data" and the Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
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 for (i) a purchase
price of $253.2 (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 Simmons 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. 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 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, a portion of which was provided by an
affiliate of the Initial Purchaser and an affiliate of Investcorp. The
Subordinated Loan Facility was repaid on April 18, 1996 with net proceeds of the
issuance to the Old Notes together with borrowings under the Senior Credit
Facility.
The Company is the second largest bedding manufacturer in the United States.
Approximately 98% of the Company's 1995 net sales were derived from the
manufacture and sale of conventional bedding, which includes innerspring
mattresses and box springs. The Company also manufactures and sells bedding
accessories such as waterbeds, bed frames and upper bunk supports, which
accounted for the other 2.0% of the Company's 1995 net sales. Over the last four
years, the Company's net sales have grown at a compound annual rate of 11.8%,
from $313.2 million in 1991 to $489.8 million in 1995. The Company also 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 to third party manufacturers domestically the Simmons
name, which is used on adjustable beds, down comforters, pillows, bed sheets,
bed pads and linens. The Company records license and royalty fees received from
these licenses as an offset to selling, general and administrative expenses.
License and royalty fees received for 1993, 1994 and 1995 were $4.3 million,
$5.4 million, and $5.8 million, respectively.
The Company's costs and expenses include manufacturing (approximately 59.8%
of 1995 net sales), selling (approximately 25.3% of 1995 net sales) and general
and administrative (approximately 7.6% of 1995 net sales). Over the last four
years, the Company's gross profit has grown at a compound annual rate of 14.6%,
from $114.3 million in 1991 to $197.0 million in 1995. As a percentage of net
sales, gross profit has increased from 36.5% in 1991 to 40.2% in 1995. Over the
last four years, the Company's EBITDA has increased at a compound annual rate of
21.2% from $18.3 million in 1991 to $39.6 million in 1995, while the Company
experienced a net loss of $18.0 million in 1991 and net income of $9.4 million
in 1995. As a percentage of net sales, EBITDA and net income (loss) have
improved from 5.9% and (5.7%) in 1991 to 8.1% and 1.9% in 1995, respectively.
In January 1989, the Simmons ESOP was established to purchase all of the
Company's then outstanding common stock (the "ESOP Purchase"). The ESOP Purchase
was funded through $249.0 million of debt and preferred stock issued by the
Company (the "Company ESOP Obligation"). Of this amount, the Company loaned the
Simmons ESOP $241.5 million for the purchase of all of the Company's common
stock then outstanding (the "ESOP Loan"). The $249.0 million Company ESOP
Obligation was an "external" obligation of the Company and the $241.5 million
25
<PAGE>
ESOP Loan was an "internal" obligation that the Simmons ESOP owed to the
Company. Initially, the Company recorded the shares of common stock issued to
the Simmons ESOP and recorded a corresponding offset for unearned compensation
as capital. Because these shares held by the Simmons ESOP were subject to
certain redemption requirements, the Company recorded outside of common
stockholders' equity an amount equal to the fair value of such shares, net of a
related amount of unearned compensation. As the internal ESOP Loan was repaid,
non-cash ESOP expense was recorded and unearned compensation was reduced. As of
the Acquisition Closing Date, the internal ESOP Loan had been reduced to
approximately $61.2 million, in part due to forgiveness in 1992 of a substantial
portion of the internal obligation. Any outstanding amounts with respect to the
external Company ESOP Obligation were repaid in connection with the Acquisition.
The Company will make annual cash contributions to the Simmons ESOP in an
amount up to 25% of eligible participant compensation, subject to certain
limitations and conditions. The Simmons 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 contributions to the Simmons ESOP. The Series
A Preferred Stock issued to the Simmons ESOP will be recorded at its aggregate
redemption value of $28.4 million and a corresponding amount of unearned
compensation will be recorded. The Series A Preferred Stock is required to be
recorded at the greater of redemption value or fair value. These amounts are
classified outside of common stockholder's equity since the participants have
the right to put the stock to the Company under certain circumstances. As the
internal ESOP Loan is repaid (over approximately six years), a portion of the
Series A Preferred Stock will be allocated to participant accounts and non-cash
ESOP expense will be recorded based on the number of shares allocated to
participant accounts at the greater of the redemption value ($5.00 per share) or
the fair value of the Series A Preferred Stock.
Prior to 1994, the annual charge to non-cash ESOP expense represented the
number of shares allocated to participant accounts resulting from the repayment
of the internal ESOP Loan valued at the original cost of the shares acquired in
1989. In 1994, the Company changed its method of accounting and began using the
fair value of the shares. This resulted in a significant reduction in the annual
expenses. The difference between the original price per share and the
corresponding reduction in unearned compensation and the fair-value based,
non-cash ESOP expense was charged or credited to additional paid-in capital.
RESULTS OF OPERATIONS
For ease of reference in the following table and discussion below, the
results of operations for 1996 represent the mathematical addition of the
historical amounts for the Predecessor period (December 31, 1995 to March 21,
1996) and the Successor period (March 22, 1996 to March 30, 1996) and are not
indicative of results that would actually have been obtained if the Acquisition
had occurred on December 31, 1995.
26
<PAGE>
The following table sets forth certain components of the Company's
Consolidated Statement of Operations data expressed as a percentage of net
sales:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
-------------------------------------------- ---------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold........... 61.4 61.3 59.8 61.8 63.4
------ ------ ------ -------- ---------
Gross profit.................... 38.6 38.7 40.2 38.2 36.6
Selling, general and
administrative expenses(a)...... 31.8 31.3 32.9 34.5 33.9
Non-cash ESOP expense........... 3.6 1.0 0.9 1.0 1.1
Amortization of intangible
assets.......................... 1.5 1.3 1.2 1.3 1.2
Interest expense, net(b)........ 2.0 1.9 1.6 1.8 1.7
Other deductions, net........... 0.2 0.6 0.1 0.2 3.7
------ ------ ------ -------- ---------
Income (loss) before income
taxes and cumulative effect of
change in accounting principle.. (0.5) 2.6 3.5 (0.6) (5.0)
Provision for income taxes
(benefit)....................... 0.3 0.8 1.6 (0.3) (1.7)
------ ------ ------ -------- ---------
Income (loss) before cumulative
effect of change in accounting
principle....................... (0.8)% 1.8% 1.9% (0.3)% (3.3)%
------ ------ ------ -------- ---------
------ ------ ------ -------- ---------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Selling, general and administrative expense is net of royalty income.
(b) Includes amortization of deferred financing costs.
</TABLE>
FIRST QUARTER ENDED MARCH 30, 1996 AS COMPARED TO FIRST QUARTER ENDED APRIL 1,
1995
Net Sales. Net sales for the quarter ended March 30, 1996 increased 9.8%, or
$10.7 million, from $108.6 million in 1995 to $119.3 million in 1996. This
increase was due primarily to a 9.1% increase in unit sales volume and a slight
increase in average unit selling price. The growth in unit sales volume resulted
from increased contract bedding sales and continued retail market acceptance of
the BackCare(R) line launched in June 1995. The slight increase in average unit
selling price is attributable to a shift in product mix to the Company's higher
priced Beautyrest(R) and BackCare(R) products.
Gross Profit. As a percentage of net sales, gross profit for the quarter
ended March 30, 1996 declined 1.6 percentage points from 38.2% in 1995 to 36.6%
in 1996. Of the decline, approximately 0.8 percentage point is attributable to
the sale of finished goods inventory which had been written up, as required by
generally accepted accounting principles, to estimated market value, less costs
to sell, as of the date of the Acquisition. The remaining decline in gross
profit percentage resulted primarily from the increased unit sales volume of
lower margin contract and promotional bedding.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses improved 0.6 percentage point, from
34.5% in 1995 to 33.9% in 1996. The improvement was attributable to the
following: (i) $0.4 million or 0.3 percentage point was due to non-recurring
expenditures related to a special national sales meeting held during the first
quarter of 1995; (ii) $0.2 million or 0.2 percentage point was due to the
centralization of the Company's consumer sales support organization; (iii) $0.2
million or 0.2 percentage point was due to higher royalty income; and (iv) $0.6
million or 0.5 percentage point was due to higher total revenues which increased
at a slightly greater rate than selling, general and administrative
27
<PAGE>
expenses. These improvements were offset, in part, by an increase of $0.7
million, or 0.6 percentage point, in expenditures related to the Company's
reengineering program, referred to elsewhere herein as UNITE.
Interest Expense, Net. Interest expense, net for the first quarter ended
March 30, 1996 remained constant at approximately $1.9 million, as slightly
lower debt balances were offset by slightly higher average interest rates.
Non-Cash ESOP Expense. Non-cash ESOP expense for the first quarter of 1996
increased slightly to approximately $1.3 million as compared to $1.1 million in
1995 due to an increase in the estimated fair value of shares to be allocated to
participant accounts.
Other Deductions, Net. Non-recurring expenses of $4.3 million were incurred
in the quarter ended March 30, 1996 in connection with the Acquisition.
Approximately $3.8 million was attributable to special compensation agreements
entered into by the Company with certain members of management of the Company.
The remaining $0.5 million is comprised of fees related to an agreement with
Investcorp International, Inc. for management advisory, consulting services and
certain other fees. See "Certain Transactions."
Provision (Benefit) for Income Taxes. The Company's effective income tax
rates for the quarters ended March 30, 1996 and April 1, 1995 differ from the
federal statutory rate because of non tax-deductible amortization of goodwill
and the utilization, in 1995, of net operating loss carryforwards.
Net Loss. For the reasons set forth above, net loss for the quarter ended
March 30, 1996 increased $3.5 million from net loss for the quarter ended April
1, 1995.
FISCAL 1995 AS COMPARED TO FISCAL 1994
Net Sales. Net sales increased 11.4%, or $50.1 million, from $439.7 million
in 1994 to $489.8 million in 1995. This increase was due to a 4.3% increase in
average unit selling price and a 6.6% increase in unit volume. This average unit
selling price increase resulted primarily from a shift in product mix to the
Company's higher-priced Beautyrest(R) products. The increase in unit volume
resulted from increased sales to existing accounts and the addition of new
customers. In 1995, the Company embarked on a new national advertising campaign
to reinforce brand awareness and also initiated a program to increase its
account base, all of which together resulted in a 10% increase in its account
base in 1995.
Gross Profit. Gross profit increased 15.9%, or $27.1 million, from $169.9
million in 1994 to $197.0 million in 1995. Approximately $19.0 million of the
increase in gross profit resulted from the increase in net sales in 1995. The
remaining increase in gross profit resulted from improved efficiencies resulting
from (i) the increased efficiencies resulting from second shifts at 14 of the
Company's manufacturing facilities and (ii) the leveraging of fixed costs as a
result of the increase in production volume in 1995. As a percentage of net
sales, gross profit increased 1.5 percentage points, from 38.7% in 1994 to 40.2%
in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1995 increased 17.0%, or $23.4 million, from $137.8
million in 1994 to $161.2 million in 1995. This increase was the result of a
$16.2 million increase in selling expenses and a $7.2 million increase in
general and administrative expenses. The increase in selling expenses was due
to: (i) an increase in selling support expenses due to higher sales volume and
the introduction of a program to grow the Company's account base; (ii) an
increase in salesforce compensation due to higher net sales; (iii) an increase
in national advertising related to the rollout in 1995 of a new advertising
program;
28
<PAGE>
and (iv) an increase in cooperative advertising expenses. The increase in
general and administrative expenses was a result of: (i) $1.3 million in
expenditures related to the Company's UNITE program, a manufacturing design and
re-engineering project initiated in 1995; (ii) an increased provision for bad
debts; and (iii) increased bonuses related to the Company's strong 1995 results.
The Company expects its expenditures related to the UNITE program to increase in
1996 by approximately $3 million in connection with its plans to implement the
program at six additional manufacturing facilities. As a percentage of net
sales, selling, general and administrative expenses increased 1.6 percentage
points, from 31.3% in 1994 to 32.9% in 1995.
Interest Expense, Net. Interest expense, net remained constant at
approximately $8.2 million in 1994 and 1995, as a result of lower debt levels
that were offset by higher interest rates.
Non-Cash ESOP Expense. Non-cash ESOP expense in 1995 remained relatively
constant at approximately $4.5 million as compared to 1994.
Provision for Income Taxes. Provision for income taxes increased 132.2%, or
$4.3 million, from $3.2 million in 1994 to $7.5 million in 1995. The effective
income tax rates for both periods differ from the federal statutory rate of
35.0% principally due to the utilization of net operating loss carryforwards and
the high levels of non tax-deductible amortization of goodwill. The increase in
the effective rate from 1994 to 1995 results from a decline in the amount of net
operating loss carryforwards available to be utilized in 1995 compared to 1994.
FISCAL 1994 AS COMPARED TO FISCAL 1993
Net Sales. Net sales increased 12.3%, or $48.3 million, from $391.4 million
in 1993 to $439.7 million in 1994. This increase was due to a 2.3% increase in
the average unit selling price and a 9.8% increase in unit volume. The average
unit selling price increase resulted primarily from standard price increases
realized in 1994 coupled with a slight shift in the Company's product mix
towards higher-priced products. The increase in unit volume was primarily a
function of increased sales to existing accounts.
Gross Profit. Gross profit increased 12.4% or $18.7 million, from $151.3
million in 1993 to $169.9 million in 1994. This increase was primarily the
result of an increase in sales and a reduction in the cost of raw materials,
which was partially offset by labor inefficiencies resulting from the
introduction of second shifts at most of the Company's manufacturing facilities.
As a percentage of net sales, gross profit increased 0.1 percentage points, from
38.6% in 1993 to 38.7% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 10.7% or $13.3 million, from $124.5 million in
1993 to $137.8 million in 1994. This increase was the result of a $7.5 million
increase in selling expenses and a $7.0 million increase in general and
administrative expenses, and partially offset by an increase in royalty income
of $1.2 million. The increase in selling expenses resulted from greater spending
on all forms of advertising coupled with an increase in salesforce compensation
resulting from increased net sales. The increase in general and administrative
expenses was a result of (i) an increase in overhead costs relating to the new
plant opened in Charlotte late in 1993 and (ii) increases in provision for
bonuses and workers' compensation insurance. As a percentage of net sales,
selling, general and administrative expense decreased 0.5 percentage points from
31.8% in 1993 to 31.3% in 1994.
Interest Expense, Net. Interest expense, net increased 1.1%, or $0.1
million, from $8.1 million in 1993 to $8.2 million in 1994, as a result of
higher interest rates which were partially offset by lower debt levels.
Other Deductions, Net. Other deductions, net of $2.5 million in 1994 is
comprised of a non-cash charge of $2.8 million in connection with the sale of an
idle plant facility and other normal non-
29
<PAGE>
operating expenses of $0.6 million offset, in part, by a $0.9 million gain on
the sale of a parcel of land.
Non-Cash ESOP Expense. Non-cash ESOP expense decreased 67.9%, or $9.5
million, from $14.0 million in 1993 to $4.5 million in 1994, primarily as a
result of the adoption of Statement of Position No. 93-6 of the American
Institute of Certified Public Accounts, Employers' Accounting for Employee Stock
Ownership Plans. This Statement of Position requires non-cash ESOP expense
contributions to be recorded as expense in the statement of operations based on
the fair value of the shares allocated to participant accounts versus historical
cost, which was used in prior years.
Provision for Income Taxes. Provision for income taxes increased 220.0%, or
$2.2 million, from $1.0 million in 1993 to $3.2 million in 1994. The effective
income tax rate for 1994 differs from the federal statutory rate of 35%
principally due to the utilization of net operating loss carryforwards offset by
high levels of non tax-deductible amortization of goodwill. The effective rate
in 1993 differs from the federal statutory rate principally due to the high
level of non tax-deductible amortization of goodwill. The decline in effective
tax rate in 1994 from 1993 principally results from the utilization of net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs will arise primarily from debt service on
indebtedness incurred in connection with the Acquisition and the funding of
capital expenditures. The Company incurred substantial indebtedness in
connection with the Acquisition, which will result in an increase in interest
expense of approximately $10.0 million per year compared to interest expense
prior to the Acquisition. As of March 30, 1996, as adjusted to give effect to
the Offering (including the application of the net proceeds therefrom), the
Company would have had outstanding approximately $195.2 million of indebtedness,
consisting of $100.0 million of Notes, $75.0 million in term loan borrowings and
approximately $9.4 million in revolving credit borrowings under the Senior
Credit Facility, $9.7 million of industrial revenue bonds and $1.1 million of
certain other debt and capital lease obligations. The degree to which the
Company is leveraged could have a significant effect on its results of
operations. For example, the funds available to the Company for purposes other
than debt service will be reduced; the Company may be more vulnerable to
increases in interest rates or downturns in economic conditions; and the
Company's ability to obtain additional financing in the future may be impaired.
While the Company believes that it should be able to satisfy its obligations and
maintain historical levels of capital expenditures and operations from cash
provided by operations, available credit facilities and appropriate financings,
no assurance to that effect can be given. See "Risk Factors--Substantial
Leverage and Debt Service Obligations."
Principal and interest payments under the Senior Credit Facility and
interest payments on the Notes will represent significant liquidity requirements
for the Company. With respect to the $75.0 million borrowed under the term loan
portion of the Senior Credit Facility, the Company must make scheduled
semi-annual principal payments totaling $2.1 million in 1996, $5.2 million in
1997, $7.2 million in 1998 and $9.2 million in 1999. The loans under the Senior
Credit Facility will bear interest at floating rates based upon the interest
rate option selected by the Company. Under the Senior Credit Facility, the
Company is obligated to enter into arrangements to fix an effective maximum rate
of interest with respect to not less than $37.5 million of the term loan portion
of the Senior Credit Facility within 90 days of the Acquisition Closing Date.
For a description of the Senior Credit Facility, see "Capital Structure--Senior
Credit Facility."
The Company's capital expenditures were $5.0 million, $4.5 million, $5.8
million and $1.6 million in 1993, 1994, 1995 and the first quarter 1996,
respectively. These capital expenditures consisted primarily of maintenance
capital expenditures and in 1995 and 1996 also included capitalized expenditures
related to SWIFT, a systems upgrade project. The Company estimates
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that total maintenance capital expenditures will be approximately $5.0 million
in 1996. In addition, total expenditures for completing the SWIFT project are
expected to be approximately $7.0 million in 1996. The Company may seek to make
selective acquisitions in the bedding industry. Although the Company has
discussions from time to time with potential acquisition candidates, the Company
currently has no commitments with respect to any such acquisitions. The
Company's ability to make capital expenditures and acquisitions is subject to
certain restrictions under the Senior Credit Facility. See "Capital
Structure--Senior Credit Facility."
The Company's principal source of cash to fund its liquidity needs is net
cash provided by operating activities. The components of net cash provided by
operating activities are detailed on the Statements of Cash Flows on pages F-7
and F-23 of this Prospectus and include net income or loss adjusted for (i)
depreciation and amortization, (ii) non-cash interest expense, (iii) gains and
losses on the sale of fixed assets, (iv) non-cash ESOP expense, and (v) the
effect of changes in certain operating assets and liabilities. Net cash from
operating activities was $13.5 million in the first quarter 1995 compared to
$(7.8) million in the first quarter 1996 (combined), due primarily to the timing
of payments of accounts payable. Additionally, in the first quarter 1996
(combined), certain cash compensation expenses were incurred in connection with
the Acquisition. Net cash provided by operating activities in 1995 decreased
17.1%, or $5.9 million, to $28.5 million from $34.4 million in 1994. This
decrease resulted primarily from an increase in accounts receivable and
inventories, partially offset by an increase in accounts payable, reflecting
increased sales levels and lower than normal balances of accounts payable at the
end of 1994. Net cash provided by operating activities increased 91.0% or $16.4
million, from $18.0 million in 1993 to $34.4 million in 1994. This increase
resulted primarily from improved operating results, as well as a decrease in
accounts receivable and inventories, partially offset by a decrease in accounts
payable. The decrease in accounts receivable reflects an increased focus by the
Company on timely collections. Accounts payable levels were lower than normal at
the end of 1994, reflecting differences in timing of payments at year-end
compared to 1993 and 1995.
At March 30, 1996 as adjusted for the Offering (including the application of
the net proceeds therefrom), the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$24.4 million, after giving effect to $9.4 million of outstanding borrowings and
$6.2 million that was reserved in respect of 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 $6.5 million in each of
1996 (commencing March 22, 1996) and 1997, 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 Company
believes that cash generated from operations, together with the amounts
available under the revolving credit facility, will be adequate to meet its debt
service requirements, capital expenditures and working capital needs for the
foreseeable future, although no assurance can be given in this regard. The
Company's future operating performance and ability to service or refinance the
New Notes and to extend or refinance the Senior Credit Facility will be subject
to future economic conditions and to financial, business and other factors, many
of which are beyond the Company's control.
In addition to the foregoing capital expenditures, the Company anticipates
that its total expenditures for UNITE, its re-engineering project to improve
overall efficiency by changing the layout of its factory floors, will be
approximately $6.0 million in 1996. While the expenditures for UNITE will have
an adverse impact on results of operations for 1996, the Company believes that
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future benefits, which should commence in the fourth quarter of 1996, will
offset implementation costs. See "Business--Manufacturing and Facilities."
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 March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
which the Company is required to adopt in 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The adoption of SFAS No. 121 is not
expected to have a material impact on the Company's financial position, annual
operating results or cash flows.
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which the Company is required to adopt in 1996. SFAS No. 123
establishes optional alternative accounting methods for stock-based compensation
as well as new required disclosures. The Company intends to account for
stock-based compensation under previously existing accounting guidance. As such,
SFAS No. 123 will be adopted for disclosure purposes only and will not impact
the Company's financial position, annual operating results or cash flows.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER, PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on , 1996; provided, however, that if the
Company has extended the period of time for which the Exchange Offer is open,
the term "Expiration Date" means the latest time and date to which the Exchange
Offer is extended.
As of the date of this Prospectus, $100.0 million aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1996, to all
holders of Old Notes known to the Company. The Company's obligation to accept
Old Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under " -- Certain Conditions to the Exchange Offer"
below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving notice of such
extension to the holders thereof. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "-- Certain Conditions to the Exchange Offer." The Company
will give notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law in connection with the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to SunTrust Bank, Atlanta (the "Exchange
Agent") at one of the addresses set forth below under "Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT
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REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instruction" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each broker-dealer holder will represent to the Company that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the holder and any
beneficial holder, that neither the holder nor any such beneficial holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company. If
the holder is not a
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broker-dealer, the holder must represent that it is not engaged in nor does it
intend to engage in a distribution of the New Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral and
written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be deposited
by
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<PAGE>
the Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date. For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering Old Notes" above
at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA"). In any such event the Company is required to use every reasonable effort
to obtain the withdrawal of any stop order at the earliest possible time.
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EXCHANGE AGENT
SunTrust Bank, Atlanta has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
BY HAND/OVERNIGHT EXPRESS: BY MAIL: BY OVERNIGHT DELIVERY:
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
(insured if registered (insured if registered (insured if registered
recommended) recommended) recommended)
SunTrust Bank, Atlanta SunTrust Bank, Atlanta SunTrust Bank, Atlanta
Corporate Trust Department Corporate Trust Department Corporate Trust Department
58 Edgewood Avenue 58 Edgewood Avenue 58 Edgewood Avenue
Room 400 Room 400 Room 400
Atlanta, Georgia 30303 Atlanta, Georgia 30303 Atlanta, Georgia 30303
VIA FACSIMILE:
(404) 332-3966
FOR INFORMATION CALL:
M. Russell Smith, Jr.
(404) 588-7811
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $ , which includes fees and expenses of the Trustee,
accounting, legal, printing and related fees and expenses.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
capitalized for accounting purposes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
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CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities law. Old Notes not exchanged pursuant to the
Exchange Offer will continue to accrue interest at 10 3/4% per annum and will
otherwise remain outstanding in accordance with their terms. Holders of Old
Notes do not have any appraisal or dissenters' rights under Delaware General
Corporation Law in connection with the Exchange Offer. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. However, (i) if the Initial Purchaser so requests with respect to Old Notes
not eligible to be exchanged for New Notes in the Exchange Offer and held by it
following consummation of the Exchange Offer or (ii) if any holder of Old Notes
is not eligible to participate in the Exchange Offer or, in the case of any
holder of Old Notes that participates in the Exchange Offer, does not receive
freely tradable New Notes in exchange for Old Notes, the Company is obligated to
file a registration statement on the appropriate form under the Securities Act
relating to the Old Notes held by such persons.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or otherwise transferred by
holders thereof (other than (i) any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or (ii) any
broker-dealer that purchases Notes from the Company to resell pursuant to Rule
144A or any other available exemption) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with any person to participate in
the distribution of such New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. A broker-dealer who holds Old
Notes that were acquired for its own account as a result of market-making or
other trading activities may be deemed to be an "underwriter" within the meaning
of the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of New Notes.
Each such broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
in the Letter of Transmittal that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." While the Company
has an obligation under the Registration Rights Agreement to update this
Prospectus by amendment or supplement for a period of 90 days following
consummation of the Exchange Offer, the Company has no obligation thereafter to
update the Prospectus and, therefore, holders required to deliver a prospectus
may not thereafter be able to resell because they may be unable to comply with
the prospectus delivery requirements described above.
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
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BUSINESS
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., which
later became Paramount Communications, Inc. ("Paramount"), acquired the Company
via a tender offer. In September 1985, Paramount 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 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,
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. As a result of the Acquisition, 100%
of the Company's common stock is owned by Holdings. The Simmons ESOP holds all
of the Series A Preferred Stock, which upon conversion into common stock of the
Company or Holdings would represent direct or indirect ownership of 15.1% of the
common stock of the Company (exclusive of stock options granted under the
Company's management stock incentive plan).
GENERAL
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), Maxipedic(R), Beautysleep(R) and three
newly introduced lines, Connoisseur(R), BackCare(R) and Equation of Sleep(R).
Sales of conventional bedding, which includes fully assembled mattresses and box
springs, accounted for approximately 98% of the Company's 1995 net sales.
Beautyrest(R), the Company's premier brand, accounted for approximately 72% of
net sales and approximately 58% of unit volume in 1995.
The Company manufactures and supplies conventional bedding to over 5,000
retail outlets, representing more than 2,500 customers, including furniture
stores, department stores, specialty sleep shops and warehouse showrooms. The
Company operates 18 manufacturing facilities, which are strategically located in
15 states and Puerto Rico in proximity to its 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 each of 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.
STRATEGY
The Company's strategic objectives are to maximize profitability and cash
flow by continuing to increase its market share and by improving its operating
efficiency. To achieve these objectives, the Company has implemented a strategy
that includes: (i) increasing penetration of existing and
39
<PAGE>
new accounts, primarily by emphasizing higher-end and more profitable products
and by continuing to introduce new and innovative products; and (ii) improving
operating performance and profitability by re-engineering the Company's
manufacturing facilities through changing the layout of the manufacturing
process and by upgrading the Company's information systems.
INCREASE PENETRATION OF EXISTING AND NEW ACCOUNTS. The Company believes
there is significant opportunity to improve its unit volume and market share by
increasing its penetration of existing and new accounts.
Existing Accounts. The Company believes that it can most effectively
increase net sales by increasing sales to existing customers. The Company
plans to achieve such increases primarily by: (i) emphasizing higher-end,
more profitable products; and (ii) increasing the number of slots it has on
its customers' floors through the introduction of new and innovative
products. The Company will continue to help its retailers to remerchandise
their showrooms and to actively market more profitable lines of bedding
through ongoing marketing initiatives and retailer sales force training. The
premium Beautyrest(R) mattresses are more profitable for both the Company
and its retailers, and management believes that a significant opportunity
exists to capture additional sales at the higher-end price points by
educating consumers about the benefits of these models. In addition, the
Company has a staff of engineers dedicated to designing and testing
innovative new products that differentiate the Company's products from those
of its competitors. Management believes that new products, such as the
BackCare(R) open coil product and the ready-to-assemble Equation of Sleep(R)
product, will enable it to increase the number of slots it has on retail
floors and displace marginal competitors, thereby enhancing its share of its
customers' bedding business. The BackCare(R) product line, which was
launched in June 1995, is being sold by 25% of the Company's customers
without any significant displacement of its existing product lines.
New Accounts. Management also is focusing on increasing the number of
accounts and expects that the Company will be able to continue to add a
substantial number of new accounts to its retailer base. The Company
recently has developed an extensive training program for its sales
representatives that focuses on marketing to prospective accounts and has
assigned sales representatives to target specific prospective accounts. The
Company also has devoted more resources to its national advertising program,
which builds brand awareness and emphasizes the various features and
benefits of the Company's products which differentiate them from other
brands. As a result of these initiatives, the Company added approximately
250 net new accounts during 1995 and approximately 60 net new accounts
during the first quarter of 1996, increasing its customer base to over 2,500
accounts.
IMPROVE OPERATING PERFORMANCE AND PROFITABILITY. Management has identified
several potential areas of improvement that are expected to result in increased
efficiency and profitability, including re-engineering the Company's
manufacturing facilities and upgrading the Company's information systems.
Re-engineering Manufacturing Facilities. The Company is working with a
nationally recognized management consulting firm on a re-engineering
project, internally referred to as UNITE, which is expected to be
implemented in each of the Company's conventional manufacturing facilities
and is expected to improve the flow of production and overall efficiency by
changing the layout of the factory floor. In December 1995, the Company
substantially completed the re-engineering of its Fredericksburg, Virginia
facility, which included reorganizing the manufacturing processes into cell
configurations and implementing a self-replenishing raw materials purchasing
system. The Company intends to re-engineer six additional plants to similar
specifications during 1996, with the remaining 10 conventional facilities to
be converted by early 1998. Based upon the initial results of the
re-engineering of the Fredericksburg facility,
40
<PAGE>
management believes that, upon completion of the scheduled re-engineering of
its manufacturing facilities, the Company will realize a significant
increase in manufacturing productivity (measured in units produced per
labor-hour), and an increase in manufacturing space available for future
expansion.
Upgrading Systems. The Company is in the process of implementing a major
upgrade of its computer systems, internally referred to as SWIFT, that is
intended to enable the Company to better analyze account profitability and
identify areas where pricing or margin improvements are available. This
system upgrade, which will consolidate the Company's existing systems into
one integrated system, also is expected to enhance customer service and
order taking by facilitating the more efficient exchange of information
between the Company and its customers. The Company expects this system
upgrade to be completed by June 1997 and believes it will improve operating
performance and profitability.
INDUSTRY AND COMPETITION
Wholesale revenues in the domestic conventional bedding industry have grown
at a compound annual rate of 6.8% to approximately $3.2 billion in 1995 from
approximately $860.4 million in 1975, according to industry sales data compiled
by ISPA. During this 20-year period, wholesale revenues increased each year,
with the exception of 1982, when such revenues declined by 1.9%. The domestic
conventional bedding industry accounts for over 90% of wholesale revenues for
the entire domestic bedding market, according to ISPA. Non-conventional bedding
products, such as flotation bedding ("waterbeds"), futons and electric
adjustable beds, account for the remainder of industry wholesale revenues. The
graph below depicts the growth of the domestic conventional bedding industry
from 1975 to 1995:
DOMESTIC CONVENTIONAL BEDDING REVENUES: 1975-1995
YEAR WHOLESALE REVENUES
- ---- ------------------
1975 $860.4 Million
1976 946.6 Million
1977 966.2 Million
1978 1.06 Billion
1979 1.2 Billion
1980 1.3 Billion
1981 1.4 Billion
1982 1.368 Billion
1983 1.6 Billion
1984 1.7 Billion
1985 1.8 Billion
1986 1.9 Billion
1987 2.09 Billion
1988 2.26 Billion
1989 2.3 Billion
1990 2.3 Billion
1991 2.38 Billion
1992 2.56 Billion
1993 2.76 Billion
1994 3 Billion
1995 3.2 Billion
-----------------------
Source: ISPA
The domestic bedding industry consists of over 800 bedding manufacturers,
ranging from small, family-owned plants to large factory-direct producers. The
four largest bedding manufacturers (the Company, Sealy Corporation, Serta, Inc.,
and Spring Air Company), accounted for approximately 58% of the industry's
estimated 1995 wholesale revenues of $3.2 billion. The 10 largest bedding
manufacturers accounted for an estimated 73% of the industry's estimated 1995
wholesale revenues, with the remaining revenues attributable to the hundreds of
small regional and local manufacturers.
The Company estimates that its share of the conventional bedding market has
grown to approximately 15.1% in 1995 from approximately 13.1% in 1992, based on
wholesale revenue data
41
<PAGE>
published by ISPA. The following table sets forth certain information regarding
management's most recent estimates of the domestic market shares of major
producers of conventional bedding, and is principally based on a report
published in the March 18, 1996 edition of Furniture/Today:
<TABLE>
<CAPTION>
1995
MARKET SHARE
COMPANY/LICENSING GROUP (ESTIMATED) MAJOR BRANDS
- --------------------------------- ------------ ---------------------------------
<S> <C> <C>
Sealy Corporation................ 17.4% Posturepedic, Correct Comfort,
Stearns & Foster
SIMMONS COMPANY.................. 15.1% BEAUTYREST, MAXIPEDIC, BACKCARE
Serta, Inc.*..................... 14.3% Perfect Sleeper, Sertapedic
Spring Air Company*.............. 11.3% Back Supporter, Spring-O-Pedic
King Koil*....................... 3.3% Posture Bond, Spinal Guard
Restonic Sleep Products*......... 2.7% Marvelous Middle, Sup-R-Posture
Englander*....................... 2.6% Lady Englander, Comfort Seal
Therapedic Division of the
International Bedding Corp....... 2.4% Medi-Coil
Springwall*...................... 2.2% Chiropractic
E.B. Malone Corp. d/b/a Bassett
Bedding.......................... 1.9% Dreammaker
All others....................... 26.8%
------
100.0%
------
------
</TABLE>
----------------
* Operates as a group of independent licensees.
ISPA estimates that approximately 70% of conventional bedding is sold for
replacement purposes and that the average time between consumer purchases of
conventional mattresses is approximately 11 years. Manufacturers compete on the
basis of product quality, brand-name recognition, price, service and prompt
delivery. Approximately 75% of conventional bedding is sold to furniture stores
and specialty sleep shops. Most of the remaining conventional bedding is sold to
department stores, national mass merchandisers and contract customers, such as
motels, hotels and hospitals.
The economics of selling conventional bedding products are attractive to
retailers for a number of reasons. Conventional bedding products produce higher
sales per square foot than most other products sold in furniture stores.
Furthermore, conventional bedding products generally provide higher gross margin
return on inventory relative to other products in furniture stores because: (i)
retailers generally carry little, if any, conventional bedding inventory other
than floor samples; and (ii) bedding products are consistently among retailers'
highest gross margin products. Furthermore, manufacturers generally share the
cost of cooperative advertising and consumer promotions with retailers.
According to a study conducted by ISPA, households headed by people 45 to 64
years old tend to purchase bedding sets in the premium price segments.
Statistics published by the United States government indicate that the number of
households in this category is expected to grow from 30.4 million in 1995 to
39.8 million in 2000, an increase of 31%, and to 42.2 million in 2005, an
additional increase of 6%. Management expects these demographic trends to result
in an increase in demand for premium priced bedding, the segment of the market
in which the Company predominantly competes.
42
<PAGE>
PRODUCTS
Overview. The Company's conventional bedding, which accounted for
approximately 98% of the Company's net sales in 1995, 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 $3,000 for a king-size luxury set. The
Company predominantly competes in the $499 and up retail price segment, which
accounts for the top 40% 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 and linens.
Pocketed Coil. The Company is the only national manufacturer that produces
conventional bedding using pocketed coil construction. The Company's
Beautyrest(R) and Connoisseur(R) lines, which employ pocketed coil 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 mattresses are
constructed so that each row of innerspring coils is joined to adjacent rows of
coils in the center third of each coil's pocket, 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 in the pocketed coil line of
bedding, accounting for approximately 72% of the Company's net sales and
approximately 58% of its unit volume in 1995. In the fall of 1995, the Company's
pocketed coil construction was incorporated into the new Connoisseur(R) line in
response to the increasing demand for top-of-the-line premium bedding. The
Connoisseur(R) line is intended to offer high-end customers a luxurious product
that is durable and that contains variable pressure foam for maximum comfort and
support. The Company expects the Connoisseur(R) line to yield higher profit
margins and further elevate the Company's image as a producer of top quality
premium bedding.
Open Coil. To provide a broad product offering, the Company manufactures the
Maxipedic(R), Beautysleep(R) and BackCare(R) product lines, which use
traditional open coil technology. The Maxipedic(R) product line, which features
non-skid quilting and a steel grid that anchors the coils and reduces lateral
motion, is intended to provide the Company's customers with a moderately priced
open coil product. Beautysleep(R) is an exclusive-label product line for
customers interested in a brand-name open coil product.
The newly introduced BackCare(R) mattresses are designed for today's
health-conscious consumers who seek superior support and comfort in the open
coil mattress category. This line combines anatomic foam with a five-zone
system, two for support and three for comfort. The foam responds to the user's
need for support under the lower back and thighs, while offering comfort under
the calves, upper shoulders and buttocks. Thus, the five-zone system is designed
to keep the back in a natural position and ensure proper alignment and comfort
as the user changes position. The BackCare(R) product line, which was introduced
in June 1995, is being sold by 25% of the Company's customers without any
significant displacement of its existing product lines.
Specialty Sleep Products. The Company manufactures waterbeds in a limited
number of its conventional bedding plants. Sold under the name Flotation
Beautyrest(R), waterbeds accounted for approximately 1% of the Company's bedding
sales in 1995. The Company, the only major domestic bedding manufacturer that
produces waterbeds, sells waterbeds to specialty retailers and other customers
throughout the United States.
43
<PAGE>
The Company currently is introducing a line of ready-to-assemble ("RTA")
bedding, which the Company believes is a potentially high-growth segment of the
bedding market. RTA will come on the market in early 1996 under the Equation of
Sleep(R) product line. This new product developed by the Company, which is
expected to be shipped to the customer in two to four boxes via United Parcel
Service or Federal Express, 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 QVC Inc. and catalogs.
CUSTOMERS
The Company manufactures and supplies conventional bedding to over 5,000
retail outlets, representing more than 2,500 customers including furniture
stores, department stores, specialty sleep shops and warehouse showrooms. In
1995, the Company was the exclusive supplier to over 200 of these customers. The
Company's 10 largest customers accounted for approximately 46% of 1995 net
sales, while no single customer accounted for more than 8% of such net sales.
The majority of the Company's net sales are to furniture stores, department
stores, sleep shops and warehouse showrooms. The following table sets forth the
customer profile for the Company's conventional bedding sales, the percentage of
total net sales made to each category of customers in 1995 and the names of
representative customers:
<TABLE>
<CAPTION>
ESTIMATED
PERCENTAGE OF
CHANNEL OF DISTRIBUTION NET SALES REPRESENTATIVE CUSTOMERS
- --------------------------------------- ------------- ---------------------------------------
<S> <C> <C>
Furniture stores....................... 50% Art Van Furniture, Inc.; Heilig-Meyers
Company; Levitz Furniture Inc.;
Rhodes Furniture
Department stores...................... 25% Federated Department Stores, Inc.; May
Department Stores Company; Montgomery
Ward & Co. Inc.; Sears, Roebuck and
Company
Specialty sleep shops.................. 17% Mattress Discounters; Nationwide Sleep
Centers; Sleepy's Bedding Centers
Warehouse showrooms.................... 5% American Furniture Warehouse; Wickes
Furniture Company Inc.
Other (membership clubs, jobbers and
contract customers).................... 3% Price/Costco Inc.; Rent-A-Center
------
100%
------
------
</TABLE>
SALES, MARKETING AND ADVERTISING
The Company's products are sold by approximately 150 field sales
representatives and a national sales staff consisting of eight people. 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. Over its 125-year history, the Company has
grown to its current market position by providing high-quality products that
appeal to consumers and a high level of service to its retailing customers.
The Company's advertising program focuses on two areas: (i) cooperative
promotional advertising, which complements and is designed around individual
retailers' marketing programs; and (ii) national advertising, which is designed
to establish and build brand awareness with end users. With cooperative
advertising, the Company shares the costs of advertising with retailers in the
form of rebates, merchandising funds and local advertising. Management believes
cooperative advertising fosters strong relationships with its retailers, who
exert significant influence on the consumer's
44
<PAGE>
purchasing decision. 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, which is ongoing, was launched in the spring of
1995. This 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 technology, which was demonstrated by the
Company's "Bowling Ball" commercial that was initially aired in April 1995.
Retailers greatly influence the bedding business through the allocation of
floor space and through the advice of the retail floor sales person, who often
has the ability to exert significant impact on customer purchase decisions.
Typically, retail floor sales people are motivated primarily by high commission
rates and by proceeds from promotions. However, the Company has found that
educating and working in partnership with sales people can increase their
awareness of the value of the Company's products. To this end, the Company has
developed programs in the Company's Atlanta offices and on-site at its retailers
that are designed to teach retail floor sales people how to match customers with
their mattress comfort preference by improving the retail floor sales person'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 sales people is one area where the Company
differentiates itself from most of its largest competitors.
The Company also has implemented an automated system for analysis of
marketing data. The Simmons Market Analysis of Retail Trends ("SMART") system
combines geographically-organized sales and demographic data to provide needed
information for the analysis of the bedding business at the retail level. This
computerized system helps the Company analyze demographic, lifestyle and sales
data and provides guidelines for increasing bedding sales. The demographic and
regional lifestyle data set forth in each SMART report provided by the Company
is used by retailers to identify and target customers in high potential sales
areas.
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 80% of its 1995 raw material needs from 10 suppliers. The Company
has long-term supply agreements with each of Leggett & Platt ("L&P"), Foamex
International, Inc. and Amoco Fabrics and Fiber Company for certain components.
L&P supplies the majority of certain components (including spring components,
insular pads, wire, fiber, quilt backing and flange material) to the bedding
industry. With the exception of L&P, the Company believes it can replace its
other suppliers because it already has identified and currently uses alternative
sources. L&P currently provides the Company with certain continuous wire and
foundation components for which alternative sources may not be readily
available. Interruption in the supply of these components could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not experienced any interruption in supply and does
not currently expect such an interruption to occur.
During 1995, L&P provided approximately one-third of the Company's total raw
material needs. The Company expects that L&P will provide a comparable portion
of the Company's 1996 total estimated raw material needs. To ensure a long-term
adequate supply of certain components, the Company and L&P have entered into
agreements, generally expiring in the year 2010, for the supply of grid tops,
innersprings and wire. Among other things, these agreements generally require
the Company to purchase a majority of its requirements of certain components
from L&P and in return, L&P will provide the Company with certain sales
allowances depending upon the volume of its purchases.
45
<PAGE>
MANUFACTURING AND FACILITIES
The Company operates 18 manufacturing facilities in 15 states and Puerto
Rico. These manufacturing facilities yield a combined practical capacity of over
20,000 units per day, assuming two eight-hour shifts daily. In 1995, the Company
produced a daily average of 15,250 bedding units per day, although average daily
production was as high as 17,700 units per day during peak periods. Currently,
13 of the Company's 18 facilities operate two shifts a day, four facilities
operate a single shift and one operates three shifts per day. Each facility is
managed by a Vice President-- General Manager who reports to one of three
Divisional Executive Vice Presidents. Each plant operates as a separate profit
center and maintains certain administrative functions, primarily sales and order
entry, accounting and payroll. The corporate headquarters oversees national
purchasing and marketing, the management of national accounts, credit
administration, accounts receivable collection, cash management and personnel
functions.
The manufacturing facilities are strategically located to service major
metropolitan areas and consist of an average of approximately 120,000 square
feet of manufacturing space, most of which is devoted to production. Most raw
materials inventory is received through "just-in-time" delivery from the
Company's major suppliers. Finished goods inventory is minimized through
made-to-order production, with most orders being scheduled, produced and shipped
within 24 to 72 hours of receipt.
The Company is working with a nationally recognized management consulting
firm on a re-engineering project, internally referred to as UNITE, which is
expected to be implemented in each of the Company's conventional manufacturing
facilities and is expected to improve the flow of production and overall
efficiency by changing the layout of the factory floor. In December 1995, the
Company substantially completed the re-engineering of its Fredericksburg,
Virginia facility, which included grouping each phase of the manufacturing
processes into cell configurations and implementing a self-replenishing raw
materials system. The Company intends to re-engineer six additional plants to
similar specifications during 1996, with the remaining 10 conventional
facilities to be converted by early 1998. Based upon the initial results of the
re-engineering of the Fredericksburg facility, management believes that, upon
completion of the scheduled re-engineering of its manufacturing facilities, the
Company will realize a significant increase in its manufacturing productivity
(measured in units produced per labor-hour), and an increase in manufacturing
space available for future expansion.
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 to develop and to test new products for marketability
and durability.
In September 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 25 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.
46
<PAGE>
WARRANTIES; PRODUCT RETURNS
The Company's conventional bedding products generally offer limited
warranties of 10 years against 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. The Company, consistent with industry practice, also
experiences non-warranty returns for reasons generally related to retailer
accommodations and order entry errors, the costs of which also are considered to
be immaterial. The Company is continuing to train its retailers' sales force
personnel on merchandising and salesmanship in order to minimize non-warranty
returns. The Company resells its returned products primarily through as-is
furniture vendors. In addition, the Company has recently begun to market its
returned products and factory overruns in Company outlets located in or near
factory outlet malls.
PATENTS, TRADEMARKS AND LICENSES
The Company owns many trademarks, including Simmons(R), Beautyrest(R),
Maxipedic(R), Connoisseur(R), Beautysleep(R), BackCare(R) and Equation of
Sleep(R), as well as patents, most of which are registered in the United States
and in many foreign countries. 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,
primarily on perpetual or automatically renewable terms. 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 and linens.
EMPLOYEES
As of March 30, 1996, the Company had approximately 2,600 employees, of
which approximately 1,140 were represented by labor unions. Employees at nine of
the Company's 18 manufacturing facilities are represented by unions.
Manufacturing employees at seven of the unionized plants are under a master
contract with the Upholstery Division of the United Steelworkers. There are also
agreements with 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. Union contracts
typically are negotiated for three-year terms. A majority of the Company's
current contracts were negotiated in 1994 and are due for renegotiation in 1997.
Since 1980, the Company has opened eight new plants, none of which is unionized.
Approximately 1,400 of the Company's current and former employees are
participants in the Simmons 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
47
<PAGE>
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.
PROPERTIES
The offices of the Company are located at One Concourse Parkway, Suite 600,
Atlanta, Georgia 30328.
The following table sets forth certain information regarding manufacturing
and certain other facilities operated by the Company as of March 30, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE
- -------------------------------------------------------------- -----------
<S> <C>
MANUFACTURING FACILITIES
Atlanta, Georgia.............................................. 148,300
Atlanta, Georgia*............................................. 30,960
Charlotte, North Carolina..................................... 113,400
Columbus, Ohio................................................ 190,000
Dallas, Texas................................................. 106,140
Denver, Colorado.............................................. 98,090
Fredericksburg, Virginia...................................... 128,500
Honolulu, Hawaii.............................................. 58,530
Jacksonville, Florida......................................... 205,729
Janesville, Wisconsin......................................... 195,340
Kansas City, Missouri......................................... 85,165
Los Angeles, California....................................... 223,382
Phoenix, Arizona.............................................. 54,000
Piscataway, New Jersey........................................ 200,908
San Leandro, California....................................... 260,500
Seattle, Washington........................................... 133,610
Springfield, Massachusetts.................................... 129,000
Toa Baja, Puerto Rico......................................... 24,500
-----------
Sub Total................................................. 2,386,054
OTHER FACILITIES
Corporate Headquarters (Atlanta, Georgia)..................... 37,500
SITE (Atlanta, Georgia)....................................... 38,000
-----------
TOTAL..................................................... 2,461,554
-----------
-----------
</TABLE>
- ------------
* This facility is not scheduled to be re-engineered pursuant to UNITE.
The Company leases all of its facilities with the exception of its
Janesville, Wisconsin manufacturing facility, which the Company owns. The
average term until final lease expiration, including renewals, is approximately
12 years. While four of the 17 leased manufacturing facilities
48
<PAGE>
have leases expiring within five years, management either is planning to
relocate to a larger facility or expects that a new lease will be signed.
The Company leases all of its facilities with the exception of its
Janesville, Wisconsin manufacturing facility, which the Company owns. The
average term until final lease expiration, including renewals, currently is
approximately 12 years. While four of the 17 leased manufacturing facilities
have leases expiring within five years, management either is planning to
relocate to a larger facility or expects that a new lease will be signed.
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.
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 material adverse
effect on the financial condition or results of operations of the Company.
On May 7, 1996, an action was filed against the Company in federal district
court in Puerto Rico alleging breach of a lease and purchase option agreement
and seeking damages of $300,000 in incurred costs and $2.2 million in lost
earnings to date. The action arises out of the Company subsidiary's termination
of the agreement with the plaintiff and others. The Company believes that the
actions of its subsidiary were in accordance with its rights under the agreement
and intends to vigorously defend the asserted claims. In the event of an
unfavorable outcome, the Company believes that any ensuing liability would not
have a material adverse effect on the Company's financial condition.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and 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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------------------ ---- ------------------------------------------
<S> <C> <C>
Zenon S. Nie.............................. 45 Chairman of the Board of Directors, Chief
Executive Officer and Director.
Martin R. Passaglia....................... 47 Senior Executive Vice President and
Director.
Jonathan C. Daiker........................ 48 Executive Vice President-Finance and
Administration, Chief Financial Officer
and Director.
William L. Ayers, IV...................... 50 Executive Vice President-Marketing and
Sales.
Joseph Ulicny............................. 53 Executive Vice President-Market
Development.
Robert K. Barton.......................... 55 Senior Vice President-Human Resources.
Gary G. Pleasant.......................... 53 Divisional Executive Vice President.
Cleve B. Murphy........................... 45 Divisional Executive Vice President.
James P. Maher............................ 60 Divisional Executive Vice President.
Leo T. Brennan............................ 61 Vice President-Materials Management.
Roger W. Franklin......................... 40 Vice President-Finance and Treasurer.
Savio W. Tung............................. 45 Director.
Christopher J. O'Brien.................... 37 Director.
Charles J. Philippin...................... 45 Director.
Jon P. Hedley............................. 35 Director.
</TABLE>
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 Bibb Companies, a linen
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.
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.
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
50
<PAGE>
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 fixtures. Prior to Philips, he
was a senior manager with Price Waterhouse, an accounting firm, from 1971 to
1981 and is a Certified Public Accountant.
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 recently was promoted to Executive
Vice President-Sales and Marketing.
Joseph Ulicny joined the Company in 1992 as Executive Vice President-Finance
and Chief Financial Officer. In Spring 1995, he assumed his current position as
Executive Vice Present-- Market Development. Prior to joining the Company, Mr.
Ulicny served 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.
Gary G. Pleasant rejoined the Company in 1991 as Vice President and General
Manager-Seattle and was promoted to his current position, Divisional Executive
Vice President, in January 1995. 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.
Cleve B. Murphy joined the Company in May 1995 as Divisional Executive Vice
President. Mr. Murphy's background includes twelve years at Sealy, Inc., 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.
James P. Maher joined the Company in 1989 and has served as Vice President
and General Manager-Jacksonville and Vice President and General Manager-San
Leandro prior to his current position as Divisional Executive Vice President.
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, from 1965 to 1984.
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. 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.
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
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, a
commercial lending institution, for four years.
51
<PAGE>
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 Saks Holdings, Inc. and The
Circle K Corporation.
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 Saks
Holdings, Inc.
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.
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 $100,000.
The current compensation arrangements for each of these officers are described
in "Employment Arrangements" below. In connection with the Acquisition, the
Company intends to adopt new compensation arrangements, the terms of which have
not yet been finalized.
52
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION-
AWARDS
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OPTIONS/ ALL OTHER
NAME AND SALARY BONUS (A) SARS (B) COMPENSATION (C)
PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- ------------------------------- ---- -------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Zenon S. Nie................... 1995 $404,167 $ 474,896 300,000 $ 7,774
Chairman & Chief Executive 1994 377,203 412,702 350,000 3,598
Officer 1993 48,295 30,000 350,000 --
Martin R. Passaglia............ 1995 250,000 262,500 71,306 4,719
Senior Executive Vice 1994 250,000 242,880 -- 19,909
President 1993 172,613 104,075 -- 21,688
Joseph Ulicny.................. 1995 167,200 175,962 -- 4,628
Executive Vice President-- 1994 160,210 155,383 -- 18,292
Market Development 1993 150,000 66,608 -- 26,207
Robert K. Barton............... 1995 165,500 173,775 70,500 4,061
Senior Vice President-- Human 1994 151,831 146,878 -- 18,894
Resources 1993 127,084 62,445 -- 17,932
Jonathan C. Daiker............. 1995 150,000 182,500 150,500 24,144
Executive Vice President-- 1994 -- -- -- --
Finance & Admininstration, 1993 -- -- -- --
Chief Financial Officer
</TABLE>
- ------------
(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 were purchased for an aggregate of $6,950,000, representing the
value of such options based on their exercise prices. Messrs. Nie,
Passaglia, Ulicny, Barton and Daiker received $1,812,800, $364,496,
$308,856, $363,867 and $117,435, respectively, for their options, which
amounts were invested in Class C Stock of Holdings.
(c) Consists of (i) contributions to defined contribution plans in 1994 and
1993, respectively, in the amounts of $0 and $0 for Mr. Nie, $18,220 and
$21,216 for Mr. Passaglia, $17,483 and $10,276 for Mr. Ulicny, $18,220 and
$17,764 for Mr. Barton, and $0 and $0 for Mr. Daiker (1995 contributions
have not been established as of this date); (ii) premiums for term life
insurance and long-term disability insurance in 1995, 1994 and 1993,
respectively, in the amounts of $7,774, $3,598 and $0 for Mr. Nie, $4,719,
$1,689 and $472 for Mr. Passaglia, $4,628, $809 and $1,036 for Mr. Ulicny,
$4,061, $674 and $168 for Mr. Barton, and $5,334, $0 and $0 for Mr. Daiker,
respectively; and (iii) relocation assistance in the amounts of $14,895 in
1993 for Mr. Ulicny and $18,810 in 1995 for Mr. Daiker.
53
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR*
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL RATES
TOTAL OF STOCK
NUMBER OF OPTIONS/ PRICE APPRECIATION
SECURITIES SARS GRANTED FOR OPTION
UNDERLYING TO EMPLOYEES EXERCISE OR TERMS
OPTION/SARS IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR(C) ($/SH) DATE 5% ($) 10% ($)
- ------------------------ ----------- -------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Zenon S. Nie............ 300,000 28.8% $4.50 2005 $849,000 $2,151,000
Martin R. Passaglia..... 71,306 6.8% $4.50 2005 $201,796 $ 511,264
Robert K. Barton........ 70,500 6.8% $4.50 2005 $199,515 $ 505,485
Jonathan C. Daiker...... 150,000 14.4% $4.50 2005 $425,915 $1,079,085
</TABLE>
* All Company options outstanding on March 22, 1996 were purchased by Holdings
in connection with the Acquisition.
RETIREMENT PLANS
The Company has one single employer defined benefit plan and two single
employer defined contribution plans (the Simmons ESOP and a 401(k) plan), and
makes contributions to multi-employer pension plans. In the aggregate, these
plans cover substantially all permanent employees.
Qualified Retirement Plans.
The Company maintains several single employer retirement plans 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.
Defined Contribution Plans. The Company sponsors two single employer defined
contribution pension plans; the Simmons Retirement Savings Plan and the Simmons
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 Simmons 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 contribution
plan; however, no employer contributions were allowed. The status of plan
participants was not affected.
Presently, there are approximately 634 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 1994
(other than the pre-tax deferrals mentioned above).
____Simmons ESOP. The Simmons 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 Simmons ESOP
are held in a trust with respect to which NationsBank, N.A. (South) (the "ESOP
Trustee") serves as trustee. The Simmons ESOP covers
54
<PAGE>
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 30, 1995,
approximately 1,400 employees participated in the Simmons ESOP.
The Simmons ESOP provides benefits to each participating employee based on
the value of Company 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
Simmons ESOP in 1989, the Simmons ESOP borrowed funds from the Company for the
purpose of acquiring Company stock. As of May 24, 1996, the Simmons ESOP was
indebted to the Company in the approximate principal amount of $61.2 million.
Prior to March 22, 1996, the date of the Acquistion, the Simmons ESOP held
approximately 11,671,663 million shares of common stock of the Company. On the
Acquisition Closing Date, the Simmons ESOP sold approximately 6,001,257 million
shares, representing all shares theretofore allocated to participants' ESOP
accounts, to Holdings for $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 Simmons ESOP. Pursuant to the Merger, the remaining
5,670,406 million 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).
The Company will make annual cash contributions to the Simmons ESOP in an
amount up to 25% of eligible participant compensation, subject to certain
limitations and conditions. The Simmons 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 Simmons 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 (in approximately six years), all
shares of Series A Preferred Stock held by the Simmons 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 Simmons ESOP
cannot be sold or otherwise transferred by the participant. The Simmons 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
55
<PAGE>
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 122
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.
Multiemployer 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
years ending December 30, 1995, December 31, 1994 and December 25, 1993, were
$1,366,000, $1,403,000 and $1,304,000, 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 Simmons ESOP, described
above. This plan covers certain employees who are not eligible to participate in
the Simmons ESOP because of restrictions imposed by the Simmons ESOP on
employees who elected favorable income tax treatment under Code Section 1402
with respect to the sale of employer securities to the Simmons 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 Simmons 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 Member, to be credited with the shares of stock which would have been
allocated to the Member's accounts under the Simmons ESOP but for the fact that
the Simmons ESOP terms restricted such an allocation. The same vesting schedule
and distribution provisions apply as are described in the Simmons ESOP. The
Company charged approximately $405,000, $582,000 and $280,000 to expense for the
years ended December 30, 1995, December 31, 1994 and December 25, 1993,
respectively. The accrued benefits under the nonqualified plan were $1,132,000,
$786,000 and $435,000 at December 30, 1995, December 31, 1994 and December 25,
1993, 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 to Messrs. Barton and Passaglia of $102,607 and $117,605, 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,
56
<PAGE>
there is a $20,000 lifetime maximum benefit for participants age 65 and over.
The Company also provides life insurance to all retirees who retired before
1979. These plans are unfunded.
The Company accrues the cost of providing post-retirement benefits including
medical and life insurance coverage, during the active service period of the
employee.
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 $500,000 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 $267,000 and $200,000
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 officer
Robert K. Barton, 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. 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 intends to
grant additional options to purchase an aggregate of up to approximately 610,715
shares of its Class C Stock to other officers and employees of the Company. 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. In addition, Holdings
has granted options to purchase up to an additional 202,900 shares of its Class
C Stock to certain members of the
57
<PAGE>
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 intends to issue options to
acquire up to an additional 48,019 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. In addition, certain holders of Class C Stock of Holdings have
indicated an intent to offer certain members of the Company's management an
opportunity to purchase shares of Class C Stock of Holdings at the same price
paid by such holders.
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.
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<PAGE>
OWNERSHIP OF VOTING SECURITIES
The Company has two classes of issued and outstanding stock (common stock
and Series A Preferred Stock), both of which possess voting rights. At May 24,
1996, 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 NationsBank, N.A. (South), as Trustee, 600 Peachtree Street,
NE, Atlanta, Georgia 30308.
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 May 24, 1996, 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
listed under "Management," the directors and 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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
NAME (A) CLASS (A)
- ---------------------------------------------------------------------- --------- ----------
<S> <C> <C>
INVESTCORP S.A. (b)(c)................................................ 200,000 100.0%
37 rue Notre-Dame,
Luxembourg
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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
NAME (A) CLASS (A)
- ---------------------------------------------------------------------- --------- ----------
<S> <C> <C>
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
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
</TABLE>
- ------------
<TABLE>
<C> <S>
(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.
</TABLE>
(Footnotes continued on following page)
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<PAGE>
(Footnotes continued from preceding page)
<TABLE>
<C> <S>
(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.
</TABLE>
STOCKHOLDERS' AGREEMENT
In connection with the Acquisition, the Company entered into an agreement
dated as of March 22, 1996 with Holdings and the Simmons ESOP (the
"Stockholders' Agreement"). The following is a summary description of the
principal terms of the Stockholders' Agreement and is subject to and qualified
in its entirety by reference to the definitive Stockholders' Agreement.
Tag-Along and Drag-Along Rights. If, following a sale by Holdings of shares
of common stock of the Company (other than pursuant to a registration statement
under the Securities Act) to an unaffiliated third party, Holdings and its
affiliates cease to own (or to continue to own), in the aggregate, at least 50%
of the shares of common stock of the Company acquired by Holdings on the
effective date of the Acquisition (a "Section 2.1 Event"), the ESOP Trustee may
elect to participate in such sale on a pro rata basis or may be required by
Holdings or the unaffiliated third party to participate in such sale on a pro
rata basis, for the same consideration per share and otherwise on the same terms
and conditions as apply to the sale of shares by Holdings, subject to certain
notice provisions and other conditions.
Exchange Rights. The ESOP Trustee may elect to exchange shares of common
stock of the Company for shares of Class C Stock of Holdings on a one-for-one
basis, as adjusted for any stock dividend, stock split, combination,
recapitalization or similar event, upon the occurrence of a Section 2.1 Event or
one of the following events (each an "Exchange Event"): (i) a sale of Holdings
pursuant to (A) the 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
stock changes more than 50%; or (ii) an initial public offering of the common
stock of Holdings pursuant to an effective registration statement under the
Securities Act. Shares of Series A Preferred Stock of the Company are
convertible, at the option of the holder, into shares of common stock of the
Company. See "Capital Structure--Preferred Stock."
Consent of ESOP Trustee. The Company and Holdings have agreed that, subject
to certain exceptions, the following actions will require the written consent of
the ESOP Trustee: (i) the occurrence of a merger or consolidation of the Company
with Holdings, any of its affiliates, or any corporation which, after such
merger or consolidation, would be an affiliate of Holdings, (ii) the issuance by
the Company or Holdings of any shares, securities convertible into shares or
options exercisable for shares of common stock of the Company or Class C Stock
of Holdings, respectively, for consideration per share less than the fair market
value of such shares or options on the date of issuance or grant (other than
shares, securities convertible into shares, or options
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<PAGE>
exercisable for shares of Class C Stock of Holdings in an outstanding amount not
to exceed 3,051,465 shares issued to directors, employees or consultants of the
Company); (iii) the payment by Holdings of dividends on any shares of Holdings
capital stock unless an equivalent amount is paid to holders of Series A
Preferred Stock upon conversion and exchange for Class C Stock of Holdings or
common stock of the Company; (iv) the undertaking by Holdings of any activity
other than incident to Holdings' ownership of the common stock of the Company or
operation of the Company; (v) any amendment by Holdings' Board of Directors to
Holdings' Bylaws, Certificate of Incorporation or Certificate of Designation
other than to increase the authorized number of shares of any class of Holdings'
capital stock; (vi) the entry by the Company or Holdings into any agreement that
prohibits or limits the Company's ability to honor the "put" option granted to
participants in the Simmons ESOP, pursuant to the terms thereof, following
termination of the participants' employment with the Company and distribution of
such participants' shares of Series A Preferred Stock, if such shares are, at
the time of distribution, not publicly traded or subject to a trading
limitation; or (vii) the consummation of a Section 2.1 Event or Exchange Event
unless the Company has legally sufficient funds to honor the redemption option
set forth in the Company's Certificate of Incorporation.
Registration Rights. The Stockholders' Agreement also grants certain
registration rights with respect to shares of common stock of the Company that
are issued or are issuable upon conversion of shares of Series A Preferred Stock
and held by the ESOP Trustee or that are beneficially owned by Holdings, an
affiliate or a transferee. The Company is obligated to bear all expenses
incident to any such registration other than the underwriting discounts and
commissions and transfer taxes, if any, incurred by selling stockholders in
connection with the shares sold pursuant to the registration statement.
PARENT OPTION AGREEMENT
In connection with the Stockholders' Agreement, the Company entered into an
agreement with Holdings pursuant to which the Company agreed that 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.
CERTAIN 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 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.
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<PAGE>
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 will be paid in late 1996 or early
1997. Of this amount, $1,575,609, $316,803, $264,444, $316,257 and $102,070 has
been or will be received by Messrs. Nie, Passaglia, Ulicny, Barton and Daiker,
respectively.
CAPITAL STRUCTURE
SENIOR CREDIT FACILITY
General. The Credit Agreement, dated as of March 22, 1996 (the "Senior
Credit Facility"), among the Company, the several lenders from time to time
parties thereto (collectively, the "Lenders") and Chemical Bank, as
administrative agent for the Lenders (the "Administrative Agent"), provides for
a $115.0 million term and revolving loan credit facility (the "Loans").
At March 30, 1996, on a pro forma basis after giving effect to the
Acquisition and adjusting for the Offering (including the application of the net
proceeds therefrom), the amount under the revolving credit portion of the Senior
Credit Facility that was available to be drawn was approximately $24.4 million,
after giving effect to $9.4 million of outstanding borrowings and $6.2 million
that was reserved in respect of 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 Loans are secured by a first priority security interest in substantially
all the personal property of the Company and a pledge by Holdings of all issued
and outstanding capital stock of the Company that is owned by Holdings. Such
pledge secures a guarantee of the Loans by Holdings. Upon the request of the
Administrative Agent, any domestic subsidiary of the Company that has material
assets will also be required to issue a guarantee of the Loans which will be
secured by a first priority security interest in substantially all personal
property of such subsidiary, and, upon the request of the Administrative Agent,
the Company will be required to pledge the issued and outstanding capital stock
of such subsidiary owned by the Company or any of its subsidiaries or up to 65%
of the issued and outstanding capital stock of any foreign subsidiary
63
<PAGE>
owned by the Company or any of its subsidiaries that has material assets to
secure indebtedness under the Senior Credit Facility.
Term Loans. The Senior Credit Facility provides for a $75.0 million term
loan facility, which is divided into two tranches, the Tranche A and Tranche B
term loans. The Tranche A term loans have a final scheduled maturity date of
March 31, 2001, and the Tranche B term loans have a final scheduled maturity
date of March 31, 2003.
The principal amounts of the Tranche A term loans are required to be repaid
in 10 consecutive semiannual installments totaling $2.0 million in fiscal year
1996, $5.0 million in fiscal year 1997, $7.0 million in fiscal year 1998, $9.0
million in fiscal year 1999, $11.0 million in fiscal year 2000, and $6.0 million
in fiscal year 2001. The principal amounts of the Tranche B term loans are
required to be repaid in 14 consecutive semiannual installments totaling
$100,000 in fiscal year 1996, $200,000 in each of fiscal years 1997, 1998, 1999
and 2000, $8.6 million in fiscal year 2001, $17.0 million in fiscal year 2002
and $8.5 million in fiscal year 2003.
Revolving Credit Facility. 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 and (b) such other date as the revolving
credit commitments thereunder shall terminate in accordance with the terms of
the Senior Credit Facility.
Interest Rates. Borrowings under the Senior Credit Facility accrue interest
at either the Alternate Base Rate (the "Alternate Base Rate") or an adjusted
Eurodollar Rate (the "Eurodollar Rate"), at the option of the Company, plus the
applicable interest margin. The Alternate Base Rate at any time is determined to
be the highest of (i) the Federal Effective Funds Rate plus 1/2 of 1% per annum,
(ii) the Base CD Rate plus 1% per annum and (iii) Chemical Bank's Prime Rate.
The applicable interest margin with respect to loans made under the revolving
credit facility and with respect to Tranche A term loans is 2.50% per annum with
respect to loans that accrue interest at the Eurodollar Rate and 1.25% per annum
for loans that accrue interest at the Alternate Base Rate. The applicable
interest margin with respect to Tranche B term loans is 3.00% per annum for
loans that accrue interest at the Eurodollar Rate and 1.75% per annum for loans
that accrue interest at the Alternate Base Rate.
Mandatory and Optional Prepayments. The Senior Credit Facility requires that
upon an initial public offering by the Company, Holdings or any subsidiary of
the Company of its common or other voting stock, or upon the incurrence of any
additional indebtedness (other than indebtedness permitted under the Senior
Credit Facility), or upon the receipt of proceeds from certain asset sales and
exchanges, 100% of the net proceeds from such offering, incurrence, sale or
exchange is required to be applied toward the prepayment of indebtedness under
the Senior Credit Facility. In addition, the Senior Credit Facility requires
that 50% of Excess Cash Flow (as defined in the Senior Credit Facility) is
required to be applied toward the prepayment of indebtedness under the Senior
Credit Facility. Such prepayments are required to be applied first to the
prepayment of the term loans and, second, to reduce permanently the revolving
credit commitments. Subject to certain conditions, the Company may, from time to
time, make optional prepayments of Loans without premium or penalty. Any
prepayment of term loans, whether mandatory or optional, is required to be
applied to the Tranche A term loans and the Tranche B term loans, and the
respective installments thereof, ratably according to the outstanding principal
amounts thereof.
Covenants. The Senior Credit Facility imposes certain covenants and other
requirements on the Company and its subsidiaries. In general, the affirmative
covenants provide for mandatory reporting by the Company of financial and other
information to the Lenders and notice by the Company to the Lenders upon the
occurrence of certain events. The affirmative covenants also include standard
operating covenants requiring the Company to operate its business in an orderly
manner consistent with past practice.
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<PAGE>
The Senior Credit Facility also contains certain negative covenants and
restrictions on actions by the Company and its subsidiaries that, among other
things, restrict: (i) consolidations, mergers and sales of assets; (ii) the
incurrence and existence of liens or other encumbrances; (iii) the incurrence
and existence of contingent obligations; (iv) the payment of dividends and
repurchases of common stock; (v) prepayments and amendments of certain
subordinated debt instruments and equity; (vi) investments, loans and advances;
(vii) capital expenditures; (viii) changes in fiscal year; (ix) certain
transactions with affiliates; and (x) changes in lines of business. 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.
In addition, the Senior Credit Facility also provides that the Company and
its subsidiaries may not create, incur, assume or suffer to exist any
indebtedness except: (i) indebtedness arising under the Senior Credit Facility;
(ii) indebtedness existing on the closing date of the Senior Credit Facility
that was specifically scheduled, excluding the refinancing of such indebtedness;
(iii) intercompany indebtedness between the Company and its domestic
subsidiaries and of the Company to any of its foreign subsidiaries; (iv)
indebtedness under the Subordinated Loan Facility up to $100.0 million plus
additional principal thereof issued in lieu of cash interest; (v) any Permanent
Subordinated Debt (as defined in the Senior Credit Facility), provided that the
aggregate principal amount of such indebtedness does not exceed $110.0 million
and $100.0 million of the net proceeds thereof are used to repay indebtedness
under the Subordinated Loan Facility; (vi) indebtedness under industrial revenue
bonds or similar governmental and municipal bonds and for the deferred purchase
price of newly acquired property and to finance equipment purchases if incurred
within 180 days of the acquisition of such property, subject to an aggregate
limit of $12.0 million at any one time outstanding; (vii) indebtedness under
certain financing leases, subject to Capital Expenditure (as defined in the
Senior Credit Facility) and Interest Coverage Ratio limits; (viii) other
indebtedness of the Company and its domestic subsidiaries, subject to a $10.0
million limit in the aggregate at any one time outstanding; (ix) indebtedness of
its foreign subsidiaries, subject to a $5.0 million limit in the aggregate at
any one time outstanding; (x) indebtedness under letters of credit not issued
under the Senior Credit Facility, subject to a $5.0 million limit in the
aggregate at any one time outstanding; (xi) indebtedness in connection with
permitted acquisitions, subject to a $5.0 million limit in the aggregate; (xii)
indebtedness in connection with the repurchase of shares of the capital stock of
the Company made in accordance with the terms of the ESOP; (xiii) indebtedness
in connection with workmen's compensation obligations and general liability
exposure; and (xiv) indebtedness of foreign subsidiaries to the Company or any
of its other subsidiaries, up to $5.0 million less the sum of other outstanding
indebtedness of such foreign subsidiaries and investments by the Company and its
domestic subsidiaries therein.
Events of Default. The Senior Credit Facility specifies certain customary
events of default including non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross-acceleration to certain other
indebtedness and agreements, bankruptcy and insolvency events, material
judgments and liabilities, change of control, unenforceability of certain
documents under the Senior Credit Facility and any amendment or other
modification of the Subordinated Loan Facility or the Notes made without all
required written consents in accordance with the terms of the Senior Credit
Facility. If certain bankruptcy and insolvency events of default occur, then all
amounts owing under the Senior Credit Facility become immediately due and
payable. If any other event of default occurs, and so long as such event of
default continues, the Administrative Agent may, with the consent of, or shall
upon the request of, a majority of the Lenders, declare all amounts owing under
the Senior Credit Facility to be due and payable.
Fees and Expenses. The Company is required to pay to the Administrative
Agent, for the account of each Lender, 1/2 of 1% per annum on the average daily
amount of the available
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<PAGE>
revolving credit commitment of each such Lender. The Company is also required to
pay to the Administrative Agent an agent's fee in an amount agreed between the
Company and the Administrative Agent.
The description of the Senior Credit Facility set forth above does not
purport to be complete and is qualified in its entirety by reference to the
Senior Credit Facility that contains the principal terms and conditions thereof,
which is available upon request from the Company.
INDUSTRIAL REVENUE BONDS
The construction cost of the Janesville, Wisconsin facility of the Company
was financed through the issuance by the city of Janesville, Wisconsin of
variable rate industrial revenue bonds in August 1980, the proceeds of which
were loaned by the city to the Company, which agreed, pursuant to a loan
agreement, to pay to the city amounts sufficient to pay debt service on the
bonds. The variable rate industrial revenue bonds were converted in November
1992 to fixed rate industrial revenue bonds in a principal amount of $9,700,000
with an effective interest rate of 7.0%, maturing on October 1, 2017.
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 May 24, 1996, there were 5,670,406 shares outstanding of the
Series A Preferred Stock, all of which were held by the Simmons ESOP.
Each share of Series A Preferred Stock is convertible, at the option of the
holder, into the number of shares 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 May 24, 1996,
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. See "Ownership of Voting
Securities--Stockholders' Agreement."
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 stock 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.
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. See "Ownership of Voting
Securities--Stockholders' Agreement."
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
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<PAGE>
the Simmons ESOP. However, upon the occurrence of a corporate merger,
consolidation, recapitalization, reclassification, liquidation, dissolution,
sale of substantially all of the assets of the Company or other similar
transaction, participants in the Simmons 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.
COMMON STOCK
The authorized common stock of the Company consists of 50,000,000 shares of
common stock, par value $0.01 per share ("Common Stock"). At May 24, 1996, there
were 31,964,452 shares of Common Stock issued and outstanding, all of which are
held of record by Holdings. All outstanding shares of Common Stock are pledged
to secure the Company's obligations under the Senior Credit Facility. Each share
of Common Stock entitles the holder thereof to one vote on all matters to be
voted on by shareholders of the Company. 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. In the event of a liquidation, dissolution or winding-up of the
Company, the holders of the Common Stock are entitled to share in the remaining
assets of the Company after payment of all liabilities (including payments
required to be made to holders of the Notes) and after satisfaction of all
liquidation preferences payable to the holders of the Series A Preferred Stock
and all other shares of stock ranking senior to the Common Stock in respect of
any distribution upon the liquidation, dissolution or winding-up of the Company.
The Common Stock has no pre-emptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of the Common Stock are fully paid and
non-assessable.
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DESCRIPTION OF NOTES
GENERAL
The New Notes are to be issued under an Indenture, dated as of April 18,
1996 (the "Indenture"), between the Company and SunTrust Bank, Atlanta, as
Trustee (the "Trustee"), a copy of which is available upon request to the
Company.
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended ("TIA"). Capitalized terms used herein
and not otherwise defined have the meanings set forth in "--Certain
Definitions."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee's agent, at The First Chicago Trust
Company of New York, 14 Wall Street, 8th Floor, Corporate Trust Department, New
York, New York, 10005), except that, at the option of the Company, payment of
interest may be made by check mailed to the addresses of the Holders as such
address appears in the Note Register.
The New Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. No service
charge will be made for any registration of transfer or exchange of New Notes,
but the Company may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The New Notes will be unsecured senior subordinated obligations of the
Company, limited to $100.0 million aggregate principal amount, and will mature
on April 15, 2006. Each New Note will bear interest at a rate per annum shown on
the front cover of this Prospectus from April 18, 1996, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
Holders of record at the close of business on April 1st or October 1st
immediately preceding the interest payment date on April 15th and October 15th
of each year, commencing October 15, 1996.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to April 15, 2001. On and after such date, the Notes will be
redeemable, at the Company's option, in whole or in part, at any time upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
in percentages of principal amount), plus accrued interest to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
If redeemed during the 12-month period commencing on or after April 15th of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ----------------------------------------------------------------------- ----------
<S> <C>
2001................................................................... 105.3750%
2002................................................................... 103.5833%
2003................................................................... 101.7917%
2004 and thereafter.................................................... 100.0000%
</TABLE>
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<PAGE>
In addition, at any time and from time to time on or prior to April 15,
1999, the Company may redeem in the aggregate up to 33 1/3% of the original
aggregate principal amount of Notes with the proceeds of one or more Public
Equity Offerings by Holdings (so long as substantially all its assets consist of
its investment in the Company) or the Company following which there is a Public
Market, at a redemption price (expressed as a percentage of principal amount) of
110.75% plus accrued interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least 66 2/3% of the
original aggregate principal amount of the Notes must remain outstanding after
each such redemption.
At any time on or prior to April 15, 2001, the Notes may also be redeemed as
a whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days' prior notice (but in no event more
than 90 days after the occurrence of such Change of Control) mailed by
first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued but unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at April 15, 2001 (such redemption price being described under "--Optional
Redemption") plus (2) all required interest payments (excluding accrued but
unpaid interest) due on such Note through April 15, 2001, computed using a
discount rate equal to the Treasury Rate plus 100 basis points, over (B) the
principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the Redemption Date to April 15, 2001; provided, however, that if the period
from the Redemption Date to April 15, 2001 is not equal to the constant maturity
of a United States Treasury security for which a weekly average yield is given,
the Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the period
from the Redemption Date to April 15, 2001 is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
SELECTION
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other method
as the Trustee in its sole discretion shall deem to be fair and appropriate,
provided that no Note of $1,000 in original principal amount or less will be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The payment of the principal of, premium (if any) and interest on the Notes
is subordinated in right of payment, as set forth in the Indenture, to the
payment when due of all Senior Indebtedness
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of the Company. However, payment from the money or the proceeds of U.S.
Government Obligations held in any defeasance trust described under "Defeasance"
below is not subordinated to any Senior Indebtedness or subject to the
restrictions described herein. At March 30, 1996, adjusting for the issuance and
sale of the Notes and the application of the net proceeds therefrom, the
outstanding Senior Indebtedness of the Company would have been $95.2 million.
Although the Indenture contains limitations on the amount of additional
Indebtedness which the Company may Incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants--Limitation on
Indebtedness" below.
"Senior Indebtedness" whether outstanding on the date of the Indenture or
thereafter issued, is defined as (i) all obligations consisting of the Bank
Indebtedness; (ii) all obligations consisting of the principal of and premium,
if any, and accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company regardless of whether post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of the Company for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which the Company is responsible or liable; (iii)
all Capitalized Lease Obligations of the Company; (iv) all obligations of the
Company (A) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (B) under interest rate
swaps, caps, collars, options and similar arrangements and foreign currency
hedges entered into in respect of any obligations described in clauses (i), (ii)
and (iii) or (C) issued or assumed as the deferred purchase price of property
and all conditional sale obligations of the Company and all obligations of the
Company under any title retention agreement; (v) all obligations of other
persons of the type referred to in clauses (ii), (iii) and (iv) and all
dividends of other persons for the payment of which, in either case, the Company
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including guarantees of such obligations and dividends; and (vi) all
obligations of the Company consisting of modifications, renewals, extensions,
replacements and refundings of any obligations described in clauses (i), (ii),
(iii), (iv) or (v); unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such obligations
are not superior in right of payment to the Notes; provided, however, that
Senior Indebtedness will not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness,
Guarantee or obligation of the Company that is subordinate or junior to any
other Indebtedness, Guarantee or obligation of the Company or (5) any
Indebtedness that is incurred in violation of the Indenture. If any Designated
Senior Indebtedness is disallowed, avoided or subordinated pursuant to the
provisions of Section 548 of Title 11 of the United States Code or any
applicable state fraudulent conveyance law, such Designated Senior Indebtedness
nevertheless will constitute Senior Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness which is subordinate or
junior in ranking in any respect to Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured Indebtedness merely because it is
unsecured.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase or retire any Notes
(collectively, "pay the Notes") if (i) any Senior Indebtedness is not
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paid when due or (ii) any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full. However, the Company may pay the Notes without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment from
the Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Company may not pay the
Notes for a period (a "Payment Blockage Period") commencing upon the receipt by
the Trustee (with a copy to the Company) of written notice (a "Blockage Notice")
of such default from the Representative of the Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) because the default giving rise to such Blockage
Notice is no longer continuing or (iii) because such Designated Senior
Indebtedness has been repaid in full). Notwithstanding the provisions described
in the immediately preceding sentence, unless the holders of such Designated
Senior Indebtedness or the Representative of such holders have accelerated the
maturity of such Designated Senior Indebtedness, the Company may resume payments
on the Notes after the end of such Payment Blockage Period. Not more than one
Blockage Notice may be given in any consecutive 360-day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness during
such period. However, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness (other than the
Bank Indebtedness), the Representative of the Bank Indebtedness may give another
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any consecutive 360-day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of the Senior Indebtedness before the
Noteholders are entitled to receive any payment and until the Senior
Indebtedness is paid in full, any payment or distribution to which Noteholders
would be entitled, but for the subordination provisions of the Indenture, will
be made to holders of the Senior Indebtedness as their interests may appear. If
a distribution is made to Noteholders that, due to the subordination provisions,
should not have been made to them, such Noteholders are required to hold it in
trust for the holders of Senior Indebtedness and pay it over to them as their
interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of the Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Company who are not holders of Senior Indebtedness or of Senior Subordinated
Indebtedness (including the Notes) may recover less,
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ratably, than holders of Senior Indebtedness and may recover more, ratably, than
the holders of Senior Subordinated Indebtedness.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(i) prior to the first public offering of Voting Stock of the Company or
Holdings, as the case may be, the Permitted Holders cease to be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of majority voting power of the Voting Stock
of Holdings or Holdings shall cease to own 84% of the issued and outstanding
Voting Stock of the Company, whether as a result of issuance of securities
of the Company or Holdings, as the case may be, any merger, consolidation,
liquidation or dissolution of the Company or Holdings, as the case may be,
any direct or indirect transfer of securities by any Permitted Holder or
otherwise (for purposes of this clause (i) and clause (ii) below, the
Permitted Holders will be deemed to beneficially own any Voting Stock of a
corporation (the "specified corporation") held by any other corporation (the
"parent corporation") so long as the Permitted Holders beneficially own (as
so defined), directly or indirectly, a majority of the Voting Stock of the
parent corporation);
(ii) following the first public offering of Voting Stock of the Company
or Holdings, as the case may be, any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more
Permitted Holders, is or becomes the beneficial owner (as defined in clause
(i) above, except that a person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company or Holdings, as the case may be; provided
that the Permitted Holders beneficially own (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company or Holdings, as the
case may be, than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of the Company or Holdings, as the case
may be (for purposes of this clause (ii), such other person shall be deemed
to beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person "beneficially owns" (as defined in
this clause (ii)), directly or indirectly, more than 35% of the voting power
of the Voting Stock of such parent corporation and the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or indirectly,
in the aggregate a lesser percentage of the voting power of the Voting Stock
of such parent corporation and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the board of directors of such parent corporation); or
(iii) following the first public offering of Voting Stock of the Company
or Holdings, as the case may be, any person (other than Investcorp, its
Affiliates and members of the Management Group) (a) nominates one or more
individuals for election to the board of directors of the Company or
Holdings, as the case may be, (b) solicits proxies, authorizations or
consents in connection therewith and (c) such number of nominees elected to
serve on the board of directors represents a majority of the board of
directors of the Company or Holdings, as the case may be, following such
election.
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In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in the
immediately following paragraph but in any event within 30 days following any
Change of Control, the Company shall (i) repay in full all Bank Indebtedness or
offer to repay in full all Bank Indebtedness and repay the Bank Indebtedness of
each lender who has accepted such offer or (ii) obtain the requisite consent
under the agreements governing the Bank Indebtedness to permit the repurchase of
the Notes as provided for in the immediately following paragraph.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on a record date to
receive interest on the relevant interest payment date); (2) the circumstances
and relevant facts and financial information regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor later than
60 days from the date such notice is mailed); and (4) the instructions
determined by the Company, consistent with this covenant, that a Holder must
follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Facility. Future
Senior Indebtedness of the Company may contain prohibitions of certain events
which would constitute a Change of Control or require such Senior Indebtedness
to be repurchased upon a Change of Control. Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Senior Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the Holders upon a repurchase may
be limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that
the Company may Incur Indebtedness if on the date thereof the Consolidated
Coverage Ratio would be greater than 2.00:1.00, if
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such Indebtedness is Incurred on or prior to March 31, 1998; and 2.25:1.00 if
such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
under the Senior Credit Facility (as the same may be amended from time to time,
without increasing the committed amount thereunder, except as otherwise
permitted by this covenant) and any Refinancing Indebtedness with respect
thereto in an aggregate principal amount on the date of Incurrence that, when
added to all other Indebtedness Incurred pursuant to this clause (i) and then
outstanding, shall not exceed the sum of the then outstanding Indebtedness under
the Senior Credit Facility and the unused commitments thereunder; provided,
however, that any Refinancing Indebtedness with respect to Indebtedness Incurred
pursuant to this clause (i) shall not be subject to the limitations contained in
clauses (i) and (ii) of the definition of Refinancing Indebtedness set forth in
"--Certain Definitions" below; (ii) Indebtedness (A) of the Company to any
Restricted Subsidiary, (B) of any Restricted Subsidiary to the Company or any
other Restricted Subsidiary; (iii) Indebtedness represented by the Notes, any
Indebtedness (other than the Indebtedness described in clauses (i) and (ii)
above) outstanding on the date of the Indenture and any Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (iii) or
paragraph (a); (iv) Indebtedness of the Company and its Restricted Subsidiaries
for (A) industrial revenue bonds or other similar governmental and municipal
bonds and (B) the deferred purchase price of newly acquired property of the
Company and its Restricted Subsidiaries used in the ordinary course of business
of the Company and its Subsidiaries (provided such purchase money financing is
entered into within 180 days of the acquisition of such property) in an amount
(based on the remaining balance of the obligations therefor on the books of the
Company and its Restricted Subsidiaries) which in the case of the preceding
clauses (A) and (B) shall not exceed $12.0 million in the aggregate at any time
outstanding; (v) Indebtedness of the Company or any of its Restricted
Subsidiaries (which may comprise Bank Indebtedness) in an aggregate principal
amount at any time outstanding not in excess of $15.0 million; (vi) Indebtedness
in an aggregate principal amount at any time outstanding not in excess of $5.0
million in respect of letters of credit (other than letters of credit issued
under the Senior Credit Facility); (vii) (A) Indebtedness assumed in connection
with acquisitions permitted under the Senior Credit Facility (so long as such
Indebtedness was not incurred in anticipation of such acquisitions), (B)
Indebtedness of newly acquired Subsidiaries acquired in such acquisitions (so
long as such Indebtedness was not incurred in anticipation of such acquisitions)
and (C) Indebtedness owed to the seller in any acquisition permitted under the
Senior Credit Facility constituting part of the purchase price thereof, all in
an aggregate principal amount at any time outstanding not in excess of $5.0
million; (viii) Indebtedness represented by the Note Guarantees and Guarantees
of Indebtedness Incurred pursuant to clause (i) or (v) above; and (ix)
Indebtedness incurred in connection with the repurchase of shares of the Capital
Stock of the Company or Holdings as permitted by paragraph (b)(v)(D) of the
covenant described under "--Limitation on Restricted Payments."
(c) Notwithstanding any other provision of this covenant, the Company will
not Incur any Indebtedness (i) pursuant to paragraph (b) if the proceeds thereof
are used, directly or indirectly, to repay, prepay, redeem, defease, retire,
refund or refinance any Subordinated Obligations unless such Indebtedness shall
be subordinated to the Notes to at least the same extent as such Subordinated
Obligations or (ii) pursuant to paragraph (a) or (b) if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any
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merger or consolidation involving the Company) except dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and except
dividends or distributions payable to the Company or another Restricted
Subsidiary (and, if such Restricted Subsidiary is not wholly owned, to its other
shareholders on a pro rata basis), (ii) purchase, redeem, retire or otherwise
acquire for value any Capital Stock of the Company or any Restricted Subsidiary
held by Persons other than the Company or another Restricted Subsidiary, (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition), (iv) pay any
amount to Holdings for the purposes set forth in clauses (v)(A) through (C) of
the following paragraph (b), or (v) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement, payment or
Investment being herein referred to as a "Restricted Payment") if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default shall have occurred and be continuing (or would result therefrom); (2)
the Company could not Incur at least $1.00 of additional Indebtedness pursuant
to paragraph (a) of the covenant described under "--Limitation on Indebtedness";
or (3) the aggregate amount of such Restricted Payment and all other Restricted
Payments (the amount so expended, if other than in cash, to be determined in
good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution of the Board of Directors) declared or made
subsequent to the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from the beginning of the fiscal quarter during which the Notes are
originally issued to the end of the most recent fiscal quarter ending at least
45 days prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the
aggregate Net Cash Proceeds received by the Company from the issue or sale of
its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date
(other than an issuance or sale to a Subsidiary of the Company or an employee
stock ownership plan or other trust established by the Company or any of its
Subsidiaries); and (C) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary) subsequent to the Issue Date
of any Indebtedness of the Company or its Restricted Subsidiaries convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company or any
Restricted Subsidiary upon such conversion or exchange).
(b) The provisions of the foregoing paragraph shall not prohibit: (i) any
purchase or redemption of Capital Stock of the Company or Subordinated
Obligations made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that (A) such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale applied in the manner set forth in this clause (i)
will be excluded from clause (3)(B) of paragraph (a); (ii) any purchase or
redemption of Subordinated Obligations made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of the Company
that is permitted to be Incurred pursuant to the covenant described under
"--Limitation on Indebtedness"; provided, however, that such purchase or
redemption will be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock"; provided, however, that
such purchase or redemption will be excluded in the calculation of the amount of
Restricted Payments; (iv) dividends paid within 60 days
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after the date of declaration thereof if at such date of declaration such
dividend would have complied with paragraph (a); provided, however, that such
dividend will be included in the calculation of the amount of Restricted
Payments; or (v) payment of dividends, other distributions or other amounts by
the Company for the purposes set forth in clauses (A) through (E) below;
provided, however, that such dividend, distribution or amount set forth in
clauses (A) through (D) will be included in the calculation of the amount of
Restricted Payments for purposes of the preceding paragraph: (A) to Holdings in
amounts equal to the amounts required for Holdings to pay franchise taxes and
other fees required to maintain its corporate existence and provide for other
operating costs of up to $500,000 per fiscal year; (B) to Holdings in amounts
equal to amounts required for Holdings to pay federal, state and local income
taxes to the extent such income taxes are attributable to the income of the
Company and its Restricted Subsidiaries (and, to the extent of amounts actually
received from its Unrestricted Subsidiaries, in amounts required to pay such
taxes to the extent attributable to the income of such Unrestricted
Subsidiaries); (C) to Holdings in amounts equal to amounts expended by Holdings
to repurchase Capital Stock of Holdings owned by former employees of the Company
or its Subsidiaries or their assigns, estates and heirs; provided, however, that
the aggregate amount paid, loaned or advanced to Holdings pursuant to this
clause (C) shall not, in the aggregate, exceed $2.5 million per fiscal year of
the Company, up to a maximum aggregate amount of $7.5 million during the term of
the Indenture, plus any amounts contributed by Holdings to the Company as a
result of resales of such repurchased shares of Capital Stock; (D) in amounts
equal to amounts expended by the Company to repurchase shares of its Capital
Stock from deceased or retired employees in accordance with the terms of the
ESOP as in effect on the Closing Date and from employees whose employment with
the Company or any of its Subsidiaries has terminated for any other reason but
only to the extent mandatorily required by the ESOP as in effect on the Closing
Date, the Code or ERISA; provided that in each case the Company has deferred
making any cash payments in respect of such repurchase obligations to the
maximum extent possible under the ESOP as in effect on the Closing Date; and (E)
in an amount not in excess of an aggregate amount of $750,000 to redeem the
Series C Preferred Stock of the Company that was called for redemption in
connection with the Acquisition.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except: (1) any encumbrance or restriction pursuant to
an agreement in effect at or entered into on the date of the Indenture; (2) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, or to provide all
or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company) and
outstanding on such date; (3) any encumbrance or restriction pursuant to an
agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this covenant or this clause (3)
or contained in any amendment to an agreement referred to in clause (1) or (2)
of this covenant or this clause (3); provided, however, that the encumbrances
and restrictions contained in any such refinancing agreement or amendment are no
less favorable to the Noteholders than encumbrances and restrictions contained
in such agreements; (4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise
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prohibited by the Indenture or (C) contained in security agreements securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to such security
agreements; and (5) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the shares
and assets subject to such Asset Disposition, (ii) at least 80% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash and (iii) an amount equal to 100% of the Net Available Cash
from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be) (A) first, to the extent the Company elects (or
is required by the terms of any Senior Indebtedness or Indebtedness (other than
Preferred Stock) of a Wholly Owned Subsidiary), to prepay, repay or purchase
Senior Indebtedness or such Indebtedness (other than Preferred Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within 12 months after the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (B)
second, to the extent of the balance of Net Available Cash after application in
accordance with clause (A), to the extent the Company or such Restricted
Subsidiary elects, to reinvest in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net Available
Cash received by the Company or another Restricted Subsidiary) within 12 months
from the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to make an offer
to purchase Notes pursuant and subject to the conditions of the Indenture to the
Noteholders at a purchase price of 100% of the principal amount thereof plus
accrued and unpaid interest to the purchase date, and (D) fourth, to the extent
of the balance of such Net Available Cash after application in accordance with
clauses (A), (B) and (C), to (x) acquire Additional Assets (other than
Indebtedness and Capital Stock) or (y) prepay, repay or purchase Indebtedness of
the Company (other than Indebtedness owed to an Affiliate of the Company and
other than Disqualified Stock of the Company) or Indebtedness of any Restricted
Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the
Company), in each case described in this clause (D) within one year from the
receipt of such Net Available Cash or, if the Company has made an Offer pursuant
to clause (C), six months from the date such Offer is consummated; provided,
however, that in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. The Company and the Restricted
Subsidiaries will not be required to apply any Net Available Cash in accordance
with this covenant except to the extent that the aggregate Net Available Cash
from all Asset Dispositions that is not applied in accordance with this covenant
exceeds $500,000.
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption of Indebtedness of the Company (other than Disqualified Stock
of the Company) or any Restricted Subsidiary and the release of the Company or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
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(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes (the "Offer") at a
purchase price of 100% of their principal amount plus accrued and unpaid
interest to the Purchase Date in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture. If the
aggregate purchase price of the Notes tendered pursuant to the Offer is less
than the Net Available Cash allotted to the purchase of the Notes, the Company
will apply the remaining Net Available Cash in accordance with clause
(a)(iii)(D) above. The Company shall not be required to make an Offer for Notes
pursuant to this covenant if the Net Available Cash available therefor (after
application of the proceeds as provided in clauses (a)(iii)(A) and (a)(iii)(B)
is less than $5.0 million for any particular Asset Disposition (which lesser
amounts shall be carried forward for purposes of determining whether an Offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this paragraph (c) by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate of the Company (an
"Affiliate Transaction") on terms (i) that are less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate and (ii) that, in the event such Affiliate
Transaction involves an aggregate amount in excess of $500,000, are not in
writing and have not been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction. In addition,
any transaction involving aggregate payments or other transfers by the Company
and its Restricted Subsidiaries in excess of $3.0 million will also require an
opinion from an independent investment banking firm or appraiser of national
prominence, as appropriate, to the effect that such transaction is fair to the
Company or such Restricted Subsidiary from a financial point of view.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"--Limitation on Restricted Payments," (ii) the performance of the Company's or
Subsidiary's obligations under any employment contract, collective bargaining
agreement, employee benefit plan, related trust agreement or any other similar
arrangement heretofore or hereafter entered into in the ordinary course of
business, (iii) payment of compensation to employees, officers, directors or
consultants in the ordinary course of business, (iv) maintenance in the ordinary
course of business of benefit programs or arrangements for employees, officers
or directors, including vacation plans, health and life insurance plans,
deferred compensation plans, and retirement or savings plans and similar plans,
(v) any transaction between the Company and a Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries, (vi) the payment of certain fees under the Management
Agreement, provided that such payment will not exceed an aggregate amount of
$1.0 million during any 12-month period, (vii) payments to certain members of
management in respect of a one-time management tax gross-up made in connection
with the Acquisition not in excess of an aggregate amount of $1,376,000, or
(viii) payments made to Holdings to reimburse Holdings for costs, fees and
expenses incident to a registration of any of the capital stock of Holdings for
a primary offering under the Securities Act, so long as the net proceeds of such
offering (if it is completed) are contributed to, or otherwise used for the
benefit of, the Company.
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Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the date of the Indenture or thereafter acquired, securing any obligation
other than Permitted Liens unless the obligations due under the Indenture and
the Notes are secured, on an equal and ratable basis (or on a senior basis, in
the case of Indebtedness subordinated in right of payment to the Notes), with
the obligations so secured.
SEC Reports. The Company shall file with the Trustee and provide
Noteholders, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall continue to file with the SEC and, within 15 days after such
reports are filed, provide the Trustee and Noteholders (at their addresses as
set forth in the register of Notes) with the annual reports and the information,
documents and other reports which are specified in Sections 13 and 15(d) of the
Exchange Act. The Company shall also comply with the other provisions of TIA
314(a).
Future Note Guarantors. The Company will cause each Domestic Subsidiary that
Incurs Indebtedness and each Restricted Subsidiary that is a guarantor of
Indebtedness Incurred pursuant to clause (b)(i) or (b)(v) of the covenant
described under "--Limitation on Indebtedness" to execute and deliver to the
Trustee a Note Guarantee pursuant to which such Subsidiary will Guarantee
payment of the Notes. Each Note Guarantee will be limited in amount to an amount
not to exceed the maximum amount that can be Guaranteed by that Subsidiary
without rendering the Note Guarantee, as it relates to such Subsidiary, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Related
Business.
Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") is a corporation organized and existing under the laws of
the United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) expressly assumes, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) immediately
after giving effect to such transaction, the Successor Company would be able to
incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of the
covenant described under "--Limitation on Indebtedness"; (iv) immediately after
giving effect to such transaction, the Successor Company will have Consolidated
Net Worth in an amount that is not less than the Consolidated Net Worth of the
Company immediately prior to such transaction; and (v) the Company will have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all or substantially all its
assets will not be released from the obligation to pay the principal of and
interest on the Notes.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), (1) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company and (2) the Company may merge with
an Affiliate incorporated for the purpose of reincorporating the Company in
another jurisdiction to realize tax or other benefits.
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DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
whether or not such payment is prohibited by the provisions described under
"--Ranking" above, (iii) the failure by the Company to comply with its
obligations under the covenant described under "--Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations under the covenants described under "--Change of Control"
above or under the covenants described under "--Certain Covenants" above (in
each case, other than a failure to purchase Notes), (v) the failure by the
Company to comply for 60 days after notice with its other agreements contained
in the Indenture, (vi) the failure of the Company or any Significant Subsidiary
to pay any Indebtedness within any applicable grace period after final maturity
or acceleration by the holders thereof because of a default if the total amount
of such Indebtedness unpaid or accelerated exceeds $10.0 million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) the rendering of any judgment or decree for the payment of
money in excess of $10.0 million against the Company or a Significant Subsidiary
if (A) an enforcement proceeding thereon is commenced or (B) such judgment or
decree remains outstanding for a period of 60 days following such judgment and
is not discharged, waived or stayed (the "judgment default provision") or (ix)
the failure of any Note Guarantee by a Note Guarantor which is a Significant
Subsidiary to be in full force and effect (except as contemplated by the terms
thereof) or the denial or disaffirmation by any such Note Guarantor of its
obligations under the Indenture or any Note Guarantee if such Default continues
for 10 days. However, a default under clauses (iv) and (v) will not constitute
an Event of Default until the Trustee or the Holders of 25% in principal amount
of the outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified in clauses (iv) and (v) hereof
after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued but unpaid interest on all the
Notes to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company
occurs and is continuing, the principal of and interest on all the Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in principal amount of the outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the
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time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal liability.
Prior to taking any action under the Indenture, the Trustee shall be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
no later than the date that is the earlier of 90 days after such default occurs
or 30 days after it is known to a trust officer or written notice is received by
the Trustee. Except in the case of a Default in the payment of principal of,
premium (if any) or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its Trust officers in good faith determines that
withholding notice is in the interests of the Noteholders. In addition, the
Company is required to deliver to the Trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any Default that occurred during the previous year. The Company also is required
to deliver to the Trustee, within 30 days after the occurrence thereof, written
notice of any event which would constitute certain Defaults, their status and
what action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each Holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose Holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under "--Optional Redemption" above, (v) make any Note payable in
money other than that stated in the Note, (vi) make any change to the
subordination provisions of the Indenture that adversely affects the rights of
any Holder, (vii) impair the right of any Holder to receive payment of principal
of and interest on such Holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
Holder's Notes or (viii) make any change in the amendment provisions which
require each Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided, however, that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or in
a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add further Guarantees with respect to the Notes,
to secure the Notes, to add to the covenants of the Company for the benefit of
the Noteholders or to surrender any right or power conferred upon the Company,
to make any change that does not adversely affect the rights of any Holder or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the Trust Indenture Act. However, no amendment may be made
to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or any group or representative thereof authorized
to give a consent) consent to such change.
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The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
or other governmental charges required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Note selected for redemption
or to transfer or exchange any Note for a period of 15 days prior to a selection
of Notes to be redeemed. The Notes will be issued in registered form and the
registered holder of a Note will be treated as the owner of such Note for all
purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "--Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "--Defaults" above and the
limitations contained in clauses (iii) and (iv) under "--Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) with respect only to
Subsidiaries, (viii) or (ix) under "--Defaults" above or because of the failure
of the Company to comply with clause (iii) or (iv) under "--Merger and
Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
SunTrust Bank, Atlanta is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
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GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" and "--Limitation on Affiliate
Transactions" only, "Affiliate" shall also mean any beneficial owner of shares
representing 5% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, and (iii) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "--Certain
Covenants--Limitation on Restricted Payments."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect of
the Senior Credit Facility and the other Senior Credit Documents and the
Refinancing Indebtedness with respect thereto, as amended from time to time,
including principal, premium (if any), interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to the Company whether or not a claim for post filing interest is allowed in
such proceedings), fees, charges, expenses, reimbursement obligations,
guarantees and all other amounts payable thereunder or in respect thereof.
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"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions (including, without limitation, the
Federal Reserve System) are authorized or required by law to close in New York
City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending prior to the date of such determination
to (ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding on such
date of determination or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such period, (2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets that are the subject of such Asset Disposition for
such period or increased by an amount equal to the EBITDA (if negative) directly
attributable thereto for such period and Consolidated Interest Expense for such
period shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to
the Company and its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (3) if since the beginning of such period the
Company or any Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (2) or (3) above if made by
the Company or a Restricted Subsidiary during
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such period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset Disposition,
Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Protection
Agreement applicable to such Indebtedness if such Interest Rate Protection
Agreement has a remaining term as at the date of determination in excess of 12
months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
incurred by the Company and its Subsidiaries in such period but not included in
such interest expense, (i) interest expense attributable to Capitalized Lease
Obligations, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) noncash interest expense, (v) commissions, discounts
and other fees and charges attributable to letters of credit and bankers'
acceptance financing, (vi) interest actually paid by the Company or any such
Subsidiary under any Guarantee of Indebtedness or other obligation of any other
Person, (vii) net costs associated with Hedging Obligations (including
amortization of fees), (viii) the product of (a) all Preferred Stock dividends
in respect of all Preferred Stock of Subsidiaries of the Company and
Disqualified Stock of the Company held by Persons other than the Company or a
Wholly Owned Subsidiary multiplied by (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of the Company, expressed as a decimal, in
each case, determined on a consolidated basis in accordance with GAAP and (ix)
the cash contributions to any employee stock ownership plan or similar trust to
the extent such contributions are used by such plan or trust to pay interest or
fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust; provided, however, that there shall be excluded
therefrom any such interest expense of any Unrestricted Subsidiary to the extent
the related Indebtedness is not Guaranteed or paid by the Company or any
Restricted Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income (loss)
of any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in clause
(iv) below) and (B) the Company's equity in a net loss of any such Person (other
than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income; (ii) any expense recognized (net of
tax benefits related thereto) as a consequence of payments permitted to be made
by the Company under clauses (v)(A) through (C) of paragraph (b) of the covenant
described under "--Certain Covenants--Limitation on Restricted Payments"; (iii)
any net income (loss) of any person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iv) any net income (loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted Subsidiary, directly
or indirectly, to the Company, except that (A) subject to the limitations
contained in (v) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
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distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend (subject, in the case of a dividend
that could have been made to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period shall be included in determining such
Consolidated Net Income; (v) any gain (but not loss) realized upon the sale or
other disposition of any asset of the Company or its consolidated Subsidiaries
(including pursuant to any sale/leaseback transaction) that is not sold or
otherwise disposed of in the ordinary course of business and any gain (but not
loss) realized upon the sale or other disposition of any Capital Stock of any
Person; (vi) any extraordinary gain or loss; and (vii) the cumulative effect of
a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and the Restricted Subsidiaries, determined on a
consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount of, or under which, at the date of determination, the
holders thereof, are committed to lend up to, at least $10.0 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the
Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes.
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" means, for any period the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense, (v) the effect of inventory
write-up under APB 16 in connection with the Acquisition, (vi) non-cash ESOP
Expense, (vii) the establishment of a reserve not in excess of $4,000,000 for a
one-time management tax gross up payment made in connection with the Acquisition
and (viii) non-cash expenses not in excess of $3,000,000 related to the
prepayment of management fees paid pursuant to certain agreements referred to in
the Indenture.
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"ESOP" means the Simmons Company Employee Stock Ownership Plan, as from time
to time amended, supplemented or otherwise modified, and a trust forming a part
thereof and its successors.
"ESOP Expense" means, with respect to any period, the aggregate amount of
expenses incurred by the Company relating to the ESOP with respect to such
period calculated in accordance with GAAP.
"Foreign Subsidiary" means any Restricted Subsidiary of the Company that is
not organized under the laws of the United States of America or any state
thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP as in effect as of the Issue Date.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof or any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
in the Register.
"Holdings" means Simmons Holdings, Inc., a Delaware corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication) (i) the principal of and premium (if any) in
respect of indebtedness of such Person for borrowed money; (ii) the principal of
and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments; (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto); (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables), which purchase price is due more than six
months after the date of placing such property in service or taking delivery and
title thereto or the completion of such services; (v) all Capitalized Lease
Obligations of such Person; (vi) the
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amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Subsidiary of the Company, any Preferred Stock (but excluding, in each case, any
accrued dividends); (vii) all Indebtedness of other Persons secured by a Lien on
any asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and (ix) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Group" means any Officer of the Company or Holdings.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred (including legal, accounting and investment banking fees and any
relocation expenses incurred as a result of an Asset Disposition), and all
Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness
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that is secured by any assets subject to such Asset Disposition, in accordance
with the terms of any Lien upon such assets, or that must by its terms, or in
order to obtain a necessary consent to such Asset Disposition, or by applicable
law be repaid out of the proceeds from such Asset Disposition, (iii) all
distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition
and (iv) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock by the Company or any Subsidiary, the cash proceeds of such issuance or
sale net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Note Guarantee" means any guarantee that may from time to time be executed
and delivered by a Subsidiary of the Company pursuant to the provisions of the
covenant described under "--Certain Covenants--Future Note Guarantors". Each
such Note Guarantee will be in the form prescribed in the Indenture.
"Note Guarantor" means any Subsidiary that has issued a Note Guarantee.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary or Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Investcorp, its Affiliates, members of the
Management Group and any Person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's or Holdings'
Capital Stock.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary, the Company or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary; and
(vii) stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments.
"Permitted Liens" means, (a) Liens for taxes, assessments or other
governmental charges not yet delinquent or that are being contested in good
faith and by appropriate proceedings if adequate reserves with respect thereto
are maintained on the books of the Company or such Restricted Subsidiary, as the
case may be, in accordance with GAAP; (b) carriers', warehousemen's,
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mechanics', landlords', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business in respect of obligations that are not yet
due or that are bonded or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are maintained
on the books of the Company or such Restricted Subsidiary, as the case may be,
in accordance with GAAP; (c) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation; (d)
deposits to secure the performance of bids, tenders, trade or government
contracts (other than for borrowed money), leases, licenses, statutory
obligations, surety and appeal bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business; (e) easements
(including reciprocal easement agreements), rights-of-way, building, zoning and
similar restrictions, utility agreements, covenants, reservations, restrictions,
encroachments, changes, and other similar encumbrances or title defects
incurred, or leases or subleases granted to others, in the ordinary course of
business, which do not in the aggregate materially detract from the aggregate
value of the properties of the Company and its Subsidiaries, taken as a whole or
in the aggregate materially interfere with or adversely affect in any material
respect the ordinary conduct of the business of the Company and its Subsidiaries
on the properties subject thereto, taken as a whole; (f) Liens pursuant to the
Senior Credit Documents, liens in connection with industrial revenue bonds,
liens securing the Bank Indebtedness and bankers' liens arising by operation of
law; (g) Liens on property of the Company or any of its Restricted Subsidiaries
created solely for the purpose of securing Indebtedness permitted by clause
(b)(iv) of the covenant described under "--Certain Covenants--Limitation on
Indebtedness" or incurred in connection with Indebtedness permitted by clause
(b)(vii) thereof; provided, however that, in the case of liens described in such
clause (b)(iv), no such Lien shall extend to or cover other property of the
Company or such Restricted Subsidiary other than the respective property so
acquired, and the principal amount of Indebtedness secured by any such Lien
shall at no time exceed the original purchase price of such property; (h) Liens
existing on the date of the Indenture; (i) Liens on goods (and the proceeds
thereof) and documents of title and the property covered thereby securing
Indebtedness in respect of commercial letters of credit; (j) (i) mortgages,
liens, security interests, restrictions or encumbrances that have been placed by
any developer, landlord or other third party on property over which the Company
or any Restricted Subsidiary of the Company has easement rights or on any real
property leased by the Company on the date of the Indenture and subordination or
similar agreements relating thereto and (ii) any condemnation or eminent domain
proceedings affecting any real property; (k) leases or subleases to third
parties; (l) Liens in connection with workmen's compensation obligations and
general liability exposure of the Company and its Restricted Subsidiaries; and
(m) Liens securing Indebtedness Incurred under clause (b)(v) of the covenant
described under "--Certain Covenants-- Limitation on Indebtedness".
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note that is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock (or other voting stock) of the Company or Holdings pursuant to an
effective registration statement (other than a registration statement on Form
S-4, S-8 or any successor or similar forms) under the Securities Act.
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"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of the Company or Holdings (as applicable) has been distributed by means
of an effective registration statement under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary (to the extent
permitted in the Indenture) and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; provided, however, that (i) except in
the case of any refunding, refinancing, replacement, renewal, repayment or
extension of any Bank Indebtedness, the Refinancing Indebtedness has a Stated
Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced, (ii) except in the case of any refunding, refinancing, replacement,
renewal, repayment or extension of any Bank Indebtedness, the Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being refinanced and (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted value)
then outstanding of the Indebtedness being refinanced, plus fees, underwriting
discounts and other costs and expenses incurred in connection with such
Refinancing Indebtedness; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that
refinances Indebtedness of the Company or (y) Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means those businesses in which the Company or any of its
Subsidiaries are engaged on the date of the Indenture, or that are directly
related thereto.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Credit Documents" means the collective reference to the Senior
Credit Facility, the notes issued pursuant thereto and the Guarantees thereof,
and the Security Agreements, the Mortgages and the Pledge Agreements (each as
defined in the Senior Credit Facility).
"Senior Credit Facility" means the credit agreement dated as of March 22,
1996, as amended, waived or otherwise modified from time to time, among the
Company, the several lenders party thereto and Chemical Bank, a New York banking
corporation, as administrative agent (except to the extent that any such
amendment, waiver or other modification thereto would be prohibited by the terms
of the Indenture, unless otherwise agreed to by the Holders of at least a
majority in aggregate principal amount of Notes at the time outstanding).
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Notes and is not subordinated by its terms to any
Indebtedness or other obligation of the Company that is not Senior Indebtedness.
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<PAGE>
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) that is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person or (ii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $300.0 million (or the foreign currency equivalent
thereof), (iii) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (i) or (ii) above
entered into with a bank meeting the qualifications described in clause (ii)
above, and (iv) investments in commercial paper, maturing not more than six
months after the date of acquisition, issued by any Lender as defined under the
Senior Credit Facility or the parent corporation of any Lender, and commercial
paper with a rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under the provisions of the
covenant described under "--Certain Covenants--Limitations on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred
and be
92
<PAGE>
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
BOOK ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered notes in global form without coupons (each, a
"Global Note"). Upon issuance, each Global Note will be deposited with, or on
behalf of, the Depository Trust Company (the "Depository") and registered in the
name of Cede & Co., as nominee of the Depository.
If a holder tendering Old Notes so requests, such holder's New Notes will be
issued as described below under "Certificated Securities" in registered form
without coupons (the "Certificated Securities").
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchaser), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit the
accounts of Participants who elect to exchange Old Notes with an interest in the
Global Note and (ii) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
So long as the Depository or its nominee is the registered owner of a Global
Note, the Depository or such nominee, as the case may be, will be considered the
sole owner or Holder of the New Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have New Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities, and will not be considered
the owners or
93
<PAGE>
Holders thereof under the Indenture for any purpose, including with respect to
the giving of any directions, instruction or approval to the Trustee thereunder.
As a result, the ability of a person having a beneficial interest in New Notes
represented by a Global Note to pledge such interest to persons or entities that
do not participate in the Depository's system, or to otherwise take action with
respect to such interest, may be affected by the lack of a physical certificate
evidencing such interest.
The Company understands that under existing industry practice, in the event
the Company requests any action of Holders or an owner of a beneficial interest
in a Global Note desires to take any action that the Depository, as the Holder
of such Global Note, is entitled to take, the Depository would authorize the
Participants to take such action and the Participant would authorize persons
owning through such Participants to take such action or would otherwise act upon
the instruction of such persons. Neither the Company nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such New
Notes.
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered Holder of the Global Note representing such New Notes under
the indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the New Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of New Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depository of
its Global Notes, Certificated Securities will be issued to each person that the
Depository identifies as the beneficial owner of the New Notes represented by
the Global Note. In addition, any person having a beneficial interest in a
Global Note or any holder of Old Notes whose Old Notes have been accepted for
exchange may, upon request to the Trustee or the Exchange Agent, as the case may
be, exchange such beneficial interest or Old Notes for Certificated Securities.
Upon any such issuance, the Trustee is required to register such Certificated
Securities in the name of such person or persons (or the nominee of any
thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related New Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depository
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the New Notes to be issued).
94
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of the material United States federal income tax
consequences of the Exchange Offer is for general information only. It is based
on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), existing and proposed Treasury regulations, and judicial and
administrative determinations, all of which are subject to change at any time,
possibly on a retroactive basis. Moreover, holders of Notes should note that
there are no Treasury Regulations, judicial decisions or other authority that
have considered a transaction closely comparable to the Exchange Offer and there
can be no assurance that the Internal Revenue Service (the "IRS") will not take
a contrary position to the positions taken herein. The following relates only to
the Old Notes, and the New Notes received therefor, that are held as "capital
assets" within the meaning of Section 1221 of the Code by persons who are
citizens or residents of the United States. It does not discuss state, local, or
foreign tax consequences, nor does it discuss tax consequences to categories of
holders that are subject to special rules, such as foreign persons, tax-exempt
organizations, insurance companies, banks, and dealers in stocks and securities.
Tax consequences may vary depending on the particular status of an investor. No
rulings will be sought from the IRS with respect to the federal income tax
consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES
FOR NEW NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING
THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS
PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD NOTES FOR NEW
NOTES.
THE EXCHANGE OFFER
In the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, the
exchange of Old Notes for New Notes pursuant to the Exchange Offer will not
constitute a material modification of the terms of the Notes and, accordingly,
such exchange will not constitute an exchange for federal income tax purposes.
Accordingly, such exchange will have no federal income tax consequences to
holders of Notes, either those who exchange or those who do not, and each holder
of Notes would continue to be required to include interest on the Notes in its
gross income in accordance with its method of accounting for federal income tax
purposes.
BACKUP WITHHOLDING
Under the Code, a holder of a Note may be subject, under certain
circumstances, to "backup withholding" at a 31% rate with respect to payments in
respect of interest thereon or the gross proceeds from the disposition thereof.
This withholding generally applies only if the holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
is notified by the IRS that he or she has failed to report properly payments of
interest and dividends and the IRS has notified the Company that he or she is
subject to backup withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is his or her correct number and that he or she is not subject to
backup withholding. Any amount withheld from a payment to a holder under the
backup withholding rules is allowable as a credit against such holder's federal
income tax liability, provided that the required information is furnished to the
IRS. Corporations and certain other entities described in the Code and Treasury
regulations are exempt from such withholding if their exempt status is properly
established.
95
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 1996 (90 days after the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the Old
Notes), other than commissions or concessions of any brokers or dealers, and
will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The financial statements of the Company as of and for the year ended
December 30, 1995 appearing in this Prospectus have been audited by Coopers &
Lybrand L.L.P., independent auditors, as stated in their report appearing
herein, and are included in reliance on such report given on the authority of
such firm as experts in accounting and auditing. The financial statements for
the two years ended December 31, 1994 appearing in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein, in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
96
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-2
Report of Independent Public Accountants............................................. F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and December 30, 1995........ F-4
Consolidated Statements of Operations for the years ended December 25, 1993,
December 31, 1994 and December 30, 1995.............................................. F-5
Consolidated Statements of Common Stockholders' Equity for the years ended
December 25, 1993, December 31, 1994 and December 30, 1995........................... F-6
Consolidated Statements of Cash Flows for the years ended December 25, 1993,
December 31, 1994 and December 30, 1995.............................................. F-7
Notes to Consolidated Financial Statements....................................... F-8
Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of March 30, 1996
for the Successor.............................................................. F-21
Condensed Consolidated Statements of Operations for the quarter ended
April 1, 1995 for the Predecessor, for the period from December 31, 1995
through March 21, 1996 for the Predecessor, and for the period from
March 22, 1996 through March 30, 1996 for the Successor........................ F-22
Condensed Consolidated Statements of Cash Flows for the quarter ended
April 1, 1995 for the Predecessor, for the period from December 31, 1995
through March 21, 1996 for the Predecessor, and for the period from
March 22, 1996 through March 30, 1996 for the Successor........................ F-23
Notes to Condensed Consolidated Financial Statements............................. F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
SIMMONS COMPANY
We have audited the accompanying consolidated balance sheet of Simmons
Company (a Delaware corporation) and subsidiaries as of December 30, 1995, and
the related consolidated statements of operations, common stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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.
As explained in Note 15 to the consolidated financial statements, on March
22, 1996, an affiliate of INVESTCORP S.A. ("Investcorp") acquired 100% of the
common stock of Simmons Company.
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 30, 1995, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 13, 1996, except for Notes 8 and 15
which are as of March 22, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SIMMONS COMPANY
We have audited the accompanying consolidated balance sheets of Simmons
Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and
December 25, 1993 and the related consolidated statements of operations, common
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit 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 31, 1994 and December 25, 1993
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, effective December 26,
1993, the Company changed its method of accounting for its Employee Stock
Ownership Plan in accordance with Statement of Position No. 93-6 of the American
Institute of Certified Public Accountants, "Employers' Accounting for Employee
Stock Ownership Plans."
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 17, 1995 except for Notes 6
and 14 which are as of May 4, 1995
(not presented herein)
F-3
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 8,477 $ 9,185
Accounts receivable, net...................................... 42,861 49,453
Inventories................................................... 15,760 18,293
Deferred income taxes......................................... 9,276 7,565
Other current assets.......................................... 5,425 5,372
------------ ------------
Total current assets...................................... 81,799 89,868
Property, plant and equipment, net.............................. 21,614 23,410
Patents......................................................... 16,165 14,275
Goodwill........................................................ 125,437 121,573
Other assets.................................................... 4,876 5,366
------------ ------------
$249,891 $254,492
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................. $ 18,312 $ 22,712
Accrued liabilities........................................... 31,933 37,800
Current maturities of long-term obligations................... 11,572 2,661
------------ ------------
Total current liabilities................................. 61,817 63,173
Noncurrent liabilities:
Long-term debt................................................ 96,954 90,291
Capital lease................................................. 909 816
Deferred income taxes......................................... 8,469 6,537
Postretirement benefit obligations other than pensions........ 7,268 7,999
Other......................................................... 8,659 8,352
------------ ------------
Total liabilities......................................... 184,076 177,168
------------ ------------
Commitments (Notes 3 and 8)
Redeemable preferred stock...................................... 641 680
------------ ------------
Redeemable common stock under ESOP, net of related unearned
compensation of $29,624 and $29,674, respectively............... 23,238 32,272
------------ ------------
Common stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized,
36,311,967 shares issued........................................ 363 363
Additional paid-in capital.................................... 190,560 176,501
Unearned compensation under ESOP.............................. (60,169) (47,531)
Accumulated deficit........................................... (88,305) (78,894)
Foreign currency translation adjustment....................... (347) (288)
Treasury stock, 60,472 and 1,727,191 shares, respectively, at
cost............................................................ (166) (5,779)
------------ ------------
Total common stockholders' equity......................... 41,936 44,372
------------ ------------
$249,891 $254,492
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C>
Net sales......................................... $391,382 $439,689 $489,815
Cost of products sold............................. 240,125 269,741 292,825
------------ ------------ ------------
Gross profit.................................. 151,257 169,948 196,990
Selling, general and administrative expenses...... 124,452 137,791 161,202
ESOP expense...................................... 14,000 4,463 4,533
Amortization of intangible assets................. 5,724 5,753 5,753
Interest expense, net............................. 8,105 8,197 8,185
Other deductions, net............................. 760 2,517 400
------------ ------------ ------------
Income (loss) before income taxes and change
in accounting principle........................... (1,784) 11,227 16,917
Provision for income taxes........................ 1,043 3,233 7,506
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle.................... (2,827) 7,994 9,411
Cumulative effect of the change in accounting for
income taxes...................................... (492) -- --
------------ ------------ ------------
Net income (loss)................................. $ (3,319) $ 7,994 $ 9,411
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL UNEARNED CURRENCY TOTAL
COMMON COMMON PAID-IN COMPENSATION ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS'
SHARES STOCK CAPITAL UNDER ESOP DEFICIT ADJUSTMENT STOCK EQUITY
---------- ------ ---------- ------------ ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 26,
1992..................... 36,311,967 $363 $231,394 $ (104,567) $ (92,980) $(146) $ (21 ) $34,043
ESOP expense............ -- -- -- 14,000 -- -- -- 14,000
Net loss................ -- -- -- -- (3,319) -- -- (3,319)
Dividends paid or
accrued on redeemable
preferred stock.......... -- -- (46) -- -- -- -- (46)
Change in foreign
currency translation... -- -- -- -- -- (77) -- (77)
Change in fair value of
ESOP shares.............. -- -- (14,525) 7,827 -- -- -- (6,698)
Purchase of treasury
stock.................... -- -- -- -- -- -- (24 ) (24)
---------- ------ ---------- ------------ ----------- --- -------- ------
Balance, December 25,
1993..................... 36,311,967 363 216,823 (82,740) (96,299) (223) (45 ) 37,879
ESOP expense............ -- -- (9,541) 14,004 -- -- -- 4,463
Income tax benefit on
ESOP..................... -- -- 3,721 -- -- -- -- 3,721
Net income.............. -- -- -- -- 7,994 -- -- 7,994
Dividends paid or
accrued on redeemable
preferred stock.......... -- -- (55) -- -- -- -- (55)
Change in foreign
currency translation... -- -- -- -- -- (124) -- (124)
Change in fair value of
ESOP shares.............. -- -- (20,388) 8,567 -- -- -- (11,821)
Purchase of treasury
stock.................... -- -- -- -- -- -- (121 ) (121)
---------- ------ ---------- ------------ ----------- --- -------- ------
Balance, December 31,
1994..................... 36,311,967 363 190,560 (60,169) (88,305) (347) (166 ) 41,936
ESOP expense............ -- -- (8,065) 12,598 -- -- -- 4,533
Income tax benefit on
ESOP..................... -- -- 3,145 -- -- -- -- 3,145
Net income.............. -- -- -- -- 9,411 -- -- 9,411
Dividends paid or
accrued on redeemable
preferred stock.......... -- -- (65) -- -- -- -- (65)
Change in foreign
currency translation... -- -- -- -- -- 59 -- 59
Change in fair value of
ESOP shares.............. -- -- (9,074) 40 -- -- -- (9,034)
Purchase of treasury
stock.................... -- -- -- -- -- -- (5,613 ) (5,613)
---------- ------ ---------- ------------ ----------- --- -------- ------
Balance, December 30,
1995..................... 36,311,967 $363 $176,501 $ (47,531) $ (78,894) $(288) $(5,779 ) $44,372
---------- ------ ---------- ------------ ----------- --- -------- ------
---------- ------ ---------- ------------ ----------- --- -------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (3,319) $ 7,994 $ 9,411
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation................................. 3,141 3,496 4,027
Non-cash interest expense.................... 1,040 1,112 1,180
Amortization of deferred debt issuance
costs............................................ 957 835 679
Loss (gain) on disposal of fixed assets...... (141) 2,823 --
Amortization of intangibles.................. 5,724 5,753 5,753
ESOP expense................................. 14,000 4,463 4,533
Provision for bad debts...................... 1,257 1,706 3,500
Provision for deferred income taxes.......... 822 2,484 1,006
Other, net................................... -- (732) (444)
Cumulative effect of change in accounting for
income taxes..................................... 492 -- --
Net changes in operating assets and
liabilities:
Accounts receivable.......................... (15,040) 7,997 (10,092)
Inventories.................................. (3,342) 641 (2,533)
Other assets and liabilities................. 862 84 2,029
Accounts payable............................. 8,322 (5,905) 4,400
Accrued liabilities.......................... 3,227 1,629 5,064
------------ ------------ ------------
Net cash provided by operating activities.... 18,002 34,380 28,513
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment..... (4,972) (4,496) (5,834)
Proceeds from sale of property................. 254 301 --
------------ ------------ ------------
Net cash used in investing activities........ (4,718) (4,195) (5,834)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from revolving line of credit and
long-term borrowings......................... 17,181 25,789 15,842
Principal payments on revolving line of credit,
long-term debt and capital lease obligations..... (26,665) (58,532) (32,259)
Treasury stock purchases....................... (24) (121) (5,613)
------------ ------------ ------------
Net cash used in financing activities........ (9,508) (32,864) (22,030)
------------ ------------ ------------
Net effect of exchange rate changes on cash...... (77) (124) 59
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents...................................... 3,699 (2,803) 708
Cash and cash equivalents, beginning of year..... 7,581 11,280 8,477
------------ ------------ ------------
Cash and cash equivalents, end of year........... $ 11,280 $ 8,477 $ 9,185
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow information:
Cash paid for interest......................... $ 6,125 $ 7,840 $ 5,458
------------ ------------ ------------
------------ ------------ ------------
Cash paid for income taxes..................... $ 390 $ 749 $ 3,047
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company was privately held by the Simmons family for many years and
later was publicly traded. Following a number of ownership changes beginning in
1978, the Company has most recently been owned by an Employee Stock Ownership
Plan (the "ESOP") and affiliates of Merrill Lynch Capital Partners, Inc.
("MLCP"). In 1991, MLCP made a $32 million equity investment, acquiring its
controlling interest of approximately 60%, as part of a financial restructuring
of the Company's balance sheet.
See Note 15 for a discussion of the acquisition of the Company, which was
completed on March 22, 1996.
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. Certain amounts in the 1993
and 1994 financial statements have been reclassified to conform with the current
year presentation.
]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.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last Saturday
in December. Fiscal years 1993 and 1995 comprised 52 weeks and fiscal 1994
comprised 53 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
F-8
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES--(CONTINUED)
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:
<TABLE>
<S> <C>
Buildings and improvements.......................................... 10 - 25 years
Machinery and equipment............................................. 5 - 15 years
</TABLE>
Patents and Goodwill
The cost of patents acquired is being amortized using the straight-line
method over the estimated remaining economic lives of the respective patents.
Accumulated amortization of patents totaled approximately $11,269,000 and
$13,198,000 as of December 31, 1994 and December 30, 1995, respectively.
Amortization expense was approximately $1,900,000, $1,929,000 and $1,929,000 for
1993, 1994 and 1995, respectively.
Goodwill is being amortized on a straight-line basis, over the estimated
future periods to be benefited (principally 40 years). Accumulated amortization
of goodwill totaled $22,967,000 and $26,831,000 as of December 31, 1994 and
December 30, 1995, respectively. Amortization expense was approximately
$3,824,000 in the accompanying statements of operations for each of fiscal years
1993, 1994 and 1995.
At each balance sheet date, management assesses whether there has been a
permanent impairment in the value of patents or goodwill by comparing
anticipated undiscounted future cash flows from operating activities with the
carrying value of the intangibles. 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
In 1994, the Company prospectively adopted Statement of Position No. 93-6 of
the American Institute of Certified Public Accounts, "Employers' Accounting for
Employee Stock Ownership Plans," whereby ESOP expense is recognized as an amount
equal to the fair market value of the shares released. The unearned compensation
balance continues to be amortized using the shares allocated method (i.e., at
cost). The difference in these two amounts is recorded as a charge 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 $560,000, $1,100,000 and $1,245,000 in 1993, 1994 and 1995,
respectively, and are included in cost of products sold in the accompanying
statements of operations.
Advertising Costs
The Company records the cost of advertising as an expense when incurred.
Advertising expense was $41,620,000, $43,532,000 and $49,510,000 for 1993, 1994
and 1995, respectively, and is included as a component of selling, general and
administrative expenses in the accompanying statements of operations.
F-9
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PRINCIPAL ACCOUNTING POLICIES--(CONTINUED)
Concentration of Credit 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 17%, 23% and
23% of total sales for 1993, 1994 and 1995, respectively. Accounts receivable
from one customer was approximately 12% and 16% of total accounts receivable at
December 31, 1994 and December 30, 1995, respectively. However, sales to no one
customer represented more than 9% of net sales for 1993, 1994 or 1995.
Purchases of raw materials from one vendor represented approximately 19%,
19% and 20% of cost of products sold for 1993, 1994 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.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, which the Company is required to adopt in 1996. SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The adoption of SFAS No.
121 is not expected to have a material impact on the Company's financial
position, annual operating results or cash flows.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which the Company is required to adopt effective in 1996. SFAS No.
123 establishes optional alternative accounting methods for stock-based
compensation as well as new required disclosures. The Company has elected to
account for stock-based compensation under previously existing accounting
guidance. As such, SFAS No. 123 will be adopted in 1996 for disclosure purposes
only and will not impact the Company's financial position, annual operating
results or cash flows.
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company is structured so that the employees of the Company will have a
beneficial ownership of the Company's common stock through their participation
in the ESOP. At December 31, 1994 and December 30, 1995, the ESOP owned
11,746,627 and 11,687,923 shares of the Company's common stock, respectively.
The funds used to purchase the common stock were borrowed by the ESOP pursuant
to various loan agreements with the Company.
The ESOP pledged all of its shares of the Company's common stock as
collateral for the loans. These shares are held by NationsBank Trust, the ESOP
trustee, in a suspense account and are released to the ESOP participants'
accounts based on debt service. As of December 31, 1994 and December 30, 1995,
5,163,682 and 6,088,982 shares, respectively, had been allocated to
participants' accounts. The remaining unallocated shares held in the ESOP had
estimated fair values of approximately $29,624,000 ($4.50 per share) and
$29,664,000 ($5.30 per share) at December 31, 1994 and December 30, 1995,
respectively.
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
F-10
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. EMPLOYEE STOCK OWNERSHIP PLAN--(CONTINUED)
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 50% 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 plan, as
long as the shares are not publicly traded or if the shares are subject to
trading limitations. The Company repurchased approximately 42,938 and 58,700
shares from ESOP participants in 1994 and 1995, respectively, at prices ranging
from $2.75 to $3.30 in 1994 and $3.30 to $4.50 per share in 1995, respectively.
These shares have been reflected as treasury stock.
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 balance
sheets as Redeemable Common Stock Under ESOP. 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 during 1995, which is also reflected as treasury
stock.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1994 and
December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Accounts receivable............................................ $47,142 $56,593
Allowance for doubtful accounts................................ (2,267) (4,600)
Allowance for cash discounts and other......................... (2,014) (2,540)
------- -------
$42,861 $49,453
------- -------
------- -------
</TABLE>
5. INVENTORIES
Inventories consist of the following at December 31, 1994 and December 30,
1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Raw materials.................................................. $10,101 $11,807
Work-in-progress............................................... 1,920 1,942
Finished goods................................................. 3,739 4,544
------- -------
$15,760 $18,293
------- -------
------- -------
</TABLE>
F-11
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31, 1994
and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------- -------
<S> <C> <C>
Land, buildings and improvements.............................. $ 9,178 $ 8,784
Machinery and equipment....................................... 27,636 32,966
Construction in progress...................................... 509 844
-------- -------
37,323 42,594
Less accumulated depreciation................................. (15,709) (19,184)
-------- -------
$ 21,614 $23,410
-------- -------
-------- -------
</TABLE>
7. OTHER ASSETS
Other assets consist of the following at December 31, 1994 and December 30,
1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Long-term note receivable......................................... $2,200 $2,200
Debt issue costs, net of accumulated amortization of $4,519 and
$5,613, respectively.............................................. 1,999 1,584
Other............................................................. 677 1,582
------ ------
$4,876 $5,366
------ ------
------ ------
</TABLE>
Debt issue costs are being amortized to interest expense using the
straight-line method (which approximates the effective interest method) over the
term of the respective debt. Amortization of $957,000, $835,000 and $679,000 for
1993, 1994 and 1995, respectively, is included as a component of interest
expense in the accompanying consolidated statements of operations.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1994 and December
30, 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Senior loans:
Tranche A term loan........................................ $ 46,013 $ 36,045
Tranche C term loan........................................ 17,700 17,700
Revolving loan............................................. 8,053 2,000
Adjustable rate senior subordinated notes.................... 2,354 2,618
Adjustable rate junior subordinated notes.................... 23,885 24,328
Janesville, Wisconsin, industrial revenue bonds, 7%, due
October 2017................................................. 9,700 9,700
Other........................................................ 735 468
-------- --------
108,440 92,859
Less current portion......................................... (11,486) (2,568)
-------- --------
$ 96,954 $ 90,291
-------- --------
-------- --------
</TABLE>
In connection with the Acquisition discussed in Note 15, the Company
refinanced the above term loans, the revolving loan, and the senior and junior
subordinated notes. As a result, the current and future maturities of long-term
debt have been adjusted to reflect the principal payment terms resulting from
such refinancing.
F-12
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT--(CONTINUED)
Interest on the Tranche A and C term loans was computed based on the
Company's selection from certain variable rates as defined in the loan
agreements. The interest rates at December 30, 1995 were 8.0% and 7.75% for the
Tranche A and C term loans, respectively.
In 1994, the Chemical Bank credit agreement was amended to allow amounts
previously held in a cash collateral account due to limitations in the ESOP
agreement to be used to prepay the Tranche A loan. This prepayment precluded the
holders of the Tranche A loan from excluding 50% of interest received from
taxable income, after such prepayment. The Company effectively pays a higher
interest rate on the related debt as a result of the disallowance.
The revolving loan agreement provides funding based on the amount of the
monthly available borrowing base, as defined in the loan agreement, up to a
maximum of $26,000,000. Interest is computed based on the Company's selection
from certain variable rates as defined in the loan agreement and at December 30,
1995 was 9.5%. The Company pays Chemical Bank a revolving credit commitment fee
of .5% per annum on the average daily unused credit facility. The available
unused portion of the revolving loan was approximately $17,743,000 at December
30, 1995. The revolving credit agreement expires in conjunction with the
maturity of the Tranche C term loan in 1997. At December 30, 1995, available
borrowings under the revolving credit agreement were reduced by standby letters
of credit in the amount of $6,257,000 related to insurance coverage, industrial
site evaluation, and the acquisition of real estate leases.
The adjustable rate senior subordinated notes pay a variable rate of
interest equal to the prime rate plus 2% and mature in January 1999. The
interest rate at December 30, 1995 was 10.5%. Interest may be paid in cash or
added to the outstanding loan principal balance.
The adjustable rate junior subordinated notes bear interest at 10% through
March 14, 1996, and 12% thereafter and mature on January 17, 2003. Interest may
be paid in cash or by issuing additional notes, thereby increasing the
outstanding loan principal balance. In connection with a 1991 exchange of notes,
these adjustable rate junior subordinated notes were recorded at the exchanged
notes' carrying value, since the total future cash payment requirements
(principal and interest) on these notes exceeded the carrying value of the
junior subordinated notes for which they were exchanged. For financial reporting
purposes, the effective interest rate has been adjusted to equate the present
value of the future cash payments specified by the terms of the new notes with
their carrying amount and was 3.96% at December 30, 1995.
All shares of common stock of the Company, accounts receivable, inventories
and property, plant and equipment have been pledged as collateral for the
various debt agreements.
Total interest expense was $8,155,000, $9,042,000 and $8,347,000, for 1993,
1994 and 1995, respectively.
The various loan agreements contain restrictions which require the Company
to comply with certain financial tests, including current ratio, consolidated
interest expense coverage ratio, consolidated net worth, leverage ratio, working
capital and capital expenditures. The Company was in compliance with all debt
covenants at December 30, 1995. In addition, the various loan agreements
restrict the Company from paying cash dividends and limit other payments, loans,
advances, additional debt, liens and material acquisitions.
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.
At December 30, 1995, the Company's fair value of long-term debt approximates
the carrying value except for the junior subordinated notes, whose fair value
was determined to be approximately $17,571,000.
F-13
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT--(CONTINUED)
Future maturities of long-term debt as of December 30, 1995 are as follows
(in thousands):
<TABLE>
<S> <C>
1996..................................................................... $2,568
1997..................................................................... 5,200
1998..................................................................... 7,200
1999..................................................................... 9,200
2000..................................................................... 11,200
Thereafter............................................................... 57,491
--------
$92,859
--------
--------
</TABLE>
The Company has entered into a series of long-term supply agreements with a
major supplier for certain raw materials. Based on various provisions of these
agreements, these commitments are currently estimated to aggregate the lesser of
$30 million or approximately 60% of the products covered by such agreements per
year, and generally expire through the year 2010.
9. LEASES
The Company has capitalized a leased facility. Annual lease payments
providing amounts sufficient to pay principal and interest are summarized as
follows (in thousands):
<TABLE>
<S> <C>
1996...................................................................... $163
1997...................................................................... 163
1998...................................................................... 163
1999...................................................................... 163
2000...................................................................... 163
Thereafter................................................................ 720
-------
1,535
Less Interest............................................................. 626
-------
Unpaid principal at December 30, 1995 (including $93 due within one
year)..................................................................... $909
-------
-------
</TABLE>
Amounts related to the capital lease are included in buildings and
improvements in the accompanying financial statements.
The Company also leases certain other facilities and equipment under
operating leases. Rent expense was $8,672,000, $10,143,000 and $10,626,000, for
1993, 1994 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 30, 1995 (in thousands):
<TABLE>
<S> <C>
1996..................................................................... $10,085
1997..................................................................... 8,901
1998..................................................................... 7,853
1999..................................................................... 7,204
2000..................................................................... 6,388
Thereafter............................................................... 30,852
--------
$71,283
--------
--------
</TABLE>
F-14
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. REDEEMABLE PREFERRED STOCK
The Company has issued 5,000 shares of Series C Preferred Stock plus shares
subsequently issued for dividends. The Company is required to redeem the Series
C upon the occurrence of certain events but in no case later than January 17,
2003. Dividends on the Series C are accrued at the rate of 8% through March 14,
1994, 9% from March 15, 1994 through March 14, 1995, 10% from March 15, 1995
through March 14, 1996, and 12% thereafter. The Series C shares are exchangeable
into new adjustable rate junior subordinated notes after three years from date
of issuance at 97% of their liquidation preference and at 100% of their fair
value after six years from date of issuance. At December 30, 1995, the Series C
had an aggregate liquidation preference of approximately $720,000, including
accrued dividends.
The Series C shares have no voting rights, except that, upon certain
occurrences of default, the holders of Series C shares will have the right to
elect one director. The Series C shares contain covenants that restrict cash
dividends on common stock. Dividends in cash, however, may be paid on shares of
common stock held by the ESOP to the extent that the ESOP utilizes the dividends
to repay amounts borrowed from the Company or purchase shares from the
employees. The Series C shares are subordinated in liquidation and right of
payment to all indebtedness of the Company. At December 31, 1994 and December
30, 1995, the Company had 6,408 and 6,801 shares issued and outstanding,
respectively.
The Series C shares were called for redemption in connection with the
Acquisition as discussed in Note 15.
11. STOCK OPTION PLAN
The board of directors has established a performance stock option plan and a
separate executive stock option plan ("the Plans"). The option price per share
is equal to the estimated fair value on the date of the grant. The Company has
reserved shares in an amount sufficient for issuance upon exercise of the
options under the plans. Stock option transactions for both plans are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Options outstanding at beginning of year... 1,470,000 1,426,000 2,170,000
Granted.................................... 60,000 840,000 1,042,000
Canceled................................... (104,000) (96,000) (160,000)
-------------------- -------------------- --------------------
Options outstanding at end of year......... 1,426,000 2,170,000 3,052,000
-------------------- -------------------- --------------------
-------------------- -------------------- --------------------
Option price range at end of year.......... $ 1.42 - 2.75 $ 1.42 - 3.30 $ 1.42 - 4.50
Options vested at end of year.............. 158,947 472,038 1,293,000
</TABLE>
F-15
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Current tax provision:
Federal................................................ $ 47 $ 277 $5,398
State.................................................. 115 208 1,102
Foreign................................................ 59 264 --
------ ------ ------
221 749 6,500
------ ------ ------
Deferred tax provision:
Federal................................................ 658 2,166 903
State.................................................. 164 318 103
------ ------ ------
822 2,484 1,006
------ ------ ------
$1,043 $3,233 $7,506
------ ------ ------
------ ------ ------
</TABLE>
The reconciliation of the statutory federal income tax rate to the effective
income tax rate for the 1993, 1994 and 1995 provision for income taxes is as
follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Income taxes at statutory rate......................... $ (606) $ 3,727 $ 5,921
State income taxes, net of federal benefit............. 115 347 889
Goodwill amortization.................................. 1,491 1,491 1,491
Reduction of valuation allowance....................... -- (3,626) (1,914)
Other, net............................................. 43 1,294 1,119
------ ------- -------
$1,043 $ 3,233 $ 7,506
------ ------- -------
------ ------- -------
</TABLE>
Components of the net deferred income tax asset (liability) at December 31,
1994 and December 30, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- ------
<S> <C> <C>
Current deferred income taxes:
Accounts receivable and inventory reserves..................... $ 1,921 $2,587
Accrued liabilities not currently deductible................... 5,957 5,014
Net operating loss carryforwards............................... 3,106 --
Valuation allowance............................................ (957) --
Prepaids and other assets, net currently taxable............... (751) (36)
------- ------
9,276 7,565
------- ------
Noncurrent deferred income taxes:
Property basis differences..................................... (1,198) (1,356)
Patents basis differences...................................... (5,569) (4,871)
ESOP liability basis differences............................... (8,990) (7,181)
Net operating loss carryforwards............................... 2,645 1,688
Valuation allowance............................................ (2,645) (1,688)
Other noncurrent accrued liabilities, not currently
deductible....................................................... 7,288 6,871
------- ------
(8,469) (6,537)
------- ------
Net deferred tax asset......................................... $ 807 $1,028
------- ------
------- ------
</TABLE>
At December 30, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,326,000, all of which are
limited to their 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 $1,688,000 to fully reserve such amounts as of
December 30, 1995. These carryforwards expire through 2006.
F-16
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
Effective December 27, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
SFAS No. 109 requires a change in accounting for income taxes to an asset and
liability approach. SFAS No. 109 uses the method under which deferred tax assets
and liabilities are determined based on the difference between the financial
accounting and income tax bases of assets and liabilities. The cumulative effect
of this change in accounting on the Company's results of operations was $492,000
and is included in the 1993 statement of operations.
13. RETIREMENT PLANS
The Company has an ESOP (see Note 3) and a defined contribution plan (a
401(k) plan) and makes contributions to multiemployer pension plans.
The Company had accrued $2,448,000 and $2,753,000 at December 31, 1994 and
December 30, 1995, 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 balance sheets.
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 multiemployer pension plans sponsored
by their respective unions. Amounts charged to pension cost, representing the
Company's required contributions to these plans for 1993, 1994 and 1995, were
$1,304,000, $1,403,000 and $1,366,000, respectively.
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 $280,000, $582,000, and $405,000 to expense for 1993, 1994, 1995,
respectively. The accrued benefits under the nonqualified plan were $786,000 and
$1,132,000 at December 31, 1994 and December 30, 1995, respectively, and are
included in other long-term liabilities in the accompanying balance sheets.
The Company provides certain health care and life insurance benefits to
eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or nonunion employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.
The Company accrues the cost of providing postretirement benefits, including
medical and life insurance coverage, during the active service period of the
employee.
F-17
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RETIREMENT PLANS--(CONTINUED)
The following table presents a reconciliation of the Plan's status at
December 31, 1994 and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................................ $3,769 $3,406
Fully eligible active plan participants......................... 689 890
Other active participants....................................... 1,377 1,259
------ ------
5,835 5,555
Unrecognized prior service cost................................... 333 303
Unrecognized net gain/(loss)...................................... (584) 88
------ ------
Accrued postretirement benefit obligation......................... $5,584 $5,946
------ ------
------ ------
</TABLE>
The components of the net periodic postretirement benefit cost for 1993,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................. $122 $137 $163
Interest cost on accumulated benefit obligation............... 408 412 387
Amortization of unrecognized prior service cost............... (30) (30) (30)
---- ---- ----
Net periodic postretirement benefit cost...................... $500 $519 $520
---- ---- ----
---- ---- ----
</TABLE>
Assumptions used in the computation of the accumulated postretirement
benefit obligation at December 31, 1994 and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Discount rate...................................................... 7.5% 7.0%
Initial health care cost trend rate................................ 14.5% 11.5%
Ultimate health care cost trend rate............................... 6.5% 5.5%
Year ultimate health care cost trend rate reached.................. 2009 2007
</TABLE>
If the health care cost trend rate were increased by 1% for all future
years, the accumulated postretirement benefit obligation as of December 30, 1995
would have increased 7.5%. The effect of this change on the aggregate of service
and interest cost for 1995 would have been an increase of 11%.
14. RELATED-PARTY TRANSACTIONS
Certain holders of the senior and junior subordinated notes are related
parties. The amounts due to these individuals at December 31, 1994 and December
30, 1995 were $1,951,136 and $438,170, respectively.
15. SUBSEQUENT EVENTS
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.
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
F-18
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS--(CONTINUED)
stock options, and the payments of fees and expenses) which will be allocated to
the assets and liabilities of the Company based upon their estimated fair values
at the date of 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 million Senior Credit Facility,
which will refinance the Company's existing senior and subordinated loans, (ii)
the $100 million proceeds under a new Subordinated Loan Facility, and (iii) $85
million of capital provided by affiliates of Investcorp, management and certain
other investors from Holdings.
In connection with the Acquisition, the Simmons ESOP sold 6,001,257 shares
of the Company's common stock (representing all of the allocated shares) for
cash, and converted each of the remaining 5,670,406 shares of common stock of
the Company (unallocated shares) into one share of Series A Preferred Stock. The
Series A Preferred Stock is convertible into common stock of the Company on a
one-to-one basis and is entitled to an aggregate liquidation preference of $28.4
million ($5.00 per share). The ESOP also has the right, upon the occurrence of
certain events, to require the Company to purchase the stock owned by the ESOP
for $5.00 per share.
The Company intends to issue $100 million in Senior Subordinated Notes,
pursuant to an offering, during April, 1996 (the "Offering"). The proceeds of
the offering will be used to retire loans under the Subordinated Loan Facility
mentioned above.
The following unaudited pro forma condensed consolidated statement of
operations presents the results of operations for the year ended December 30,
1995 as though the Acquisition and the Offering had been completed on January 1,
1995, and assumes that there were no other changes in the operations of the
Company. The following unaudited pro forma condensed consolidated balance sheet
assumes the Acquisition and the Offering had been completed on December 30,
1995. Such pro forma information excludes non-recurring charges of $1.0 million
related to the write-up of inventory to its estimated fair value, $3.7 million
related to amounts payable to management, $350,000 for non-recurring fees and
tax benefits of $2.0 million related to these items. The pro forma results are
not necessarily indicative of the financial results that might have occurred had
the Acquisition and the Offering actually taken place on January 1, 1995, or of
future results of operations (in thousands):
<TABLE>
<S> <C>
Net sales....................................................................... $489,815
Cost of products sold........................................................... 292,750
Selling, general and administrative expenses.................................... 161,202
ESOP expense.................................................................... 4,625
Amortization of intangible assets............................................... 7,648
Interest expense, net........................................................... 19,068
Other deductions, net........................................................... 1,570
--------
Loss before taxes on income................................................... 2,952
Provision for income taxes...................................................... 2,316
--------
Net loss........................................................................ $ 636
--------
--------
</TABLE>
F-19
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS--(CONTINUED)
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Current Assets:
Cash and cash equivalents..................................................... $ 9,185
Accounts receivable, net...................................................... 49,453
Inventories................................................................... 19,293
Deferred income taxes......................................................... 7,165
Other current assets.......................................................... 6,372
--------
Total current assets...................................................... 91,468
Property, plant and equipment................................................... 26,410
Patents......................................................................... 17,000
Goodwill........................................................................ 192,603
Deferred income taxes........................................................... 8,843
Other assets.................................................................... 12,705
--------
Total assets.............................................................. $349,029
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities:
Accounts Payable.............................................................. $ 22,712
Accrued liabilities........................................................... 33,155
Current maturities of long-term obligations................................... 4,761
--------
Total current liabilities................................................. 60,628
Long-term debt.................................................................. 188,244
Capital lease................................................................... 816
Postretirement benefit obligations other than pensions.......................... 7,999
Other........................................................................... 10,252
--------
Total liabilities......................................................... 267,939
Series A Preferred Stock--ESOP.................................................. 28,352
Unearned compensation--ESOP..................................................... (28,352)
Common stockholder's equity..................................................... 81,090
--------
Total liabilities and stockholder's equity................................ $349,029
--------
--------
</TABLE>
The allocation of the purchase price shown above is, in most instances,
based on preliminary information and is therefore subject to revision when
additional information concerning asset and liability valuations is obtained.
F-20
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 8,111
Accounts receivable, net...................................................... 53,581
Inventories................................................................... 17,574
Deferred income taxes......................................................... 7,165
Other current assets.......................................................... 5,574
--------
Total current assets...................................................... 92,005
Property, plant and equipment, net.............................................. 27,907
Patents......................................................................... 17,007
Goodwill........................................................................ 190,367
Deferred income taxes........................................................... 9,607
Other assets.................................................................... 12,813
--------
$349,706
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.............................................................. $ 14,032
Accrued liabilities........................................................... 42,686
Current maturities of long-term obligations................................... 4,528
--------
Total current liabilities................................................. 61,246
Noncurrent liabilities:
Long-term obligations......................................................... 186,701
Post retirement benefit obligations other than pensions....................... 7,581
Other......................................................................... 12,539
--------
Total liabilities......................................................... 268,067
--------
Series A Preferred Stock--ESOP.................................................. 28,352
Unearned compensation--ESOP..................................................... (28,243)
Common stockholder's equity:
Common stock, $.01 par value; 50,000,000 shares authorized, 31,964,452 shares
issued.......................................................................... 320
Additional paid-in capital.................................................... 84,680
Accumulated deficit........................................................... (3,468)
Foreign currency translation adjustment....................................... (2)
--------
Total common stockholder's equity......................................... 81,530
--------
$349,706
--------
--------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-21
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR ----------
----------------------------- PERIOD
PERIOD FROM FROM
DECEMBER 31, MARCH 22,
1995 1996
QUARTER ENDED THROUGH THROUGH
APRIL 1, MARCH 21, MARCH 30,
1995 1996 1996
------------- ------------ ----------
<S> <C> <C> <C>
Net sales........................................... $ 108,653 $106,431 $ 12,886
Cost of products sold............................... 67,104 66,630 9,042
------------- ------------ ----------
Gross profit.................................... 41,549 39,801 3,844
Selling, general and administrative expenses........ 37,518 35,846 4,626
ESOP expense........................................ 1,133 1,203 109
Amortization of intangibles......................... 1,438 1,324 118
Interest expense, net............................... 1,929 1,489 461
Other deductions, net............................... 197 96 4,309
------------- ------------ ----------
Loss before income taxes........................ (666) (157) (5,779)
Provision for income tax benefit (expense).......... 296 (282) 2,311
------------- ------------ ----------
Net loss............................................ $ (370) $ (439) $ (3,468)
------------- ------------ ----------
------------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-22
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------- --------------
QUARTER PERIOD FROM PERIOD FROM
ENDED DECEMBER 31, 1995 MARCH 22, 1996
APRIL 1, THROUGH THROUGH
1995 MARCH 21, 1996 MARCH 30, 1996
-------- ----------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (370) $ (439) $ (3,468)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation.............................. 973 874 96
Non-cash interest expense................. 225 322 --
Amortization of deferred debt issuance
costs......................................... 56 84 --
Amortization of intangibles............... 1,438 1,324 118
ESOP expense.............................. 1,133 1,203 109
Provision for bad debts................... 453 566 50
Provision for deferred income taxes....... (1,342) (164) --
Other, net................................ (15) 66 --
Net changes in operating assets and
liabilities:
Accounts receivable....................... (4,041) (1,732) (3,012)
Inventories............................... (2,028) 1,229 490
Other assets and liabilities.............. 1,046 (531) (2,916)
Accounts payable.......................... 8,379 (7,250) (1,430)
Accrued liabilities....................... 7,564 6,787 (224)
-------- ------- --------------
Net cash provided by (used in) operating
activities.................................... 13,471 2,339 (10,187)
-------- ------- --------------
Cash flows from investing activities:
Purchases of property, plant, and
equipment..................................... (163) (1,567) --
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... (163) (1,567) (174,615)
-------- ------- --------------
Cash flows from financing activities:
Proceeds from Predecessor revolving line of
credit and long-term borrowings............... 2,842 3,334 --
Predecessor principal payments on revolving
line of credit, long term debt and capital
lease obligations............................. (12,437) (3,490) --
Payments of Predecessor debt................ -- -- (55,495)
Proceeds of Successor debt.................. -- -- 160,000
Payments of financing costs................. -- -- (5,742)
Proceeds from issuance of Successor common
stock......................................... -- -- 85,000
Treasury stock purchases.................... (5,218) (660) --
-------- ------- --------------
Net cash provided by (used in) financing
activities.................................... (14,813) (816) 183,763
-------- ------- --------------
Net effect of exchange rate changes on cash... 6 9 --
-------- ------- --------------
Decrease in cash and cash equivalents......... (1,499) (35) (1,039)
Cash and cash equivalents, beginning of
period........................................ 8,477 9,185 9,150
-------- ------- --------------
Cash and cash equivalents, end of period...... $ 6,978 $ 9,150 $ 8,111
-------- ------- --------------
-------- ------- --------------
Supplemental cash flow information:
Cash paid for interest...................... $ 859 $ 803 $ 273
-------- ------- --------------
-------- ------- --------------
Cash paid for income taxes.................. $ -- $ 2,315 $ 93
-------- ------- --------------
-------- ------- --------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-23
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PREPARATION OF INTERIM FINANCIAL STATEMENTS
The Condensed Consolidated Financial Statements of the Company have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of the management of the
Company, these statements include all adjustments necessary for a fair
presentation of the results of all interim periods reported herein. All
adjustments are of a normal recurring nature unless otherwise disclosed. Certain
information and footnote disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or omitted pursuant to
SEC rules and regulations. However, management believes that the disclosures
made are adequate for a fair presentation of results of operations, financial
position and cash flows. These condensed consolidated financial statements
should be read in conjunction with the year-end consolidated financial
statements and accompanying notes included elsewhere herein. Operating results
for the periods in the quarter ended March 30, 1996 are not necessarily
indicative of future results that may be expected for the year ending December
28, 1996.
2. THE ACQUISITION
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. 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.
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 were allocated to the assets and liabilities of the Company
based upon their estimated fair market value at the date of Acquisition, under
the purchase method of accounting. The allocation of the purchase price was, in
certain instances, based on preliminary information and is therefore subject to
revision when additional asset and liability valuations are obtained. In the
opinion of the Company's management, the asset and liability valuation for the
Acquisition will not be materially different than that initially recorded.
The financing for the Acquisition (including the refinancing of outstanding
debt) was provided for 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.
In connection with the Acquisition, the Simmons ESOP sold 6,001,257 shares
of the Company's common stock (representing all of the allocated shares) for
cash, and converted each of the remaining 5,670,406 shares of common stock of
the Company (unallocated shares) into one share of Series A Preferred Stock. The
Series A Preferred Stock is convertible into common stock of the Company on a
one-to-one basis and is entitled to an aggregate liquidation preference of $28.4
million ($5.00 per share). The ESOP also has the right, upon the occurrence of
certain events, to require the Company to purchase the stock owned by the ESOP
for $5.00 per share.
F-24
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
2. THE ACQUISITION--(CONTINUED)
On April 18, 1996, the Company issued $100.0 million in 10.75% Senior
Subordinated Notes, pursuant to an offering (the "Offering") (See Note 4). The
proceeds of the offering were used to retire loans under the Subordinated Loan
Facility mentioned above.
The following unaudited pro forma data present the results of operations for
the quarters ended April 1, 1995 and March 30, 1996, respectively, as though the
Acquisition and the Offering had been completed on January 1, 1995 and assume
that there were no other changes in the operations of the Company. Such pro
forma information excludes non-recurring charges of $1.0 million related to the
write-up of inventory to its estimated fair value, $3.7 million related to
amounts payable to management, $350,000 for non-recurring fees, and tax benefits
of $2.0 million related to these items. The pro forma results are not
necessarily indicative of the financial results that might have occurred had the
Acquisition and the Offering actually taken place on the above mentioned date,
or of the future results of operations (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
<S> <C> <C>
APRIL 1, MARCH 30,
1995 1996
-------- ---------
Net sales........................................... $108,653 $ 119,317
Loss before income tax benefit...................... (4,157) (4,367)
Net loss............................................ (2,564) (3,079)
</TABLE>
3. INVENTORIES
Inventories consist of the following at March 30, 1996 (in thousands):
<TABLE>
<S> <C>
Raw materials................................................... $ 11,185
Work-in-progress................................................ 2,130
Finished goods.................................................. 4,259
--------
$ 17,574
--------
--------
</TABLE>
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at March 30, 1996 (in
thousands):
<TABLE>
<S> <C>
Senior loans:
Tranche A term loan........................................... $ 25,000
Tranche B term loan........................................... 35,000
Adjustable rate senior subordinated notes....................... 2,711
Adjustable rate junior subordinated notes....................... 17,697
Subordinated Loan Facility, 12.25%.............................. 100,000
Industrial Revenue Bonds, 7.00%, due 2017....................... 9,700
Other, including capital lease obligations...................... 1,121
--------
191,229
Less current portion............................................ (4,528)
--------
$186,701
--------
--------
</TABLE>
F-25
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. LONG-TERM OBLIGATIONS--(CONTINUED)
In connection with the Acquisition, the Company entered into a new Senior
Credit Facility (the "Senior Credit Facility"). 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, the Tranche A and Tranche B term loans. The Tranche A term loans have
a final scheduled maturity date of March 31, 2001, and the Tranche B term loans
have 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:
<TABLE>
<CAPTION>
REVOLVING TRANCHE A TRANCHE B
CREDIT LOAN TERM LOAN TERM LOAN
----------- --------- ---------
<S> <C> <C> <C>
Alternate base rate margin............... 1.25% 1.25% 1.75%
Eurodollar rate (LIBOR-based)............ 2.50% 2.50% 3.00%
</TABLE>
The interest rates in effect at March 30, 1996 for the revolving credit,
Tranche A term, and Tranche B term loans were 9.75%, 9.5% and 10.0%,
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 million of the variable rate 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 March 30, 1996 the amount under the revolving credit portion of the
Senior Credit Facility that was available to be drawn was approximately $33.8
million, after giving effect to no amounts of outstanding borrowings and $6.2
million that was reserved for the Company's reimbursement obligations with
respect to outstanding letters of credit. The remaining availability under the
revolving credit facility may be utilized to meet the Company's current working
capital requirements, including issuance of stand-by and trade letters of
credit. The Company also may utilize the remaining availability under the
revolving credit facility to fund acquisitions and capital expenditures.
The Senior Credit Facility 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.
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
F-26
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. LONG-TERM OBLIGATIONS--(CONTINUED)
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 "Note Indenture"). 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.
The Company plans to issue 10.75% Series A Senior Subordinated Notes due
2006 (the "New Notes") pursuant to an exchange offer whereby holders of the
Notes will have the opportunity to receive New Notes which will be registered
under the Securities Act of 1933, as amended, but are otherwise identical to the
Old Notes.
Future maturities of long-term obligations as of March 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1996 (nine months).............................................. $ 2,334
1997............................................................ 5,200
1998............................................................ 7,200
1999............................................................ 9,200
2000............................................................ 11,200
Thereafter...................................................... 156,095
--------
$191,229
--------
--------
</TABLE>
Subsequent to March 30, 1996 the Tranche A term loan was increased to $40.0
million and the proceeds, together with certain additional funds, were used to
retire the adjustable rate junior and senior subordinated notes. The above
future maturities, and the current maturities of long-term obligations in the
condensed consolidated balance sheet, have been adjusted to reflect these
transactions, as well as the terms of the Notes.
5. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Successor paid Investcorp and its
affiliates approximately $9.1 million in exchange for Investcorp's assistance in
arranging the Acquisition and the financing.
6. INCOME TAXES
As a result of the Acquisition and the resultant purchase price allocation,
the components of deferred income tax assets were adjusted to reflect the
differences in the amounts allocated to
F-27
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. INCOME TAXES--(CONTINUED)
assets and liabilities and their tax bases at the date of Acquisition. The
components of the deferred income tax assets at March 30, 1996 were as follows
(in thousands):
<TABLE>
<S> <C>
Current deferred income tax assets:
Accounts receivable and inventory reserves..................................... $ 2,187
Accrued liabilities not currently deductible................................... 4,978
-------
7,165
-------
Net noncurrent deferred income tax assets (liabilities):
Property basis differences..................................................... (2,556)
Patents basis differences...................................................... (6,636)
ESOP liability basis differences............................................... 13,059
Net operating loss carryforwards............................................... 1,688
Valuation allowance............................................................ (1,688)
Adjustable rate notes basis differences........................................ (2,931)
Other noncurrent accrued liabilities not currently deductible.................. 8,671
-------
9,607
-------
Total net deferred income tax assets........................................... $16,772
-------
-------
</TABLE>
F-28
<PAGE>
No person has been authorized to give Prospectus
any information or to make any
representations other than those $
contained in this Prospectus, and, if
given or made, such information or Simmons Company
representations must not be relied upon
as having been authorized. This 10 3/4% Series A Senior
Prospectus does not constitute an offer Subordinated Notes due 2006
to sell or the solicitation of an offer
to buy any securities other than the
securities to which it relates or any
offer to sell or the solicitation of an
offer to buy such securities in any
circumstances in which such offer or
solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale
made hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information contained
herein is correct as of any time
subsequent to its date.
- -------------------------------------------
Table of Contents
Summary.............................. 3
Risk Factors......................... 11
The Acquisition...................... 15
The Simmons ESOP..................... 16
Use of Proceeds...................... 16
Capitalization....................... 17
Selected Historical and Pro Forma
Financial Data...................... 18
Pro Forma Condensed Consolidated
Financial Data (Unaudited)........... 21
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations.......................... 25
The Exchange Offer................... 33
Business............................. 39
Management........................... 50
Ownership of Voting Securities....... 59
Certain Transactions................. 62
Capital Structure.................... 63
Description of Notes................. 68
Certain Federal Income Tax
Considerations....................... 95
Plan of Distribution................. 96
Legal Matters........................ 97
Experts.............................. 97
Index to Consolidated Financial
Statements........................... F-1
UNTIL , 1996 (90 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
NOTES, WHETHER OR NOT PARTICIPATING IN
THE ORIGINAL DISTRIBUTION MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR , 1996
SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company
in connection with the offering of New Notes. All amounts are estimates except
the registration fees.
<TABLE>
<S> <C>
Registration fees............................................... $
Printing........................................................
Legal expenses..................................................
Trustee's fees..................................................
Accounting fees.................................................
Miscellaneous...................................................
Total....................................................... $
</TABLE>
ITEM 14. 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.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company's 10 3/4% Senior Subordinated Notes due 2006 (the "Old Notes")
were issued on April 18, 1996 for aggregate consideration of $100,000,000. Chase
Securities Inc. acted as the Initial Purchaser with respect to the offering. The
aggregate discount paid to the Initial Purchaser was $3,000,000. The Initial
Purchaser offered the Old Notes pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). The initial issuance
and sale of the Old Notes to the Initial Purchaser were made pursuant to the
exemption from registration set forth in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------------ ---------------------------------------------------------------------------
<S> <C>
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 adopted by the Company
4.1+ Indenture between the Company and SunTrust Bank, as Trustee, dated as of
April 18, 1996.
4.2+ Exchange and Registration Rights Agreement between the Company and Chase
Securities Inc. dated April 18, 1996.
4.3+ Letter of Transmittal.
5* Opinion of Gibson, Dunn & Crutcher.
8* Opinion of Gibson, Dunn & Crutcher regarding tax matters.
10.1+ Stock Purchase Agreement between management stockholders, Merrill Lynch
Capital Appreciation Partnership No. B-XI, L.P., MLCP Associates L.P. No.
II, ML IBK Positions Inc., ML 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 as of February 21, 1994.
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 the 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 as of 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
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 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,
1994 to January 15, 1999.
10.23+ Labor Agreement between the Company and Buckeye Lodge 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 Ageement 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.
10.32+ Lease between the Company, as tenant, and Hunter Industrial Venture, as
landlord, dated September 22, 1986, for premises in Kansas City,
Missouri. (i) Amendment dated July 31, 1989 (ii) Amendment dated February
27, 1990 (iii) Second Amendment to Lease
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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
10.34* Lease between the Company, as tenant, and Glenn Rudel (d/b/a Rudel
Development), as landlord, dated June 18, 1987, for premises in Phoenix,
Arizona. (i) Addendum dated June 18, 1987 (ii) Second Addendum dated
March 28, 1989
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
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
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 Simmons Upholstered Furniture Inc., as Licensee
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.52+ Patent and Technology License Agreement, dated as of July 13, 1990 between
Simmons Company 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* License Agreement, dated as of June 29, 1990 between Simmons, Simmons I.P.
Inc., as Licensor, and Simmons Canada Inc., as Licensee.
10.56* Industrial Property License Agreement, Areas 1-5, dated as of April 9, 1987
as 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 between the Company and Zenon S. Nie dated November 5,
1993.*
12+ Statement re: Computation of Ratio of Earnings to Fixed Charges.
21+ Subsidiaries of the Company.
23.1+ Consent of Coopers & Lybrand L.L.P.
23.2+ Consent of Arthur Andersen LLP
23.3* Consent of Gibson, Dunn & Crutcher LLP
25+ Statement of Eligibility of Trustee.
27+ Financial Data Schedule
</TABLE>
- ------------
+ previously filed
* to be filed by amendment
(b) Financial Statement Schedules:
1. Financial Statement Schedules filed herewith:
None applicable
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 14 or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question
II-5
<PAGE>
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 22. UNDERTAKINGS
The Company undertakes to update the Registration Statement with
post-effective amendments to reflect (i) any prospectus required by Section
10(a)(3) of the Securities Act; (ii) facts or events arising after the effective
date of the Registration Statement which constitute a fundamental change; and
(iii) any material information with respect to the plan of distribution not
disclosed previously in the Registration Statement or any material change to
such information in the Registration Statement. The Company also undertakes to
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Atlanta, Georgia, on July 23, 1996.
SIMMONS COMPANY
By: *
..................................
Zenon S. Nie
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on July 23, 1963.
<TABLE>
<CAPTION>
NAME TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
* Chairman of the Board of Directors,
............................................. Chief Executive Officer and Director
Zenon S. Nie (Principal Executive Officer)
* Senior Executive Vice President and Director
.............................................
Martin R. Passaglia
* Executive Vice President--Finance and
............................................. Administration, Chief Financial Officer and
Jonathan C. Daiker Director (Principal Financial and
Accounting Officer)
* Director
.............................................
Savio W. Tung
* Director
.............................................
Christopher J. O'Brien
* Director
.............................................
Charles J. Philippin
* Director
.............................................
Jon P. Hedley
</TABLE>
*By /s/ JOHN M. KENNEY
..................................
John M. Kenney
Attorney-in-Fact
II-7
