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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-04841
SIMMONS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1007444
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 600
Atlanta, Georgia 30328
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (770) 512-7700
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 27, 1998 was $ 0 .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding as of March
27, 1998 is 31,964,452.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
GENERAL
Simmons Company, a Delaware corporation (the "Company"), is the second
largest bedding manufacturer in the United States. The Company manufactures and
distributes a broad range of mattresses, box springs, bedding frames and sleep
accessories under well-recognized brand names, including Beautyrest(R),
Simmons(R), BackCare(R), Maxipedic(R), Beautysleep(R) and Connoisseur(R). Sales
of conventional bedding, which includes fully assembled mattresses and box
springs, accounted for substantially all of the Company's 1997 net sales.
The Company manufactures and supplies conventional bedding to over
5,500 retail outlets, representing more than 2,500 customers, including
furniture stores, department stores, specialty sleep shops and warehouse
showrooms. The Company operates 17 manufacturing facilities in 15 states, and
its subsidiary operates a manufacturing facility in Puerto Rico. These
facilities are strategically located in proximity to customers, thereby reducing
transportation costs, facilitating just-in-time delivery and enhancing the
Company's ability to service large national accounts. The Company believes that
operating its manufacturing facilities affords a number of advantages over
several of its national, brand-name competitors that operate as a group of
independent licensees, including (i) producing consistently high-quality
merchandise across all facilities; (ii) allowing the Company to share its best
practices among manufacturing facilities; (iii) ensuring consistency of local
marketing for national accounts; and (iv) permitting efficient allocation of
production among manufacturing facilities to accommodate variations in regional
demand.
HISTORY OF THE COMPANY
Founded in 1871, the Company was privately held by the Simmons family
for many years and later was publicly traded. Historically, the Company was a
worldwide mattress manufacturer; in 1977 over 20% of the Company's net sales
came from international sales. In 1978, Gulf & Western Industries, Inc. acquired
the Company via a tender offer. In September 1985, Gulf & Western Industries,
Inc. sold the Company to Wickes Companies, Inc., which in turn sold the stock to
a group of private investors led by Wesray Capital through a leveraged buyout in
October 1986. During 1987 and 1988, the Company sold its European and Asian
subsidiaries and several parcels of real estate in order to pay down debt
incurred to finance the leveraged buyout.
In January 1989, 100% of the Company's stock was acquired by the
newly-created Simmons ESOP for approximately $250.0 million. Between 1989 and
1991, the Company sold additional real estate as well as its Canadian and
Mexican subsidiaries, the proceeds of which were used to repay a portion of the
Company's debt. In conjunction with a financial restructuring completed in 1991,
Merrill Lynch Capital Partners, Inc. ("MLCP") provided the Company with a $32.2
million equity investment, the proceeds of which were used to reduce further the
Company's debt, giving MLCP an approximately 60% interest in the Company.
On March 22, 1996, Simmons Holdings, Inc., a company organized on
behalf of INVESTCORP S.A. ("Investcorp"), management and certain other
investors, acquired 100% of the outstanding common stock of the Company from
affiliates of MLCP, the Simmons Company Employee Stock Ownership Plan (together
with a trust forming a part thereof, the " ESOP") and certain management
stockholders (collectively, the "Sellers") for (i) a purchase price of $253.2
million (including the refinancing or assumption of existing indebtedness and
the purchase of management stock options, and excluding the payment of fees,
expenses and compensation payable to management) plus (ii) the issuance to the
ESOP of 5,670,406 shares of the Company's Series A Preferred Stock, having one
vote per share and a liquidation preference of $5.00 per share (together with
the financing
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thereof, the "Acquisition"). Financing for the Acquisition was provided by (i)
$85.0 million of capital provided by affiliates of Investcorp, management and
certain other investors, (ii) $80.4 million of borrowings under a $115.0 million
Senior Credit Facility among the Company, certain lenders and Chase Manhattan
Bank (formerly known as Chemical Bank) ("Chase"), as administrative agent (the
"Senior Credit Facility") and (iii) $100.0 million of borrowings under a
Subordinated Loan Facility among the Company, certain lenders (including an
affiliate of Investcorp) and Chase, as administrative agent (the "Subordinated
Loan Facility"). The Subordinated Loan Facility was repaid on April 18, 1996
with the net proceeds of the issuance of Senior Subordinated Notes which, in
turn, were replaced with Series A Senior Subordinated Notes due 2006 in a
registered exchange offer completed in September 1996.
INDUSTRY AND COMPETITION
The domestic conventional bedding industry accounts for over 90% of
wholesale revenues for the entire domestic bedding market, according to the
International Sleep Products Association ("ISPA"). Non-conventional bedding
products, such as flotation bedding ("waterbeds"), futons and electric
adjustable beds, account for the remainder of industry wholesale revenues. The
domestic bedding industry consists of over 800 bedding manufacturers, ranging
from small, family-owned plants to large factory-direct producers. The Company's
management estimates that its share of the conventional bedding market has grown
to approximately 16.0% in 1997 from approximately 13.1% in 1992, based on
wholesale revenue data published by ISPA.
PRODUCTS
Overview. The Company's conventional bedding consists primarily of
brand name bedding that varies in price, design, material and size. Retail
prices for the Company's products range from under $200 for a twin-size
promotional bedding set to approximately $3,500 for a king-size luxury set. The
Company predominantly competes in the $499 and up retail price segment, which
accounts for the top 35% of the market in terms of units sold. The Company also
manufactures and sells waterbeds, licenses the Simmons name and manufacturing
processes to third-party manufacturers abroad to produce and distribute
conventional bedding products within their designated territories and licenses
the Simmons name to third-party manufacturers domestically for use on adjustable
beds, down comforters, pillows, bed sheets, bed pads, futons, air beds and
linens.
Pocketed Coil(TM). The Company is the primary national manufacturer
that produces conventional bedding using Pocketed Coil(TM) construction. The
Company's Beautyrest(R) and Connoisseur(R) lines, which employ Pocketed Coil(TM)
innersprings, are designed to be among the most comfortable and durable premium
mattresses in the market. Unlike open coil mattresses, in which each innerspring
coil is joined to adjacent coils at the top and the bottom, Pocketed Coil(TM)
innersprings are constructed so that each row of innerspring coils is joined to
adjacent rows of coils in the center third of the fabric pocket enclosing each
coil, thereby permitting the top and bottom of each coil to respond
independently to pressure applied to the surface of the mattress. With each coil
capable of moving independently, this design allows the mattress to contour to
the user's body, reducing excess movement.
Beautyrest(R) is the Company's flagship product utilizing the Pocketed
Coil(TM) innerspring line of bedding. In the fall of 1995, the Company's
Pocketed Coil(TM) construction was incorporated into the Connoisseur(R) line in
response to the increasing demand for top-of-the-line premium bedding. The
Connoisseur(R) line offers high-end customers a luxurious product that is
durable and that contains variable pressure foam for maximum comfort and
support.
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The BackCare(R) mattress line is a five zone open coil construction
designed to support the five zones of the anatomy. The BackCare(R) brand
leverages the unique five zone construction design into meaningful consumer
benefits by carrying the five zone construction through each element of the
sleep set including: the foundation, coil unit, upholstery and quilt design. The
five zones are comprised of two support zones for the lumbar and thighs and
three comfort zones for the upper back, hips and lower legs.
Conventional Coil. To provide a broad product offering, the Company
manufactures the Maxipedic(R), and Beautysleep(R) product lines, which use
enhanced conventional coil technology. The Maxipedic(R) product line is intended
to provide the Company's customers with a moderately priced conventional coil
product. Beautysleep(R) is an exclusive-label product line for customers
interested in a brand-name conventional coil product.
Specialty Sleep Products. The Company manufactures waterbeds, under the
name Simmons Beautyrest(R) Flotation, in a limited number of its traditional
bedding plants. The Company, the only major domestic bedding manufacturer that
produces waterbeds, sells waterbeds to specialty retailers and other customers
throughout the United States.
The Company introduced in 1997 a line of ready-to-assemble ("RTA")
bedding. This new product developed by the Company is vacuum packed so that it
can be shipped to the consumer in one box. This product is targeted for use by
the customer outside of the master bedroom and is intended to increase customer
and retailer convenience, require less retail and inventory floor space, and
allow access to non-traditional distribution channels such as home shopping
networks, catalogs and mass merchants.
CUSTOMERS
The Company manufactures and supplies conventional bedding to over
5,500 retail outlets, representing more than 2,500 customers including furniture
stores, department stores, specialty sleep shops and warehouse showrooms. The
Company's 10 largest customers accounted for approximately 38% of 1997 net
sales, while sales to Heilig Meyers entities represented approximately 10.7% of
net sales for 1997.
The majority of the Company's net sales are comprised of sales to
furniture stores, department stores, sleep shops and warehouse showrooms.
SALES, MARKETING AND ADVERTISING
The Company's products are sold by over 150 field sales representatives
and a national sales staff. Field sales representatives visit individual
retailers on a regular basis to assist showroom floor sales people with product
presentation, point-of-purchase signage and sales techniques, while the national
sales staff is responsible for national marketing and national accounts.
The Company's advertising program focuses on two areas: (i) cooperative
promotional advertising, which complements and is designed around individual
retailer's marketing programs; and (ii) national advertising, which is designed
to establish and build brand awareness with end users. The Company seeks to
build long-term brand awareness through regular national advertising and achieve
short-term sales objectives through individual commercials. One of the Company's
most successful campaigns, the "Do Not Disturb" campaign, was designed to build
awareness of the Company and of its competitive points of differentiation,
especially the advantages of the Company's use of Pocketed Coil(TM) technology,
and is conveyed by the Company's "Bowling Ball" commercial.
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The Company has developed and sponsors at Simmons' Institute of
Technology & Education, as well as, on-site at its retailers, programs that are
designed to teach retail floor salespeople how to match customers with their
mattress comfort preference by improving the retail floor salesperson's product
knowledge and sales skills. The Company's sales force is trained in advertising,
merchandising and salesmanship. Management believes that its attention and focus
on the training of its sales representatives and its customers' retail floor
salespeople is one area where the Company differentiates itself from most of its
largest competitors.
SUPPLIERS
The Company purchases substantially all of its conventional bedding raw
materials (i.e., spring components, wire, lumber, foam and ticking) centrally in
order to maximize economies of scale and volume discounts. The Company sourced
approximately 85% of its 1997 raw material needs from 10 suppliers, including
approximately one-third of the Company's total raw material needs from Leggett &
Platt ("L&P"). The Company has long-term supply agreements with each of L&P,
Foamex International, Inc. and Amoco Fabrics and Fiber Company for certain
components. The Company has not experienced any interruption in supply and does
not currently expect such an interruption to occur.
SEASONALITY
The volume of the Company's sales is somewhat seasonal with generally
lower sales occurring during the first quarter of each fiscal year when compared
to the remaining three quarters of the year. The Company also experiences a
seasonal fluctuation in its profitability, with a slightly lower gross profit
percentage occurring during the first quarter of each fiscal year when compared
to margin percentages obtained in the remaining part of the year. The Company
believes that seasonality of profitability is a factor that affects the
conventional bedding industry generally and is primarily due to retailers'
emphasis in the first quarter on price reductions and promotional bedding and
manufacturers' emphasis on close-outs of the prior year's product lines, which
together result in lower profit margins.
ENGINEERING AND DEVELOPMENT
The Company seeks to maintain close contact with bedding industry
developments through sleep research conducted by industry groups and by the
Company's engineering department, as well as through participation in the Better
Sleep Council, an industry association that promotes awareness of sleep issues,
and ISPA. The Company's marketing and manufacturing departments work closely
with the engineering staff, as well as, outside physicians and engineers to
develop and to test new products for marketability and durability.
In 1995, the Company completed the construction of the Simmons
Institute of Technology and Education ("SITE"), a state-of-the-art 38,000 square
foot research center in Atlanta, Georgia. Approximately 24 engineers and
technicians are employed full-time at SITE. These employees conduct product and
materials testing, design manufacturing facilities and equipment, improve
process engineering and development, and ensure high-quality products.
Management believes that the Company's engineering staff gives the Company a
competitive advantage over certain of its competitors who do not have
significant in-house engineering departments.
WARRANTIES
The Company's conventional bedding products generally offer limited
warranties of 10 years against
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manufacturing defects, with certain bedding manufactured to dealer
specifications for promotional purposes carrying warranties of one year.
Management believes that its warranty terms are generally consistent with those
of its primary national competitors. The Company's historic costs of honoring
warranty claims have been an immaterial percentage of net sales.
PATENTS, TRADEMARKS AND LICENSES
The Company owns many registered trademarks, including BackCare(R),
Beautyrest(R), Beautysleep(R), Connoisseur(R), Maxipedic(R) and Simmons(R), and
patents, most of which are registered in the United States and in many foreign
countries, as well as certain unregistered trademarks, including POCKETED
COIL(TM). The Company considers its trademarks, particularly Simmons(R) and
Beautyrest(R), to be of material importance to the business of the Company since
they have the effect of developing brand identification and maintaining consumer
loyalty. Management is not aware of any fact that would negatively impact the
continuing use of any of the Company's material patents, licenses, trademarks or
trade names. As a result of the disposition of certain of the Company's foreign
operations through the early 1990s, the Company now licenses the Simmons name
and many of its trademarks, processes and patents to third party manufacturers
abroad to produce and distribute conventional bedding products within their
designated territories. In addition, the Company has licensed the Simmons name
and certain trademarks, generally for limited terms, to domestic third party
manufacturers of adjustable beds, down comforters, pillows, bedsheets, bed pads,
futons, airbeds and linens.
EMPLOYEES
As of December 27, 1997, the Company had approximately 2,800 employees,
of which approximately 1,100 were represented by labor unions. Employees at nine
of the Company's manufacturing facilities are represented by unions.
Manufacturing employees of the unionized plants have negotiated various
contracts with the Upholstery Division of the United Steelworkers, the
Teamsters, United Furniture Workers, Longshoremen and International Association
of Machinists. Labor relations historically have been good, with no
labor-related work stoppages in over 20 years. Since 1980, the Company has
opened eight new plants, none of which is unionized. Approximately 1,700 of the
Company's current employees are participants in the ESOP.
REGULATORY MATTERS
As a manufacturer of bedding and related products, the Company uses and
disposes of a number of substances, such as glue, lubricating oil, solvents, and
other petroleum products, that may cause the Company to be subject to regulation
under numerous federal and state statutes governing the environment. Among other
statutes, the Company is subject to the Federal Water Pollution Control Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Clean Air Act and related state
statutes and regulations. The Company believes that it is in material compliance
with all applicable federal and state environmental statutes and regulations.
Compliance with all such provisions which have been enacted relating to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not expected to have any material adverse
effect upon the Company's business, financial condition or results of
operations. The Company is not aware of any pending federal environmental
legislation which would have a material adverse effect on the Company's
financial condition or results of operations.
The Company's conventional bedding and other product lines are subject
to various federal and state laws and regulations relating to flammability,
sanitation and other standards. The Company believes that it is in material
compliance with all such laws and regulations.
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FORWARD-LOOKING STATEMENTS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. A number of the matters and subject areas discussed in the
foregoing "Business" section and in Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of such matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and such discussion also may materially differ from the Company's actual future
experience involving any one or more of such matters and subject areas. The
Company has attempted to identify, in context, certain of the factors that it
currently believes may cause actual future experience and results to differ from
the Company's current expectations regarding the relevant matter or subject
area. The operation and results of the Company's bedding manufacturing business
may also be subject to the effect of other risks and uncertainties in addition
to the relevant qualifying factors identified elsewhere in the foregoing
"Business" section and in Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," including, but not limited
to, general economic conditions in the geographic areas and market segments in
which the Company operates, the ability to achieve further market penetration,
additional customers and distribution channels, aggressive promotional and
discounting tactics by certain of the Company's national competitors, and other
risks and uncertainties described from time to time in the Company's reports
filed with the Commission.
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ITEM 2. DESCRIPTION OF PROPERTIES
The offices of the Company are located at One Concourse Parkway,
Atlanta, Georgia 30328.
The following table sets forth certain information regarding
manufacturing and certain other facilities operated by the Company as of March
27, 1998:
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Approximate
Square
Location Footage
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Manufacturing Facilities
Atlanta, Georgia 148,300
Atlanta, Georgia 30,960
Charlotte, North Carolina 144,180
Columbus, Ohio 190,000
Dallas, Texas 140,981
Denver, Colorado 98,090
Fredericksburg, Virginia 128,500
Honolulu, Hawaii 58,530
Jacksonville, Florida 205,729
Janesville, Wisconsin 288,700
Shawnee, Kansas 130,000
Los Angeles, California 223,382
Phoenix, Arizona 103,408
Piscataway, New Jersey 264,908
San Leandro, California 260,500
Seattle, Washington 133,610
Springfield, Massachusetts 129,000
Toa Baja, Puerto Rico 24,500
---------
Subtotal 2,703,278
Other Facilities
Corporate Headquarters (Atlanta, Georgia) 37,500
SITE (Atlanta, Georgia) 38,000
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Total 2,778,778
=========
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The Company leases all of its facilities with the exception of its
Janesville, Wisconsin and Shawnee, Kansas manufacturing facilities, which the
Company owns. The Company's manufacturing facilities yield a combined practical
capacity of over 20,000 units per day, assuming two eight hour shifts daily.
Management believes that the Company's facilities, taken as a whole, have
adequate productive capacity and sufficient manufacturing equipment to conduct
business at levels meeting current demand.
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of common
equity of the Company. As of December 27, 1997 there is one holder of record of
the Company's common shares.
No dividends have been paid on any class of common equity of the
Company during the last three fiscal years. Pursuant to the restrictions
contained in the Senior Credit Facility and the Indenture, the Company is not
expected to be able to pay dividends on its common stock for the foreseeable
future, other than certain limited dividends permitted by the Senior Credit
Facility and the Indenture governing the Notes.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary historical financial and other
data of the Company for the five years ended December 27, 1997. The Company's
capital structure changed significantly as a result of the March 22, 1996
acquisition and the concurrent and subsequent refinancings of debt. Due to
required purchase accounting adjustments relating to such transaction, the
consolidated financial and other data for the period subsequent to the
acquisition (the "Successor" period) is not comparable to such data for the
periods prior to the acquisition (the "Predecessor" periods). The data for the
combined year ended December 28, 1996 represents the mathematical addition of
the two short Predecessor and Successor periods in that year.
The selected consolidated financial and other data set forth in the
following table, other than the combined 1996 data, has been derived from the
Company's audited consolidated financial statements. This table (in thousands)
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere herein.
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<CAPTION>
Successor Predecessor
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Period from Period from
March 22, Combined December 31,
Year 1996 Year 1995 Year
Ended through Ended through Ended
December 27, December 28, December 28, March 21, December 30,
1997 1996 1996 1996 1995
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STATEMENT OF OPERATIONS DATA:
Net sales $550,085 $ 423,870 $ 530,301 $ 106,431 $489,815
Income (loss) before
extraordinary item and change
in accounting principle 6,362 3,018 2,579 (439) 9,411
Extraordinary item -- (1,706) (1,706) -- --
Cumulative effect of change in
accounting principle (a) -- -- -- -- --
-------- --------- --------- --------- --------
Net income (loss) $ 6,362 $ 1,312 $ 873 $ (439) $ 9,411
======== ========= ========= ========= ========
OTHER DATA:
Depreciation $ 5,870 $ 3,468 $ 4,342 $ 874 $ 4,027
EBITDA (b) 52,635 41,644 46,414 4,770 39,577
Capital expenditures:
Normal recurring 7,616 4,203 4,726 523 3,021
SWIFT and UNITE 3,786 6,531 7,575 1,044 2,813
New plant facilities (c) 4,299 2,612 2,612 -- --
BALANCE SHEET DATA (as of end of Periods):
Cash and cash equivalents $ 9,108 $ 4,573 -- -- $ 9,185
Total assets 375,125 367,849 -- -- 254,492
Total long-term obligations,
including current maturities 184,443 196,815 -- -- 93,768
Redeemable preferred
stock, net (d) 11,230 5,000 -- -- 680
Redeemable common
stock, net (e) -- -- -- -- 32,272
</TABLE>
<TABLE>
<CAPTION>
Predecessor
----------------------------
Year Year
Ended Ended
December 31, December 25,
1994 1993
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $439,689 $ 391,382
Income (loss) before
extraordinary item and change
in accounting principle 7,994 (2,827)
Extraordinary item -- --
Cumulative effect of change in
accounting principle (a) -- (492)
-------- ---------
Net income (loss) $ 7,994 $ (3,319)
======== =========
OTHER DATA:
Depreciation $ 3,496 $ 3,141
EBITDA (b) 33,981 29,236
Capital expenditures:
Normal recurring 4,496 4,972
SWIFT and UNITE -- --
New plant facilities (c) -- --
BALANCE SHEET DATA (as of end of Periods):
Cash and cash equivalents $ 8,477 $ 11,280
Total assets 249,891 272,533
Total long-term obligations,
including current maturities 109,435 141,976
Redeemable preferred
stock, net (d) 641 592
Redeemable common
stock, net (e) 23,238 11,418
</TABLE>
See Notes to Selected Consolidated Financial and Other Data
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NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
(a) Results from the adoption of Statement of Financial Accounting
Standards No. 109 in 1993 relating to income taxes.
(b) EBITDA represents earnings before interest expense, income tax expense,
non-cash ESOP expense, depreciation and amortization, cumulative effect
of change in accounting principle and extraordinary item, and, for the
year ended December 27, 1997 and the combined year ended December 28,
1996 and the period from March 22, 1996 through December 28, 1996,
excludes amortization of the prepaid management fee of $1,000, $833 and
$833, respectively, in connection with the Acquisition. EBITDA for the
combined year ended December 28, 1996 excludes the effect of the
purchase accounting inventory write-up of $1,000, the compensation
charge of $3,735 for amounts payable to management, and the charge of
$350 for non-recurring fees. EBITDA for the year ended December 27,
1997 and the combined year ended December 26, 1996 also excludes a
credit of $375 and $281, respectively, for the amortization of the
reserve for unfavorable lease commitments. Management believes that
EBITDA is generally accepted as providing useful information regarding
a company's ability to service and/or incur debt. EBITDA should not be
considered in isolation or as a substitute for net income, cash flows
or other consolidated net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
(c) For the year ended December 27, 1997 and the period from March 22, 1996
through December 28, 1996, $2,388 and $2,612, respectively, of the
amount spent for new plant facilities was refinanced with the proceeds
from the issuance of an industrial revenue bond in the first quarter of
1997. The remaining amount in 1997 of $1,911 was financed with the
proceeds from a construction loan facility.
(d) For the Successor period, the amount consists of the Series A Preferred
Stock that was issued to the Simmons ESOP in connection with the
Acquisition net of the related unearned compensation. For the
Predecessor periods, the amounts consist of preferred stock that was
issued in connection with the recapitalization of the Company in 1991
and was called for redemption in connection with the Acquisition.
(e) Historically, under the terms of the Simmons ESOP, the participants had
the right to put their common stock to the Company under certain
circumstances. Accordingly, for the Predecessor periods the fair market
value of the common stock that could have been put to the Company,
along with the related amount of unearned compensation, are classified
outside of common stockholders' equity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the
"Selected Financial Data" and the Financial Statements of the Company and the
notes thereto included elsewhere herein.
GENERAL
On March 22, 1996, Simmons Holdings, Inc., a company organized on
behalf of Investcorp, management and certain other investors, acquired 100% of
the outstanding common stock of the Company from the Sellers. The Company
employed the purchase method of accounting for the Acquisition effective March
22, 1996. As a result of the required purchase accounting adjustments, the
post-Acquisition financial statements for the period from March 22, 1996 to
December 28, 1996 (the "Successor Financials") are not comparable to the
financial statements for the periods prior to the Acquisition (the "Predecessor
Financials").
RESULTS OF OPERATIONS
For purposes of the discussion below, the results of operations for the
year ended December 28, 1996 represent the mathematical addition of the
historical amounts for the Predecessor period (December 31, 1995 through March
21, 1996) and the Successor period (March 22, 1996 through December 28, 1996)
and are not indicative of the results that would actually have been obtained if
the Acquisition had occurred on December 30, 1995.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Net Sales. Net sales increased 3.7%, or $19.8 million, from $530.3
million in 1996 to $550.1 million in 1997. This increase was due primarily to a
4.4%, or $22.8 million increase in bedding average unit selling price and a
relatively slight increase in unit sales volume. The strong improvement in
bedding average unit selling price is attributable to a higher mix of
Beautyrest(R) sales and sales of higher priced BackCare(R) products. Unit sales
volume increased only slightly in 1997 due to the following: (i) the Company's
decision to discontinue its supply relationship with Mattress Discounters when
the terms of the relationship did not meet management's account profitability
expectations; (ii) the repositioning of the BackCare(R) product line to be
consistent with the Company's overall marketing strategy; and (iii) lost sales
volumes during the bankruptcy proceedings of Montgomery Ward & Co. and Levitz
Furniture, Inc. However, due to the breadth of penetration and continued
consumer acceptance of the Company's Beautyrest(R) and BackCare(R) product
lines, the Company was able to replace revenues lost as a result of its decision
to discontinue its relationship with Mattress Discounters. The bankruptcy
filings and the Mattress Discounters' decision have not had, nor are they
expected to have, any material adverse effect on the Company's financial
condition.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the year ended December 27, 1997 decreased 2.5 percentage points from 60.5%
in 1996 to 58% in 1997. The improvement is attributable to the following: (i) a
higher product mix concentration of Beautyrest(R) products; (ii) relatively
stable raw material costs; (iii) improved operating efficiencies due to the
effect of the completed implementation of the Company's UNITE reengineering
program; and (iv) the cost of goods sold in 1996 reflecting the sale of finished
goods inventory which had been written up, as required by generally accepted
accounting principles, to net realizable value as of the date of the
Acquisition.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
27, 1997 increased 1.0 percentage point from 32.4% in 1996 to 33.4% in 1997. The
increase is attributable to the following: (i) an increase in selling expenses
related to competitive sales promotion programs and additional sales personnel;
(ii) higher outside consulting fees associated with special projects undertaken
by the Company; (iii) additional expenses, as well as, a partial year of
amortization expense related to the rollout of SWIFT, the Company's systems
upgrade project; (iv) an increase in distribution costs due to contractual
increases and expansion into outlying territories; and (v) a higher provision
for uncollectible accounts.
13
<PAGE> 14
ESOP Expense. ESOP expense in 1997 increased from approximately $5.0
million in 1996 to $6.2 million due primarily to an increase in the number of
eligible participants in 1997.
Amortization of Intangible Assets. Amortization of intangible assets
for the year ended December 27, 1997 increased $0.7 million due primarily to a
full year of amortization relating to the increase in goodwill resulting from
purchase accounting adjustments made in connection with the Acquisition.
Interest Expense, Net. Interest expense, net for the year ended
December 27, 1997 increased $2.3 million to $19.1 million due primarily to a
full year of interest expense which resulted from the March 1996 issuance of
senior subordinated notes and a new senior credit facility as financing for the
Acquisition. (See "Notes to Condensed Consolidated Financial Statements.")
Provision for Income Taxes. The Company's effective tax rates for the
years ended December 27, 1997 and December 28, 1996 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
Net Income. For the reasons set forth above, the year ended December
27, 1997 resulted in net income of $6.4 million as compared to net income of
$0.9 million for the year ended December 28, 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Net Sales. Net sales increased 8.3%, or $40.5 million, from $489.8
million in 1995 to $530.3 million in 1996. This increase was due primarily to a
8.1% or $39.9 million increase in bedding unit sales volume, offset, in part, by
a decline in bedding average unit selling price aggregating 0.1% or $0.6
million. The growth in bedding unit sales volume resulted from increased
contract and Beautyrest(R) bedding sales and the continued growth of the
BackCare(R) product line due to incremental product placements and retailer
acceptance. The decline in average unit selling price is predominantly
attributable to a higher mix of contract bedding and the full year effect of the
introduced BackCare(R) line, which have lower average unit sales prices than the
Company's 1995 mix.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold
for the year ended December 28, 1996 increased 0.7 percentage point from 59.8%
in 1995 to 60.5% in 1996. The increase was primarily attributable to: (i)
introductory selling prices associated with the introduction of the Company's
new BackCare(R) product line; (ii) a higher product mix concentration of
contract bedding; (iii) costs resulting from temporary inefficiencies due to the
redesigned layout of certain plant facilities pursuant to the Company's
reengineering project; and (iv) the sale of finished goods inventory which had
been written up, as required by generally accepted accounting principles, to
fair market value as of the date of the Acquisition. Offsetting these cost
increases, in part, was a reduction in the Company's provision for warranty
claims due to the favorable impact of expanded outlets for resale of units
returned due to minor defects.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the year ended December
28, 1996 improved 0.5 percentage point from 32.9% in 1995 to 32.4% in 1996. The
improvement reflects management's efforts to contain costs in these areas and
the Company's fixed expenses being spread over a larger revenue base. Also
contributing to the improvement were lower bad debt and bonus provisions
compared to 1995, lower expenses due to higher early retirement and worker
compensation amounts recorded in 1995. Offsetting these improvements, in part,
were an increase in expenditures related to the Company's UNITE reengineering
project and an increase in distribution costs due to higher volume and increased
fuel costs.
ESOP Expense. Non-cash ESOP expense in 1996 increased from
approximately $4.5 million to $5.0 million due primarily to an increase in the
fair value of shares allocated to participant accounts.
Amortization of Intangible Assets. Amortization of intangible assets
for the year ended December 28, 1996 increased $1.2 million due in part to the
effect of an increase in goodwill resulting from purchase accounting adjustments
made in connection with the Acquisition in March 1996.
14
<PAGE> 15
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Interest Expense, Net. Interest expense, net, increased $8.6 million to
$16.8 million due primarily to interest expense on increased total indebtedness,
which resulted from the new senior credit and subordinated loan facilities as
financing for the Acquisition, and from the issuance of senior subordinated
notes which refinanced the subordinated loan. ("See Notes to Consolidated
Financial Statements.")
Other Expense, Net. Other expense, net for the year ended December 28,
1996 increased $1.3 million to $1.7 million due primarily to non-recurring
expenses of $4.4 million incurred following the Acquisition, of which,
approximately $3.8 million was attributable to special compensation arrangements
entered into by the Company with certain members of management of the Company.
Total recurring expenses totaling $1.2 million were comprised of fees for
management advisory, consulting services and certain other fees. These expenses
were offset, in part, by a $4.0 million gain on the sale of minority interests
in certain foreign affiliates. ("See Notes to Consolidated Financial
Statements.")
Provision for Income Taxes. The Company's effective tax rates for the
years ended December 28, 1996 and December 30, 1995 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill
and the utilization, in 1995, of net operating loss carryforwards.
Extraordinary Item. The Company recorded an extraordinary charge, net
of related income taxes, for the write-off of debt issuance costs associated
with the long-term subordinated loan facility which was refinanced with the
proceeds of the issuance of the Senior Subordinated Notes due 2006.
Net Income. For the reasons set forth above, the year ended December
28, 1996 resulted in net income of $0.9 million as compared to $9.4 million at
December 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash to fund its liquidity needs is net
cash provided by operating activities and availability under its revolving
credit facility. Net cash provided by operating activities was $32.3 million for
the year ended December 27, 1997 compared to $4.1 million used in the combined
periods ended December 28, 1996, due primarily to (i) higher net income in 1997
as described above; (ii) the timing of accounts receivable collections; and
(iii) the timing of payments of accounts payable and accrued liabilities. The
Company's principal uses of funds provided by operating activities consist of
payments of principal, interest, and capital expenditures. Capital expenditures
totaled $15.7 million for the year ended December 27, 1997. These capital
expenditures consisted primarily of normal recurring capital expenditures in the
amount of $7.6 million, capital expenditures relating to the construction of new
manufacturing facilities in the amount of $4.3 million and capitalized
expenditures related to the Company's systems upgrade project in the amount of
$3.8 million. The Company estimates that total normal recurring capital
expenditures will be approximately $7.0 million in 1998. In addition, total
expenditures for completing SWIFT, the Company's systems upgrade project, are
expected to be approximately $2.3 million in 1998. Management believes that
annual capital expenditure limitations in its Senior Credit Facility will not
significantly inhibit the Company from meeting its ongoing capital needs.
The Company may seek to make selective acquisitions in the bedding
industry. Although the Company has discussions from time to time with potential
candidates, the Company currently has no commitments with respect to any such
acquisitions.
In connection with the Acquisition, the Company entered into the Senior
Credit Facility which provides for a $40.0 million revolving credit facility.
The revolving credit facility will expire on the earlier of (a) March 31, 2001
or (b) such other date as the revolving credit commitments thereunder shall
terminate in accordance with the terms of the Senior Credit Facility. The
15
<PAGE> 16
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
Senior Credit Facility also provides for a $75.0 million term loan facility,
which is divided into two tranches, Tranche A and Tranche B term loans. The
Tranche A term loan has a final scheduled maturity date of March 31, 2001, and
the Tranche B term loan has a final scheduled maturity date of March 31, 2003.
The interest rates per annum in effect at December 27, 1997 for the Tranche A
term and Tranche B term loans were 8.25% and 8.75%, respectively.
On June 11, 1996, the Company entered into two interest rate swap
agreements to effectively convert $40.0 million of the variable Tranche A and
Tranche B debt to fixed rate debt with effective interest rates of 8.8% - 9.3%.
The interest rate swap agreements have a duration of two years. At December 27,
1997, the fair value of the interest rate swap agreements was not significant.
At December 27, 1997, the Company's weighted average borrowing cost was 9.7%.
At December 27, 1997, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$36.1 million, after giving effect to $3.9 million that was reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit. Amounts available under the revolving credit portion of the Senior
Credit Facility may be used for working capital and general corporate purposes,
including acquisitions and capital expenditures, subject to certain limitations
under the Senior Credit Facility. Pursuant to the terms of the Senior Credit
Facility: (i) the Company may make capital expenditures in an amount not to
exceed, prior to any carryover provisions, $7.0 million in each of 1998 and
1999, and escalating thereafter; and (ii) to the extent that acquisitions are
not permitted as capital expenditures under the Senior Credit Facility, the
Company may make acquisitions in an amount that is the lesser of (A) $30.0
million or (B) $15.0 million plus 50% of cumulative Excess Cash Flow (as defined
in the Senior Credit Facility).
The Senior Credit Facility contains certain covenants and restrictions
on actions by the Company and its subsidiaries. In addition, the Senior Credit
Facility requires that the Company comply with specified financial ratios and
tests, including minimum cash flow, a maximum ratio of indebtedness to cash flow
and a minimum interest coverage ratio. As of December 27, 1997, the Company was
in compliance with respect to all covenants under the Senior Credit Facility.
On April 18, 1996, the Company completed a refinancing, which consisted
of the sale of $100.0 million in Notes pursuant to a private offering, the
proceeds of which were used to repay the outstanding indebtedness under the
Company's Subordinated Loan Facility. The Notes mature on April 15, 2006 and
bear interest at the rate of 10.75% per annum payable semiannually on April 15th
and October 15th of each year. The Notes may be redeemed at the option of the
Company on or after April 15, 2001, under the conditions and at the redemption
price as specified in the Note Indenture, dated as of April 18, 1996, under
which the Notes were issued. The Notes are subordinated to all existing and
future Senior Indebtedness (as defined) of the Company and will be effectively
subordinated to all obligations of any subsidiaries of the Company.
On September 4, 1996, the Company issued 10.75% Series A Senior
Subordinated Notes due 2006 (the "New Notes") in exchange for all Notes,
pursuant to an exchange offer whereby holders of the Notes received New Notes
which have been registered under the Securities Act of 1933, as amended, but are
otherwise identical to the Notes.
In December 1997, Simmons Caribbean Bedding Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and equipment installation. As of December 27,
1997, approximately $1.3 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
Management believes that the Company will have the necessary liquidity
for the foreseeable future from cash flow from operations, and amounts available
under its revolving credit facility in the Senior Credit Facility to fund: (i)
its obligations under the Senior Credit Facility and the New Notes; (ii)
expected capital expenditures; (iii) selective acquisitions in the bedding
industry;
16
<PAGE> 17
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
and (iv) other needs required to manage and operate its business.
SEASONALITY
The volume of the Company's sales is somewhat seasonal with generally
lower sales occurring during the first quarter of each fiscal year when compared
to the remaining three quarters of the year. The Company also experiences a
seasonal fluctuation in its profitability, with a slightly lower gross profit
percentage occurring during the first quarter of each fiscal year when compared
to margin percentages obtained in the remaining part of the year. The Company
believes that seasonality of profitability is a factor that affects the
conventional bedding industry generally and is primarily due to retailers'
emphasis in the first quarter on price reductions and promotional bedding and
manufacturers' emphasis on close outs of the prior year's product lines, which
together result in lower profit margins.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
SFAS No. 130 is effective for the Company's fiscal year beginning December 28,
1997. Reclassification of financial statements for earlier periods presented for
comparative purposes is required. The adoption of SFAS No. 130 is not expected
to have a material impact on the Company's consolidated results of operations,
financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for public business enterprises to report information about operating segments
in annual and interim financial statements. It also establishes standards for
related disclosures about products and services and geographic areas. SFAS No.
131 is required to be applied beginning with the Company's annual financial
statements for the 1998 fiscal year. Financial statement disclosures for prior
periods are required to be restated. The Company has evaluated the disclosure
requirements and has concluded that the Company operates in only one segment.
The adoption of SFAS No. 131 will have no material impact on the Company's
consolidated results of operations, financial position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other post retirement benefits to
the extent practicable. This standard is effective beginning with the Company's
annual financial statements for the 1998 fiscal year, and prior period
disclosures are required to be restated. Management is currently reviewing the
provisions of SFAS No. 132 and does not believe that the adoption of SFAS No.
132 will have a material impact on the Company's financial statements.
SIGNIFICANT CUSTOMER DEVELOPMENTS
During the year ended December 27, 1997, Montgomery Ward & Co.
("Wards") and Levitz Furniture Inc. ("Levitz"), two of the Company's larger
customers, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As
of December 27, 1997 and the date of each of the bankruptcy filings, the Company
had the reserves necessary to cover its estimated exposure. For a period prior
to the filings under the bankruptcy code, the Company halted shipments to Wards
and Levitz to minimize its exposure. Subsequent to the filing, the Company
recommenced shipments to the retailers. The Company's management will continue
to monitor the reorganization progress of Wards and Levitz and will attempt to
limit exposure as deemed prudent under the circumstances. Management believes
that these situations will not have a material adverse effect on the Company's
financial position or results of operations.
17
<PAGE> 18
Simmons Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued
IMPACT OF THE YEAR 2000 ISSUE
Issues relating to the Year 2000 are the result of computer programs
being written using two digits rather than four to define the applicable year.
When computer systems either reach or calculate a date greater than December 31,
1999, the computers may process the date as 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
In order to mitigate the risks associated with this situation, Simmons
has formed a committee consisting of personnel from all major disciplines within
the Company to address the year 2000 issue. The committee has developed a list
of all information systems and is investigating each system to determine its
year 2000 readiness. No major equipment, facilities or service issues have been
identified, nor are any anticipated at this time. Communications with all major
vendors and customers are anticipated to be completed by the end of 1998.
In the last few years, Simmons has undergone a major initiative to
replace all of its major enterprise systems. The systems replace all major order
cycle business applications as well as all financial applications. The last
plant system to be converted to the new system will be completed in June 1998.
While the new systems are largely compliant, there are some areas within them
that are not fully year 2000 capable. Therefore, once the last plant system is
converted, Simmons will initiate a project to upgrade these systems to year 2000
compliant versions of the software. It is anticipated that this project will be
completed by the end of 1998. Simmons is covered under maintenance agreements
with all of its major software suppliers; therefore, no incremental software
costs will be incurred with this initiative. Costs to complete this exercise are
currently expected to relate to internal data processing resources, as well as,
some external consultant fees to assist in the effort. The incremental costs are
anticipated to be under $250 thousand.
In addition, the Simmons human resource system is not year 2000
compliant. Simmons has undertaken a software selection process to replace this
system. It is anticipated that this project will be completed by the end of
1998.
Simmons' main system hardware and operating systems, networking
operating systems, office productivity software and communications equipment are
all believed to be compliant in their current state.
The costs of these initiatives and their completion dates are based
upon management's best estimates, which were derived using various assumptions
of future events including the continued availability of certain resources,
third party statements of compliance and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from these plans.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
SIMMONS COMPANY
We have audited the accompanying consolidated financial statements and
the financial statement schedule listed in Item 14 of this Form 10-K of Simmons
Company. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simmons Company and subsidiaries as of December 27, 1997 and December 28, 1996,
and the consolidated results of their operations and their cash flows for the
periods ended December 27, 1997, December 28, 1996, March 21, 1996 and December
30, 1995 in conformity with generally accepted accounting principles. In
addition, in our opinion the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 27, 1998
19
<PAGE> 20
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,108 $ 4,573
Accounts receivable, less allowance for
doubtful accounts of $3,938 and $5,644 65,488 66,634
Inventories 19,970 18,833
Deferred income taxes 3,229 9,980
Other current assets 13,808 7,768
-------- --------
Total current assets 111,603 107,788
Property, plant and equipment, net 47,564 38,079
Patents, net of accumulated amortization of
$4,870 and $2,071 12,162 14,961
Goodwill, net of accumulated amortization of
$8,457 and $3,577 184,850 187,070
Deferred income taxes 8,453 8,040
Other assets 10,493 11,911
-------- --------
$375,125 $367,849
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 21
Simmons Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,847 $ 24,800
Accrued wages and benefits 8,830 7,807
Accrued advertising and incentives 15,457 17,124
Accrued interest 3,793 2,734
Other accrued expenses 9,435 8,336
Current maturities of long-term obligations 10,873 2,701
--------- ---------
Total current liabilities 76,235 63,502
Noncurrent liabilities:
Long-term obligations 173,570 194,114
Postretirement benefit obligations other than pensions 7,612 7,642
Other 13,864 11,300
--------- ---------
Total liabilities 271,281 276,558
--------- ---------
Commitments and contingencies
Redeemable Series A Preferred Stock under ESOP, net of
related unearned compensation of $17,122 and $23,352 11,230 5,000
Common stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized,
31,964,452 shares issued 320 320
Additional paid-in capital 84,680 84,680
Retained earnings 7,674 1,312
Foreign currency translation adjustment (55) (21)
Treasury stock, 974 shares in 1997 at cost (5) --
--------- ---------
Total common stockholders' equity 92,614 86,291
--------- ---------
$ 375,125 $ 367,849
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
Simmons Company and Subsidiaries
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- ------------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $550,085 $423,870 $ 106,431 $489,815
Costs and expenses:
Cost of products sold 319,074 254,127 66,630 292,825
Selling, general and administrative 183,556 135,762 35,846 161,202
ESOP expense 6,230 3,797 1,203 4,533
Amortization of intangibles 7,679 5,650 1,324 5,753
-------- -------- --------- --------
516,539 399,336 105,003 464,313
-------- -------- --------- --------
Income from operations 33,546 24,534 1,428 25,502
Interest expense, net 19,088 15,277 1,489 8,185
Other expense, net 1,571 1,557 96 400
-------- -------- --------- --------
Income (loss) before income taxes and
extraordinary item 12,887 7,700 (157) 16,917
Provision for income taxes 6,525 4,682 282 7,506
-------- -------- --------- --------
Income (loss) before extraordinary item 6,362 3,018 (439) 9,411
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,137 -- 1,706 -- --
-------- -------- --------- --------
Net income (loss) $ 6,362 $ 1,312 $ (439) $ 9,411
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
Simmons Company and Subsidiaries
Consolidated Statements of Common Stockholders' Equity
(in thousands, except common share amounts)
<TABLE>
<CAPTION>
Retained Foreign
Additional Unearned Earnings Currency
Common Common Paid-In Compensation (Accumulated Translation
Shares Stock Capital Under ESOP Deficit) Adjustment
------ ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
December 31, 1994 36,311,967 $363 $ 190,560 ($60,169) ($88,305) ($347)
ESOP share allocations -- -- (8,065) 12,598 -- --
Income tax benefit on ESOP -- -- 3,145 -- -- --
Net income -- -- -- -- 9,411 --
Dividends paid or accrued on
redeemable preferred stock -- -- (65) -- -- --
Change in foreign currency
translation -- -- -- -- -- 59
Change in fair value of ESOP
shares -- -- (9,074) 40 -- --
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- -------- -------- -----
December 30, 1995 36,311,967 363 176,501 (47,531) (78,894) (288)
ESOP share allocations -- -- (2,298) 3,501 -- --
Income tax benefit on ESOP -- -- 896 -- -- --
Net income -- -- -- -- (439) --
Change in foreign currency
translation -- -- -- -- -- 9
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- -------- -------- -----
March 21, 1996 36,311,967 $363 $ 175,099 $(44,030) $(79,333) $(279)
========== ==== ========= ======== ======== =====
SUCCESSOR
March 22, 1996 (reflects the
new basis of 31,964,452
common shares in
connection with the
Acquisition) 31,964,452 $320 $84,680$ -- $ -- $ (2)
Net income -- -- -- -- 1,312 --
Change in foreign currency
translation -- -- -- -- -- (19)
---------- ---- --------- ------ -------- -----
December 28, 1996 31,964,452 320 84,680 -- 1,312 (21)
Net income -- -- -- -- 6,362 --
Change in foreign currency
translation -- -- -- -- -- (34)
Purchase of treasury stock -- -- -- -- -- --
---------- ---- --------- ------ -------- -----
December 27, 1997 31,964,452 $320 $ 84,680 $ -- $ 7,674 $ (55)
========== ==== ========= ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
-------- -------------
<S> <C> <C>
PREDECESSOR
December 31, 1994 $ (166) $ 41,936
ESOP share allocations -- 4,533
Income tax benefit on ESOP -- 3,145
Net income -- 9,411
Dividends paid or accrued on
redeemable preferred stock -- (65)
Change in foreign currency
translation -- 59
Change in fair value of ESOP
shares -- (9,034)
Purchase of treasury stock (5,613) (5,613)
------- --------
December 30, 1995 (5,779) 44,372
ESOP share allocations -- 1,203
Income tax benefit on ESOP -- 896
Net income -- (439)
Change in foreign currency
translation -- 9
Purchase of treasury stock (660) (660)
------- --------
March 21, 1996 $(6,439) $ 45,381
======= ========
SUCCESSOR
March 22, 1996 (reflects the
new basis of 31,964,452
common shares in
connection with the
Acquisition) $ -- $ 84,998
Net income -- 1,312
Change in foreign currency
translation -- (19)
------- --------
December 28, 1996 -- 86,291
Net income -- 6,362
Change in foreign currency
translation -- (34)
Purchase of treasury stock (5) (5)
------- --------
December 27, 1997 $ (5) $ 92,614
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------- ----------------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,362 $ 1,312 $ (439) $ 9,411
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 13,549 9,118 2,198 9,780
Amortization of deferred debt issuance costs 613 521 84 679
ESOP expense 6,230 3,797 1,203 4,533
Extraordinary loss -- 1,706 -- --
Gain from sale of investment -- (4,011) -- --
Provision for bad debts 2,750 1,273 566 3,500
Provision for deferred income taxes 6,226 4,420 282 1,006
Other, net -- (475) 388 736
Net changes in operating assets and liabilities:
Accounts receivable (1,604) (17,288) (1,732) (10,092)
Inventories (1,137) (769) 1,229 (2,533)
Other assets (5,235) (3,724) (531) 2,029
Accounts payable 3,047 9,117 (7,250) 4,400
Accrued liabilities 1,500 (11,443) 6,341 5,064
-------- --------- ------- --------
Cash provided by (used in) operating activities 32,301 (6,446) 2,339 28,513
-------- --------- ------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (15,355) (13,546) (1,567) (5,834)
Proceeds from sale of investment -- 4,700 -- --
Payment to the seller for the acquisition -- (151,625) -- --
Payments to option holders -- (6,950) -- --
Payments of acquisition costs -- (16,040) -- --
-------- --------- ------- --------
Net cash used in investing activities (15,355) (183,461) (1,567) (5,834)
-------- --------- ------- --------
Cash flows from financing activities:
Proceeds from Predecessor revolving line of credit
and long-term borrowings -- -- 3,334 15,842
Predecessor principal payments on revolving line
of credit, long-term debt and capital lease
obligations -- -- (3,490) (32,259)
Payments of Predecessor debt -- (76,134) -- --
Proceeds of Successor long-term borrowings 34,329 317,700 -- --
Payments of Successor long-term borrowings (46,701) (131,473) -- --
Payments of financing costs -- (9,744) -- --
Proceeds from issuance of Successor
common stock -- 85,000 -- --
Treasury stock purchases (5) -- (660) (5,613)
-------- --------- ------- --------
Net cash from (used in) financing activities (12,377) 185,349 (816) (22,030)
-------- --------- ------- --------
Net effect of exchange rate changes on cash (34) (19) 9 59
-------- --------- ------- --------
Increase (decrease) in cash and cash equivalents 4,535 (4,577) (35) 708
Cash and cash equivalents, beginning of period 4,573 9,150 9,185 8,477
-------- --------- ------- --------
Cash and cash equivalents, end of period $ 9,108 $ 4,573 $ 9,150 $ 9,185
======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
24
<PAGE> 25
Simmons Company and Subsidiaries
Consolidated Statements of Cash Flows - Continued
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------- ---------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest $17,526 $ 11,798 $ 803 $ 5,458
======= ========= ========= ========
Cash paid for income taxes $ 60 $ 93 $ 2,315 $ 3,047
======= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
25
<PAGE> 26
Simmons Company and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share amounts)
1. THE COMPANY
Simmons Company ("Simmons" or "the Company") is one of the largest
bedding manufacturers in the United States. The Company manufactures and
distributes mattresses, box springs, bedding frames and sleep accessories.
Simmons also sells bedding products to certain institutional customers, such as
schools and government entities, and to the lodging industry. The Company also
licenses its patents and trademarks to various domestic and foreign
manufacturers.
On March 22, 1996, Simmons Holdings, Inc. ("Holdings"), through its
subsidiary formed for this purpose, Simmons Acquisition Corp. ("SAC"), acquired
100% of the outstanding common stock of the Company (the "Acquisition").
Holdings was formed to consummate the Acquisition on behalf of affiliates of
INVESTCORP S.A. ("Investcorp"), management and certain other investors.
Immediately following the completion of the Acquisition, SAC merged into the
Company, as a result of which 100% of the common stock of the Company became
owned by Holdings. For purposes of identification and description, Simmons
Company is referred to as the "Predecessor" for the period prior to the
Acquisition, the "Successor" for the period subsequent to the Acquisition, and
the "Company" for both periods. For purposes of financial reporting, the period
from December 31, 1995 through March 21, 1996 is referred to as "Predecessor
'96" and the period from March 22, 1996 through December 28, 1996 is referred to
as "Successor '96."
The purchase price for the Acquisition was approximately $269.6 million
(including approximately $94.6 million in refinancing or assumption of existing
indebtedness, purchase of certain stock options, and the payments of fees and
expenses) which was allocated to the assets and liabilities of the Company based
upon their estimated fair market value at the date of the Acquisition, under the
purchase method of accounting. The financing for the Acquisition (including the
refinancing of outstanding debt) was provided by (i) borrowings under a new
$115.0 million Senior Credit Facility, which refinanced the Company's existing
senior and subordinated loans, (ii) the $100.0 million proceeds under a new
Subordinated Loan Facility, and (iii) $85.0 million of capital provided by
affiliates of Investcorp, management and certain other investors from Holdings.
As part of the Acquisition, the Simmons Company Employee Stock
Ownership Plan (the "ESOP") sold 6,001,257 shares of the Company's common stock
(representing all of the allocated shares) to Holdings. The remaining 5,670,406
shares of common stock of the Company (unallocated shares) were converted into
5,670,406 shares of Series A Preferred Stock.
On April 18, 1996, the Company issued $100.0 million in 10.75% Senior
Subordinated Notes, pursuant to an offering (the "Offering") (See Note 8). The
proceeds of the offering were used to retire loans under the Subordinated Loan
Facility mentioned above.
The following condensed pro forma disclosure for net sales and net
income are based on the consolidated financial statements included elsewhere
herein, adjusted to give effect to (i) the Acquisition and (ii) the Offering of
the Notes and the application of the net proceeds therefrom to repay the
Subordinated Loan Facility (collectively, the "Transactions"). This pro forma
disclosure assumes that the Transactions were consummated as of December 31,
1995 and does not purport to be indicative of the results that would actually
have been obtained if the Transactions had occurred on the date indicated or of
the results that may be obtained in the future.
<TABLE>
<CAPTION>
Combined
Pro Forma (in thousands): 1996
--------
<S> <C>
Net sales $530,301
========
Net income (loss) $ 4,657
========
</TABLE>
26
<PAGE> 27
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
2. PRINCIPAL ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of the Company and all its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Basis of Accounting
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles. Such financial
statements include estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities and the
amounts of revenues and expenses. Actual results could differ from those
estimates. Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the current year presentation.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last
Saturday in December. Fiscal years 1997, 1996 (Successor '96 and Predecessor
'96, combined) and 1995 comprised 52 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation expense
is determined principally using the straight-line method over the estimated
useful lives for financial reporting and accelerated methods for income tax
purposes. Expenditures that substantially increase asset values or extend useful
lives are capitalized. Expenditures for maintenance and repairs are expensed as
incurred. When property items are retired or otherwise disposed of, amounts
applicable to such items are removed from the related asset and accumulated
depreciation accounts and any resulting gain or loss is credited or charged to
income. Useful lives are generally as follows:
<TABLE>
<S> <C>
Buildings and improvements 10 - 25 years
Machinery and equipment 5 - 15 years
</TABLE>
Patents and Goodwill
The Acquisition resulted in a new basis of the value of the Company's
intangible assets. Accordingly, patents were adjusted to their estimated fair
value. For all periods, the cost of patents acquired are being amortized using
the straight-line method over the estimated remaining economic lives of the
respective patents, principally over seven years. Amortization expense was
approximately $2,799, $2,071, $438 and $1,929 for 1997, Successor '96,
Predecessor '96 and 1995, respectively.
Goodwill is being amortized on a straight-line basis, over the
estimated periods benefited (principally 40 years). In 1996 goodwill increased
as a result of accounting for the Acquisition. Amortization expense was $4,880,
$3,577, $886 and $3,824 for 1997, Successor '96, Predecessor '96 and 1995,
respectively.
27
<PAGE> 28
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
At each balance sheet date, management assesses whether there has been
a permanent impairment in the value of intangible assets by comparing
anticipated undiscounted future cash flows from operating activities with the
carrying value of the intangible asset. The factors considered by management in
this assessment include operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors.
Revenue Recognition
The Company recognizes revenue at the time the product is shipped to
the customer.
ESOP Expense
The Company follows the provisions of Statement of Position No. 93-6 of
the American Institute of Certified Public Accountants, "Employers' Accounting
for Employee Stock Ownership Plans," whereby ESOP expense is recognized as an
amount equal to the fair market value of the shares allocated to participants'
accounts. The unearned compensation balance continues to be amortized using the
shares allocated method (i.e., at cost). The difference in these two amounts, if
any, is recorded as an adjustment to additional paid-in capital.
Product Development Costs
Costs associated with the development of new products and changes to
existing products are charged to expense as incurred. These costs amounted to
approximately $1,185, $862, $270 and $1,245 for 1997, Successor '96, Predecessor
'96 and 1995, respectively, and are included in cost of products sold in the
accompanying consolidated statements of operations.
Advertising Costs
The Company records the cost of advertising as an expense when
incurred. Advertising expense was $54,802, $43,652, $9,861 and $49,510 for 1997,
Successor '96, Predecessor '96 and 1995, respectively, and is included as a
component of selling, general and administrative expenses in the accompanying
consolidated statements of operations.
Significant Concentrations of Risk
The Company manufactures and markets sleep products, including
mattresses, box springs, and flotation mattresses to retail establishments
primarily in the United States. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require collateral.
Sales to three of the Company's major customers aggregated approximately 21%,
21% and 23% of total sales for 1997, Successor '96 and Predecessor '96,
combined, and 1995, respectively. Accounts receivable from one customer was
approximately 9% and 5% of total accounts receivable at December 27, 1997 and
December 28, 1996, respectively. Sales to Heilig Meyers entities represented
approximately 10.7% of net sales for 1997, however, sales to no one customer
represented more than 10% of net sales for Successor '96 and Predecessor '96,
combined, or 1995.
Purchases of raw materials from one vendor represented approximately
24%, 23% and 20% of cost of products sold for 1997, Successor '96 and
Predecessor '96, combined, and 1995, respectively.
The Company maintains cash balances in excess of FDIC insurance limits
at certain large financial institutions. The Company monitors the financial
condition of such institutions and considers the risk of loss to be remote.
28
<PAGE> 29
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company is structured so that the employees of the Company have a
beneficial ownership of the Company's stock through their participation in the
ESOP. At December 30, 1995, the ESOP owned 11,690,115 shares of the Company's
common stock. The funds used to purchase the common stock were borrowed by the
ESOP pursuant to various loan agreements with the Company.
In connection with the Acquisition, the ESOP sold 6,001,257 shares of
common stock of the Company to Holdings (representing all the shares held by the
ESOP that had been allocated to plan participants as of such date) for $31.2
million in the aggregate, which amount was reinvested in diversified investments
in the respective accounts of such participants in the ESOP. Each of the
remaining 5,670,406 shares of common stock of the Company was converted into one
share of Series A Preferred Stock. Each share of Series A Preferred Stock is
entitled to one vote, is convertible into one share of common stock of the
Company at any time at the option of the holders thereof and is entitled to a
liquidation preference of $5.00 per share. Upon the occurrence of certain
events, Holdings or the Company may cause the Series A Preferred Stock to be
converted into common stock of the Company and, following such conversion, to be
exchanged for shares of Holdings' capital stock.
The ESOP pledged all of its shares of the Company's common and
preferred stock as collateral for the ESOP loans. These shares are held by State
Street Bank and Trust Company, the ESOP trustee, in a suspense account and are
released to the ESOP participants' accounts based on debt service. As of
December 30, 1995, 6,019,709 shares of common stock had been allocated to
participants' accounts. The remaining unallocated shares of common stock held in
the ESOP had an estimated fair value of approximately $29,664 ($5.30 per share)
at December 30, 1995. As of December 28, 1996, no shares of Series A Preferred
Stock had been allocated to participants' accounts, although 1,000,000 shares of
such stock had been committed to be released. In 1997, 1,096,000 shares were
released to participant's accounts for the 1996 ESOP allocation. In addition, as
of December 27, 1997, 1,150,000 additional shares of such stock have been
committed to be released. The remaining unallocated shares of Series A Preferred
Stock held in the ESOP had an estimated fair value of approximately $17,122
($5.00 per share) at December 27, 1997.
Under the ESOP, employees are eligible to participate in the ESOP
following the date when the employee has completed at least one year of service
and has reached age 21. All employees of the Company, except employees who are
covered by a negotiated collective bargaining agreement (unless the collective
bargaining agreement provides for participation in the ESOP) or who are
nonresident aliens, are covered by the ESOP. Approximately 60% of the Company's
full-time employees are participants in the ESOP. The participants and
beneficiaries of the ESOP are not subject to income tax with respect to
contributions made on their behalf until they receive distributions from the
ESOP.
Under the provisions of the ESOP, the Company is obligated to
repurchase participant shares which have been distributed under the terms of the
ESOP, as long as the shares are not publicly traded or if the shares are subject
to trading limitations. The Company repurchased approximately 58,700 shares from
ESOP participants in 1995 at prices ranging from $3.30 to $4.50 per share,
18,452 shares from ESOP participants in 1996 (prior to the Acquisition) at a
price of $4.50 per share and 974 shares from ESOP participants in 1997 at a
price of $5.00 per share. These shares are reflected as treasury stock in the
common stockholders' equity section of the balance sheet.
Because of the Company's obligation to repurchase its shares from the
ESOP under certain circumstances for their then current fair value, the Company
has classified the redemption value of such shares in the accompanying
consolidated balance sheets as Redeemable Series A Preferred Stock under ESOP as
of December 27, 1997 and December 28, 1996, and as Redeemable Common Stock under
ESOP as of December 30, 1995. Additionally, pursuant to generally accepted
accounting principles, the Company has classified a proportional amount of
unearned compensation under ESOP in the same manner.
The Company also repurchased 1,608,019 shares at $3.30 to $4.50 per
share from non-ESOP stockholders
29
<PAGE> 30
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
during 1995, which is also reflected as treasury stock in 1995.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 27, 1997 and
December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable $ 73,239 $ 77,335
Allowance for doubtful accounts (3,938) (5,644)
Allowance for cash discounts and other (3,813) (5,057)
-------- --------
$ 65,488 $ 66,634
======== ========
</TABLE>
5. INVENTORIES
Inventories consisted of the following at December 27, 1997 and
December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $12,209 $12,044
Work-in-progress 1,531 1,888
Finished goods 6,230 4,901
------- -------
$19,970 $18,833
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
27, 1997 and December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Land, buildings and improvements $ 11,945 $ 6,716
Machinery and equipment 39,309 28,824
Construction in progress 3,713 4,299
-------- --------
54,967 39,839
Less accumulated depreciation (7,403) (1,760)
-------- --------
$ 47,564 $ 38,079
======== ========
</TABLE>
Depreciation expense for 1997, Successor '96, Predecessor '96 and 1995
was $5,870, $3,468, $874 and $4,027, respectively.
7. OTHER ASSETS
Other assets consisted of the following at December 27, 1997 and
December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Long-term note receivable $ 2,200 $ 2,200
Debt issuance costs, net of accumulated amortization
of $1,165 and $552, respectively 7,259 7,670
Other 1,034 2,041
------- -------
$10,493 $11,911
======= =======
</TABLE>
Debt issuance costs are amortized using the effective interest method
and are included in interest expense.
30
<PAGE> 31
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Amortization of $613, $521, $84 and $679 for 1997, Successor '96, Predecessor
'96 and 1995, respectively, is included as a component of interest expense in
the accompanying consolidated statements of operations.
8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 27, 1997
and December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Senior loans:
Tranche A term loan $ 33,000 $ 35,516
Tranche B term loan 34,700 34,784
Revolving loan -- 16,000
10.75% Series A Senior Subordinated
Notes due 2006 100,000 100,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 4.30%, due 2016 5,000 --
Construction loan 1,329 --
Other, including capital lease obligations 714 815
--------- ---------
184,443 196,815
Less current portion (10,873) (2,701)
--------- ---------
$ 173,570 $ 194,114
========= =========
</TABLE>
In connection with the Acquisition on March 22, 1996, the Company
entered into a new Senior Credit Facility (the "Senior Credit Facility") the
proceeds of which refinanced the outstanding amounts under the old senior loan
facility and the adjustable rate senior and junior subordinated notes. The
Senior Credit Facility provides for a $40.0 million revolving credit facility.
The revolving credit facility will expire on the earlier of (a) March 31, 2001
or (b) such other date as the revolving credit commitments thereunder shall
terminate in accordance with the terms of the Senior Credit Facility. The Senior
Credit Facility also provides for a $75.0 million term loan facility, which is
divided into two tranches, Tranche A and Tranche B term loans. The Tranche A
term loan has a final scheduled maturity date of March 31, 2001, and the Tranche
B term loan has a final scheduled maturity date of March 31, 2003.
The interest rate under the Senior Credit Facility is based, at the
Company's option, on an Alternate Base Rate or a Eurodollar Rate (both as
defined), plus margins as follows:
<TABLE>
<CAPTION>
Revolving Tranche A Tranche B
Credit Loan Term Loan Term Loan
----------- --------- ---------
<S> <C> <C> <C>
Alternate base rate 1.25% 1.25% 1.75%
Eurodollar rate (LIBOR-based) 2.50% 2.50% 3.00%
</TABLE>
The interest rates per annum in effect at December 27, 1997 for the
Tranche A and Tranche B term loans were 8.25% and 8.75%, respectively.
Management of the Company has developed and implemented a policy to
maintain the percentage of fixed and variable rate debt within certain
parameters. The Company enters into interest rate swap agreements whereby the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount linked to LIBOR. Any differences paid or received on the
interest rate swap agreement are recognized as adjustments to interest expense
over the life of the swap, thereby adjusting the effective interest rate on the
underlying obligation. On June 11, 1996, the Company entered into two interest
rate swap agreements to effectively convert $40.0 million of the variable
Tranche A and Tranche B debt to fixed rate debt with effective interest rates of
8.8% - 9.3%. The interest rate swap agreements have a duration of two years and
have an option to extend for a one year period. At December 27, 1997, the fair
31
<PAGE> 32
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
value of the interest rate swap agreements was not significant.
At December 27, 1997, the amount under the revolving credit portion of
the Senior Credit Facility that was available to be drawn was approximately
$36.1 million, after giving effect to $3.9 million that was reserved for the
Company's reimbursement obligations with respect to outstanding letters of
credit. The remaining availability under the revolving credit facility may be
utilized to meet the Company's current working capital requirements, including
issuance of stand-by and trade letters of credit. The Company also may utilize
the remaining availability under the revolving credit facility to fund
acquisitions and capital expenditures.
The Senior Credit Facility contains certain covenants and restrictions
on actions by the Company and its subsidiaries. In addition, the Senior Credit
Facility requires that the Company comply with specified financial ratios and
tests, including minimum cash flow, a maximum ratio of indebtedness to cash flow
and a minimum interest coverage ratio. During the third quarter of 1996, the
Company recorded a $4.0 million gain on the sale of minority interests in
certain foreign affiliates. The net proceeds from the sale were used to prepay
term loan payments as required by the Senior Credit Facility. As of December 27,
1997, the Company was in compliance with respect to all covenants under the
Senior Credit Facility.
On April 18, 1996, the Company completed a refinancing, which consisted
of (i) the sale of $100.0 million of 10.75% Senior Subordinated Notes due 2006
("the "Notes") pursuant to a private offering, (ii) the application of
approximately $96.0 million (after deduction of discounts to the Initial
Purchaser and other expenses of the Offering), together with other available
funds, to repay the outstanding indebtedness under the Company's Subordinated
Loan Facility. The Notes mature on April 15, 2006 and bear interest at the rate
of 10.75% per annum from April 15, 1996 payable semiannually on April 15th and
October 15th of each year, commencing October 15, 1996. The Notes may be
redeemed at the option of the Company on or after April 15, 2001, under the
conditions and at the redemption price as specified in the Note Indenture, dated
as of April 18, 1996, under which the Notes were issued. The Notes are
subordinated to all existing and future Senior Indebtedness (as defined) of the
Company and will be effectively subordinated to all obligations of any
subsidiaries of the Company. On September 4, 1996, the Company issued 10.75%
Series A Senior Subordinated Notes due 2006 (the "New Notes") in exchange for
all Notes, pursuant to an exchange offer whereby holders of the Notes received
New Notes which have been registered under the Securities Act of 1933, as
amended, but are otherwise identical to the Notes.
In December 1997, Simmons Caribbean Bedding, Inc., a wholly owned
subsidiary of the Company, entered into a construction loan facility in the
amount of $3.2 million, which will be converted into a permanent loan upon
completion of a new facility and new equipment installation. As of December 27,
1997, approximately $1.3 million was drawn against the loan facility and is
accruing interest at a fluctuating rate equal to two hundred basis points (200)
over the London Interbank Offered Rate (or LIBOR), adjusted every ninety (90)
days.
Future maturities of long-term obligations as of December 27, 1997 are
as follows:
<TABLE>
<S> <C>
1998 $ 10,873
1999 8,777
2000 10,669
2001 13,879
2002 16,150
Thereafter 124,095
--------
$184,443
========
</TABLE>
The fair value of the Company's long-term debt is estimated based on
the current rates offered to the Company for debt of similar terms and
maturities except for the 10.75% Series A Senior Subordinated Notes due 2006
which are measured at quoted market rate. The fair value of the Company's 10.75%
Series A Senior Subordinated Notes due 2006 was $105,250 at December 27, 1997.
All other long-term debt approximates the carrying value at December 27, 1997.
32
<PAGE> 33
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
9. OTHER EXPENSE, NET
Other expense, net is comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------- ---------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
ended through through ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Acquisition related:
Management compensation $ -- $ 3,735 $ -- $ --
Other acquisition related expense -- 648 -- --
Management advisory fee 1,000 833 -- --
Gain on sale of investment -- (4,011) -- --
Other non-operating expenses 571 352 96 400
------ ------- ---- ----
$1,571 $ 1,557 $ 96 $400
====== ======= ==== ====
</TABLE>
The gain on sale of investment was related to the Company's
minority interests in Simmons Asia, Ltd. (10.0%), Simmons Bedding & Furniture
(HK) Ltd. (8.1%) and Simmons Company, Ltd. (6.8%).
10. EXTRAORDINARY ITEM
In April 1996, the Company recorded a $1,706 charge, net of income
tax benefit of $1,137 representing the remaining unamortized debt issuance costs
related to long-term obligations repaid as a result of the refinancing of
certain Acquisition debt.
11. LEASES
The Company leases certain facilities and equipment under
operating leases. Rent expense was $11,258, $9,709, $2,388 and $10,626 for 1997,
Successor '96, Predecessor '96 and 1995, respectively.
The following is a schedule of the future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 27, 1997:
<TABLE>
<S> <C>
1998 $ 9,266
1999 9,249
2000 8,384
2001 8,210
2002 7,923
Thereafter 16,484
-------
$59,516
=======
</TABLE>
12. SERIES A PREFERRED STOCK
The Company is authorized to issue 6,000,000 shares of preferred
stock, par value $.01 per share, 5,950,000 of which have been designated as
"Series A Preferred Stock." The remaining 50,000 shares are designated "Series C
Cumulative Redeemable Exchangeable Preferred Stock," none of which are
outstanding. At December 27, 1997, there were 5,670,406 shares outstanding of
the Series A Preferred Stock, 5,669,432 shares of which were held by the ESOP
and 974 shares held by the Company as treasury stock.
Each share of Series A Preferred Stock is convertible, at the
option of the holder, into the number of shares
33
<PAGE> 34
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
of common stock of the Company that results from multiplying the number of
shares of Series A Preferred Stock by the "Conversion Factor" in effect at the
time of the conversion. At December 27, 1997 the Conversion Factor was one.
However, the Conversion Factor will be (i) proportionately increased if (A) the
outstanding shares of common stock of the Company are subdivided into a greater
number of shares or a dividend convertible into or exchangeable for common stock
is paid or (B) the Investcorp Option is exercised, and (ii) proportionately
decreased if the outstanding shares of common stock of the Company are combined
into a smaller number of shares. Shares of Series A Preferred Stock also are
exchangeable for shares of Class C Stock of Holdings upon the occurrence of
certain events.
Shares of Series A Preferred Stock are redeemable for cash at the
option of the holder at a redemption price of $5.00 per share upon the
occurrence of one of the following events: (i) a sale of Holdings pursuant to
(A) a sale of 50% or more of the outstanding shares of Holdings' voting capital
stock, (B) a sale of all or substantially all of the assets of Holdings, or (C)
a merger, consolidation or recapitalization of Holdings as a result of which the
ownership of the surviving corporation's voting capital changes more than 50%;
or (ii) an initial public offering of common stock of the Company or Holdings
pursuant to an effective registration statement under the Securities Act of
1933.
In addition, holders of shares of Series A Preferred Stock have
certain "tag-along rights" and are subject to certain "drag-along rights"
pursuant to the terms of the Stockholders' Agreement following certain sales by
Holdings of shares of common stock of the Company.
Each share of Series A Preferred Stock entitles the holder thereof
to a number of votes equal to the number of votes carried by the number of
shares of common stock of the Company that would be issuable if such share of
Series A Preferred Stock were converted to common stock. In most circumstances
the ESOP Trustee votes such shares as directed by a committee appointed under
the ESOP. However, upon the occurrence of a corporate merger, consolidation,
recapitalization, liquidation, dissolution, sale of substantially all of the
assets of the Company or other similar transaction, participants in the ESOP may
direct the committee as to the manner in which such participants' allocated
shares shall be voted. Holders of Series A Preferred Stock are entitled to
receive equal per share dividends on an as-converted basis when dividends or
distributions are declared upon shares of common stock of the Company.
In the event of any involuntary or voluntary liquidation,
dissolution or winding-up of the affairs of the Company, holders of Series A
Preferred Stock are entitled to receive out of the assets of the Company
available for distribution to the shareholders, before any payments are made or
assets distributed on any common stock or on any other class or series of
capital stock of the Company, the amount of $5.00 per share. If the assets of
the Company are insufficient to permit such distribution, the entire assets of
the Company distributable to stockholders of the Company will be distributed
ratably among the holders of Series A Preferred Stock in proportion to the sum
of their respective per share liquidation values.
13. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee stock incentive plans.
Under APB 25, because the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123").
At the time of the Acquisition, Holdings purchased all outstanding
vested options to acquire common stock of the Company from certain members of
management of the Company for an aggregate purchase price of approximately $6.9
million, of which $4.3 million was used by certain members of management to
purchase stock of Holdings. Therefore, SFAS 123 disclosure of 1995 information
is omitted, as this information is not meaningful in light of the aforementioned
transaction.
34
<PAGE> 35
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
At the time of the Acquisition, the board of directors established
a Management Stock Incentive Plan (the "1996 Plan"), which provides for the
granting of nonqualified options for Class C common stock of Holdings to members
of management and certain key employees. Generally, the options outstanding
under the 1996 Plan: (i) are granted at prices which equate to or are above the
market value of the Class C stock on the date of grant, (ii) vest ratably over a
five year period based upon the achievement of an annual EBITDA amount, as
defined in the plan, or immediately upon the tenth (10th) anniversary of the
grant date and (iii) expire upon the thirtieth (30th) day following the tenth
(10th) anniversary of the grant date or other date(s) based upon certain
conditions as defined in the plan.
In connection with the Acquisition, the Company entered into an
agreement with Holdings whereby if Holdings grants any options to purchase
shares of common or Class C Stock of Holdings to a director, employee or
consultant of the Company, the Company will grant to Holdings corresponding
options, exercisable only upon exercise of the Holdings options, to purchase the
same number of shares of common stock of the Company at the same per share
exercise price and subject to substantially the same terms and conditions as the
Holdings options. All references to stock options under the 1996 Plan pertain to
the Holdings options which have been attributed to the Company for disclosure
purposes. Information relating to stock options during 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
----------- ----------
<S> <C> <C>
Shares under option
at December 28, 1996 2,911,561 $ 2.66
Granted 50,000 $ 2.95
Forfeited (39,728) $ 2.66
---------- --------
Shares under option
at December 27, 1997 2,921,833 $ 2.66
========== ========
Shares exercisable
at December 27, 1997 574,369 $ 2.66
========== ========
Shares exercisable
at December 28, 1996 0 $ 2.66
========== ========
</TABLE>
All outstanding options were nonqualified options. No compensation expense
related to stock option grants was recorded in 1997 or 1996 as the option
exercise prices were equal to fair market value on the date of grant.
Pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method under that Statement. The fair value
for these options was estimated at the date of grant using the minimum present
value method with the following weighted average assumptions for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rate 6.08% 6.32%
Expected life 7 years 7 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' expected life. The
Company's pro forma net earnings were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net earnings - as reported $6,362 $1,312
Net earnings - proforma 6,133 1,155
Weighted average fair value of options
granted during the year $ 1.00 $ 0.93
</TABLE>
35
<PAGE> 36
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
The effects of applying SFAS 123 in this proforma disclosure are not indicative
of future amounts.
Prior to 1996, the Board of Directors had established a
performance stock option plan and a separate executive stock option plan ("the
Old Plans"). The option price per share was equal to the estimated fair value on
the date of the grant. The Company had reserved shares in an amount sufficient
for issuance upon exercise of the options under the Old Plans.
14. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------- ----------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
Ended through through Ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Current tax provision:
Federal $ -- $ -- $ -- $5,398
State -- -- -- 1,102
Foreign 299 262 -- --
------ ------ ------ ------
299 262 -- 6,500
------ ------ ------ ------
Deferred tax provision:
Federal 5,230 3,627 231 903
State 996 793 51 103
------ ------ ------ ------
6,226 4,420 282 1,006
------ ------ ------ ------
$6,525 $4,682 $ 282 $7,506
====== ====== ====== ======
</TABLE>
The reconciliation of the statutory federal income tax rate to the
effective income tax rate for 1997, Successor '96, Predecessor '96, and 1995
provision for income taxes is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -------------------------
Period from Period from
March 22, December 31,
Year 1996 1995 Year
Ended through through Ended
December 27, December 28, March 21, December 30,
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income taxes at federal statutory rate $4,382 $2,618 $ (53) $5,921
State income taxes, net of federal benefit 657 556 (18) 889
Goodwill amortization 1,393 1,216 301 1,491
Reduction of valuation allowance -- -- -- (1,914)
Other, net 93 292 52 1,119
------ ------ ------- ------
$6,525 $4,682 $ 282 $7,506
====== ====== ======= ======
</TABLE>
36
<PAGE> 37
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
Components of the net deferred income tax asset (liability) at December
27, 1997 and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
Current deferred income taxes:
<S> <C> <C>
Accounts receivable and inventory reserves $ 3,378 $ 4,054
Accrued liabilities not currently deductible 521 3,739
Net operating loss carryforwards 82 2,505
Prepaids and other assets, net currently taxable (752) (318)
-------- --------
3,229 9,980
Noncurrent deferred income taxes:
Property basis differences (2,896) (2,960)
Patents basis differences (4,214) (5,205)
ESOP liability basis differences 8,710 10,844
Net operating loss carryforwards 2,638 1,688
Valuation allowance (2,638) (1,688)
Other noncurrent accrued liabilities, not currently
deductible 6,853 5,361
-------- --------
8,453 8,040
-------- --------
Net deferred tax asset $ 11,682 $ 18,020
======== ========
</TABLE>
At December 27, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,782, all of which is limited
to its utilization under the Internal Revenue Code. Due to such limitations, the
Company believes it is more likely than not that it will not realize the benefit
of the loss carryforwards and has provided a valuation allowance of
approximately $2,638 to fully reserve such amounts as of December 27, 1997. The
Company carried back its unlimited net operating loss generated in the 1996 tax
year. These carryforwards expire through 2011. Undistributed earnings to be
permanently reinvested by the international subsidiaries totaled approximately
$1,500 at December 27, 1997. Because these earnings are to be permanently
reinvested, no U.S. deferred income tax has been recorded for them.
15. RETIREMENT PLANS
The Company has a defined contribution pension plan (a 401(K) plan) for
substantially all employees other than employees subject to collective
bargaining agreements. Eligible participants may make limited contributions to
the defined contribution plan; however, no employer contributions are allowed.
Certain union employees participate in multi-employer pension plans
sponsored by their respective unions. Amounts charged to pension cost,
representing the Company's required contributions to these plans for 1997,
Successor '96 and Predecessor '96, combined, and 1995 were $1,439, $1,495 and
$1,366, respectively.
The Company had accrued $2,679 and $2,709 at December 27, 1997 and
December 28, 1996, respectively, for a supplemental executive retirement plan
for a former executive. Such amounts are included in postretirement benefit
obligations other than pensions in the accompanying consolidated balance sheets.
The Company also has an unfunded nonqualified employee stock ownership
plan to provide benefits to certain employees who were not eligible to
participate in the ESOP. Benefits are to be paid in cash and are computed based
on the value of shares the participants would have received had they
participated in the ESOP. Participants are entitled to receive accrued benefits
upon termination of employment with the Company, retirement, death, or permanent
disability. Benefits vest based on the provisions of the ESOP. The Company
charged approximately $64, $128 and $405 to expense for 1997, Successor '96 and
Predecessor '96, combined, and 1995, respectively. The accrued benefits under
the nonqualified plan were $189 and $156 at December 27, 1997 and December 28,
1996, respectively, and are included in other long-term liabilities in the
accompanying consolidated balance sheets. Vested interests of current
participants in the plan were distributed upon consummation of the Acquisition.
37
<PAGE> 38
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
The Company provides certain health care and life insurance benefits to
eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or nonunion employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20 thousand lifetime maximum benefit
for participants age 65 and over. The Company also provides life insurance to
all retirees who retired before 1979. These plans are unfunded.
The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active service period
of the employee.
The following table presents a reconciliation of the Plan's status at
December 27, 1997 and December 28, 1996:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,809 $ 3,177
Fully eligible active plan participants 849 996
Other active participants 1,480 1,378
------ -------
5,138 5,551
Unrecognized prior service cost 243 273
Unrecognized net gain/(loss) 748 (51)
------ -------
Accrued postretirement benefit obligation $6,129 $ 5,773
====== =======
</TABLE>
The components of the net periodic postretirement benefit cost for 1997,
Successor '96 and Predecessor '96, combined, and 1995 are as follows:
<TABLE>
<CAPTION>
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service cost $ 187 $ 156 $ 163
Interest cost on accumulated benefit
obligation 338 375 387
Amortization of:
Unrecognized prior service cost (30) (30) (30)
Gain (22) -- --
----- ----- -----
Net periodic postretirement benefit cost $ 473 $ 501 $ 520
===== ===== =====
</TABLE>
Assumptions used in the computation of the accumulated postretirement
benefit obligation at December 27, 1997 and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Discount rate 7.00% 7.25%
Initial health care cost trend rate 10.50% 11.00%
Ultimate health care cost trend rate 5.50% 5.50%
Year ultimate health care cost trend rate reached 2007 2007
</TABLE>
If the health care cost trend rate were increased by 1% for all future
years, the accumulated postretirement benefit obligation as of December 27, 1997
would have increased 8.8%. The effect of this change on the aggregate of service
and interest cost for 1997 would have been an increase of 13.0%.
38
<PAGE> 39
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
16. CONTINGENCIES
From time to time, the Company has been involved in various legal
proceedings. Management believes that all such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
17. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Management
Agreement") with Investcorp International Inc. ("International") pursuant to
which the Company agreed to pay International $1.0 million per annum for a
five-year term. At the closing of the Acquisition, the Company paid
International $3.0 million for the first three years of the term of the
Management Agreement in accordance with its terms. As of December 27, 1997,
approximately $1.2 million of this payment remained unamortized and a portion of
the balance is reflected in the other current asset and other asset sections of
the accompanying consolidated balance sheet, as appropriate.
In connection with the Acquisition, the Company entered into an
agreement with Holdings pursuant to which the Company agreed to reimburse
Holdings for certain expenses incident to Holdings' ownership of the Company's
capital stock for as long as Holdings and the Company file consolidated federal
income tax returns. Such expenses include franchise taxes and other fees
required to maintain Holdings' corporate existence; operating costs incurred by
Holdings attributable to its ownership of the Company's capital stock not to
exceed $250 thousand per fiscal year; federal, state and local taxes paid by
Holdings and attributable to income of the Company and its subsidiaries other
than taxes arising from the sale or exchange by Holdings of the Company's common
stock; the purchase price of capital stock or options to purchase capital stock
of Holdings owned by former employees of the Company or its subsidiaries not to
exceed $2,500 per year or $7,500, in the aggregate, permitted under the Senior
Credit Facility and the indenture relating to the Series A Senior Subordinated
Notes due 2006; and registration expenses incurred by Holdings incident to a
registration of any capital stock of Holdings under the Securities Act.
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
40
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and principal occupation
or position of each of the directors and executive officers of the Company. Each
director of the Company will hold office until the next annual meeting of
shareholders of the Company or until his successor has been elected and
qualified. Officers of the Company are elected by the Board of Directors of the
Company and serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Zenon S. Nie 47 Chairman of the Board of Directors, Chief
Executive Officer and Director.
Jonathan C. Daiker 50 Executive Vice President - Finance and Administration,
Chief Financial Officer and Director.
Martin R. Passaglia 49 Senior Executive Vice President and Director.
Jon P. Hedley 37 Director.
Christopher J. O'Brien 39 Director.
Charles J. Philippin 47 Director.
Savio W. Tung 46 Director.
William L. Ayers, IV 52 Executive Vice President - Marketing and Sales.
Joseph Ulicny 55 Executive Vice President - Market Development.
Robert K. Barton 57 Senior Vice President - Human Resources.
Leo T. Brennan 62 Vice President-Materials Management.
Roger W. Franklin 42 Vice President-Finance and Treasurer.
James P. Maher 62 Divisional President.
Cleve B. Murphy 47 Divisional President.
Gary G. Pleasant 55 Divisional President.
</TABLE>
DIRECTORS
The following sets forth the name, principal occupation and employment
and business experience during the last five years for each of the Company's
directors:
Zenon S. Nie joined the Company in 1993 as Chief Executive Officer and
was appointed Chairman in January 1994. Prior to joining the Company, Mr. Nie
served as President of the Consumer Home Fashions Division of The Bibb Company,
a textile manufacturer, from 1991 to 1993. From 1981 through 1991, Mr. Nie held
several senior management positions at Serta, Inc., a bedding manufacturer,
including President, Executive Vice President, Chief Operating Officer, Senior
Vice President-Manufacturing, Finance and Administrative and Vice
President-Strategic Planning. Mr. Nie's previous experience includes several
marketing positions at Sealy Corporation, a bedding manufacturer. Mr. Nie is a
director of Ladd Furniture, Inc.
Jonathan C. Daiker joined the Company in April 1995 as Executive Vice
President-Finance and Administration, Chief Financial Officer. Prior to joining
the Company, Mr. Daiker held a number of directorships in the corporate offices
of Philips Electronics North America Corporation, a consumer electronics
manufacturer, as well as operating positions within its divisional structure
from 1981 to 1995. Most recently, he was Senior Vice President and Chief
Financial Officer for Philips Lighting Company, a manufacturer of commercial and
residential electrical lighting products. Prior to Philips, he was a senior
manager with Price Waterhouse, an accounting firm, from 1971 to 1981, and is a
Certified Public Accountant.
Martin R. Passaglia joined the Company in 1973 as a Sales
Representative. He has held various positions during his tenure including
Regional Sales Manager, Vice President and General Manager-Hawaii, Executive
Vice President-Account Development and Executive Vice President-Marketing and
was promoted to Senior Executive Vice President in January 1994.
41
<PAGE> 42
Jon P. Hedley became a director of the Company upon its creation in
March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly owned subsidiaries since April 1990. Mr. Hedley is a director
of CSK Auto Corp. and Saks Holdings, Inc.
Christopher J. O'Brien became a director of the Company upon its
creation in March 1996. He has been an executive of Investcorp, its predecessor
or one or more of its wholly owned subsidiaries since December 1993. Prior to
joining Investcorp, Mr. O'Brien was a Managing Director of Mancuso & Company
for four years. Mr. O'Brien is a director of CSK Auto Corp., Falcon Building
Products, Inc. and Star Markets, Inc.
Charles J. Philippin became a director of the Company upon its creation
in March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly owned subsidiaries since July 1994. Prior to joining
Investcorp, Mr. Philippin was a partner of Coopers & Lybrand L.L.P., an
accounting firm. Mr. Philippin is a director of CSK Auto Corp., Falcon Building
Products, Inc. and Saks Holdings, Inc.
Savio W. Tung became a director of the Company upon its creation in
March 1996. He has been an executive of Investcorp, its predecessor or one or
more of its wholly-owned subsidiaries since September 1984. Mr. Tung is a
director of CSK Auto Corp., Saks Holdings, Inc. and Star Markets, Inc.
EXECUTIVE OFFICERS
The following sets forth the name, position and certain other
information with respect to the executive and certain other appointed officers
of the Company:
William L. Ayers, IV joined the Company in 1973. He has held several
sales management positions including Vice President and General Manager-Los
Angeles and Divisional Executive Vice President, and was promoted to Executive
Vice President-Sales and Marketing in February 1994.
Joseph Ulicny joined the Company in 1992 as Executive Vice
President-Finance and Chief Financial Officer. In 1995, he assumed his current
position as Executive Vice President - Market Development. Prior to joining the
Company, Mr. Ulicny served in financial executive positions with Dannon Company,
a yogurt wholesaler, for over seven years from 1985 to 1992.
Robert K. Barton joined the Company in February 1982 as Director of
Dealer Financial Services. He served as Vice President-Dealer Financial
Services, Vice President-Administration and Vice President-Human Resources prior
to assuming his current position as Senior Vice President-Human Resources in
March 1989.
Leo T. Brennan joined the Company in 1978 as Director of Purchasing and
was promoted to his current position as Vice President-Materials Management in
1985.
Roger W. Franklin joined the Company in November 1986 as Director of
Taxes. He served as Vice President-Controller prior to assuming his current
position as Vice President-Finance and Treasurer in October 1990. Prior to
joining the Company, Mr. Franklin spent almost nine years with Price Waterhouse,
an accounting firm, in both the audit and tax areas from 1978 to 1986 and is a
Certified Public Accountant.
James P. Maher joined the Company in 1989 and has served as Vice
President and General Manager-Jacksonville, Vice President and General
Manager-San Leandro and Divisional Executive Vice President. He was promoted to
his current position of Divisional President in January 1997. Before joining the
Company, Mr. Maher held senior management positions with Nachman Corporation, a
wire and bedding components manufacturer, Leggett & Platt, Inc., a manufacturer
of bedding components, and May & Company, a bedding manufacturer.
Cleve B. Murphy joined the Company in May 1995 as Divisional Executive
Vice President. He was promoted to his current position of Divisional President
in January 1997. Mr. Murphy's background includes twelve years at Sealy
Corporation., a bedding manufacturer, where he started as Sales Manager and
became one of four Regional Vice Presidents, from 1983 to 1995. Prior to his
employment with Sealy, Mr. Murphy served eight years as General Manager for
Englander, a bedding manufacturer, from 1975 to 1983 and two years with Serta,
Inc. from 1973 to 1975.
42
<PAGE> 43
Gary G. Pleasant rejoined the Company in 1991 as Vice President and
General Manager-Seattle and was promoted to Divisional Executive Vice President,
in January 1995. He was promoted to his current position of Divisional President
in January 1997. Mr. Pleasant had been previously employed by the Company from
1966 to 1985 in various sales management positions. From 1985 to 1991, Mr.
Pleasant worked for Sealy Corporation, first as Vice President-Sales -
Ohio-Sealy and then as National Vice President-Marketing and Sales.
DIRECTOR COMPENSATION
The Company pays no additional remuneration to its employees or to
executives of Investcorp for serving as directors. See "--Executive
Compensation." There are no family relationships among any of the directors or
executive officers.
43
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in the
previous three years by the Company's Chief Executive Officer and each of the
other four most highly compensated executive officers whose remuneration
exceeded $100,000. The current compensation arrangements for each of these
officers are described in "Employment Arrangements" below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation-
Awards
-------------
Securities
Underlying
Annual Compensation Options / All Other
----------------------
Salary Bonus (a) SARs (b) Compensation (c)
Name and Principal Position Year ($) ($) (#) ($)
--------------------------- ---- ------ --------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Zenon S. Nie 1997 517,500 586,366 -- 14,282
Chairman & Chief Executive Officer 1996 501,458 876,823 1,800,000 31,551
1995 404,167 474,896 300,000 23,142
Martin R. Passaglia 1997 267,500 211,325 -- 10,519
Senior Executive Vice President 1996 267,500 234,063 64,237 161,721
1995 250,000 262,500 71,306 20,459
Jonathan C. Daiker 1997 213,000 169,060 -- 8,437
Executive Vice President - Finance & 1996 205,750 230,031 156,338 30,741
Administration, Chief Financial 1995 150,000 182,500 150,500 24,144
Officer
Robert K. Barton 1997 180,000 143,517 -- 10,715
Senior Vice President - Human 1996 171,750 150,281 63,667 147,447
Resources 1995 165,500 173,775 70,500 19,801
Joseph Ulicny 1997 180,000 142,793 -- 10,029
Executive Vice President - Market 1996 172,483 150,923 30,000 27,028
Development 1995 167,200 175,962 -- 19,996
</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
issued prior to the Acquisition were purchased for an aggregate of $6,950,000,
representing the value of such options based on their exercise prices. Messrs.
Nie, Passaglia, Daiker, Ulicny and Barton received $1,812,800, $364,496,
$117,435, $308,856 and $363,867, respectively, for their options, which amounts
were invested in Class C Stock of Holdings. The 1996 amounts represent Class C
common shares of Simmons Holdings, Inc., issued in connection with the
Acquisition which are attributed to the Company through Parent Option agreement
between Holdings and the Company.
(c) Consists of (i) contributions to defined contribution plans in 1996 and
1995, respectively, in the amounts of $17,192 and $15,368 for Mr. Nie, $17,192
and $15,740 for Mr. Passaglia, $17,192 and $0 for Mr. Daiker, $17,192 and
$15,740 for Mr. Barton, and $17,192 and $15,368 for Mr. Ulicny (1997
contributions have not been established as of this date); (ii) premiums for term
life insurance and long-term disability insurance in 1997, 1996 and 1995,
respectively, in the amounts of $14,282, $14,359 and $7,774 for Mr. Nie,
$10,519, $11,185 and $4,719 for Mr. Passaglia, $8,437, $8,231 and $5,334 for Mr.
Daiker, $10,715, $11,908 and $4,061 for Mr. Barton, $10,029, $9,836 and $4,628
for Mr. Ulicny, respectively; (iii) payments of benefit under non-qualified ESOP
in 1996, in the amount
44
<PAGE> 45
of $133,344 and $118,347 for Mr. Passaglia and Mr. Barton, respectively; and
(iii) relocation assistance in 1996 and 1995 in the amounts of $5,228 and
$18,810 for Mr. Daiker.
AGGREGATE OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
Number of Shares Of
Common Stock
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 27, 1997 at December 27, 1997
----------------------------- ---------------------------------
Name Vested Unvested Vested Unvested
<S> <C> <C> <C> <C>
Zenon S. Nie 360,000 1,440,000 $104,688 $418,752
Martin R. Passaglia 12,847 51,390 3,736 14,944
Jonathan C. Daiker 31,268 125,070 9,093 36,370
Robert K. Barton 12,733 50,934 3,703 14,811
Joseph Ulicny 6,000 24,000 1,745 6,979
</TABLE>
RETIREMENT PLANS
Qualified Retirement Plans.
The Company maintains several single employer retirement plans
including a single employer defined benefit plan and two single employer defined
contribution plans (the Simmons ESOP ("ESOP") and a 401(K) plan) which are
intended to be qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The Company also participates in a number of
multi-employer pension plans, from which it has no present intention to
withdraw. In the aggregate, these plans cover substantially all permanent
employees.
Defined Contribution Plans.
The Company sponsors two single employer defined contribution pension
plans; the Simmons Retirement Savings Plan and the ESOP.
Simmons Retirement Savings Plan. The Simmons Retirement Savings Plan
contains a cash or deferred arrangement under Section 401(K) of the Code.
Employees with 12 weeks of employment who have reached age 21 are permitted to
participate in the plan, and generally employees covered by collective
bargaining agreements are not permitted to participate, unless the agreement
expressly provides for participation.
As a result of forming the ESOP in January 1989, the Company suspended
all employer and employee contributions to this defined contribution plan during
1989 and 1990. Effective during the 1991 plan year, eligible participants could
again make limited contributions to this defined benefit plan; however, no
employer contributions were allowed. The status of plan participants was not
affected.
Presently, there are approximately 505 participants in this plan, and
participants have the ability to direct the investment of their account
balances. Eligible employees may defer the receipt of a portion of their covered
compensation up to 6% of compensation on a pre-tax basis, subject to various
limitations. Participants are fully vested in their contributions at all times.
The Company did not make any contributions to the plan during plan year 1997
(other than the pre-tax deferrals mentioned above).
ESOP. The ESOP is a defined contribution pension benefit plan that is
designed to qualify as a leveraged employee stock ownership plan within the
meaning of Section 4975(e)(7) of the Code. Assets of the ESOP are held in a
trust with respect to which State Street Bank and Trust Company (the "ESOP
Trustee") serves as trustee. The ESOP covers otherwise eligible employees of the
Company who have completed at least one year of service for the Company, and
have reached age 21. As of December 27, 1997, approximately 1,700 employees
participated in the ESOP.
45
<PAGE> 46
The ESOP provides benefits to each participating employee based on the
value of the Company's Series A Preferred Stock allocated to such participant's
account over the period of such participant's participation in the plan. In
general, benefits become payable to participants only following retirement or
other separation from employment.
Leveraged ESOPs differ from other defined contribution employee pension
benefit plans due to their ability to borrow funds from the employer sponsoring
the plan or from other parties in order to acquire company stock for allocation
to participants' accounts as such indebtedness is repaid. Pending such
allocation, as described below, company stock acquired by the ESOP is held by
the trustee in a suspense account. In connection with the establishment of the
ESOP in 1989, the ESOP borrowed funds from the Company for the purpose of
acquiring Company stock. As of December 27, 1997, the ESOP was indebted to the
Company in the approximate principal amount of $51.2 million. Prior to March 22,
1996, the date of the Acquisition, the ESOP held 11,671,663 shares of common
stock of the Company. On the Acquisition Closing Date, the ESOP sold 6,001,257
shares, representing all shares theretofore allocated to participants' ESOP
accounts, to Holdings for approximately $31.2 million in the aggregate, the net
proceeds of which were reinvested in diversified investments in the respective
accounts of such participants in the ESOP. Pursuant to the Merger, the remaining
5,670,406 shares, representing all unallocated shares held in the suspense
account, were converted into Series A Preferred Stock. If converted into common
stock of the Company or capital stock of Holdings, the Series A Preferred Stock
would represent direct or indirect ownership of 15.1% of the common stock of the
Company, after giving effect to such conversion (exclusive of stock options
granted under the Company's management stock incentive plan) or the Investcorp
Option.
The Company will make annual cash contributions to the ESOP in an
amount up to 25% of eligible participant compensation, subject to certain
limitations and conditions. The ESOP will then use all such cash to repay the
internal ESOP Loan to the Company. As a result, there is no cash cost to the
Company associated with the contribution to the ESOP. As the internal ESOP Loan
is repaid, a portion of the Series A Preferred Stock will be allocated to
participant accounts and non-cash ESOP expense equal to the fair value of the
allocated shares is charged to non-cash ESOP expense. At such time as the
internal ESOP Loan is repaid in full (expected to be in approximately four
years), all shares of Series A Preferred Stock held by the ESOP will have been
allocated to plan participants.
With certain limited exceptions (such as an exception required by law
permitting certain retirement age individuals with at least 10 years of plan
participation to liquidate, over a six-year period, shares allocated to their
accounts) shares allocated to a participant's account under the ESOP cannot be
sold or otherwise transferred by the participant. The ESOP provides for
distributions to be made to participants following termination of employment.
With respect to participants whose termination of employment occurs after
becoming eligible for retirement (age 65), early retirement (age 55 with at
least 10 years of service), on account of permanent disability or death,
distribution generally is made during the plan year following the plan year in
which such termination occurs. In all other cases, distribution generally is
made or commences to be made after the expiration of a five plan year period
following the plan year in which termination occurs. Distributions are made in
cash, based on the fair market value (as determined pursuant to an annual
appraisal) of the shares allocated to the participant's account. Such shares are
deemed to have a value of not less than the redemption price for such shares. A
participant entitled to a distribution is entitled under law to have Company
shares allocated to his or her account distributed in kind. A participant
electing to have a distribution of shares has a limited right to require the
Company to purchase such shares at fair market value over an approximately two
year period, with such value to be not less than the redemption price, in the
case of shares of Series A Preferred Stock.
Defined Benefit Plan. The Company also sponsors a single employer
defined benefit pension plan for eligible employees called the Retirement Plan
for Simmons U.S.A. Employees. This plan currently benefits only employees
covered by certain collective bargaining agreements, and has approximately 113
participants. The monthly benefit for such participants upon normal retirement
is generally determined as the sum of (i) 0.75% of monthly earnings as of
January 1, 1963 multiplied by specified credited service as of May 1, 1963, (ii)
1.0% of the first $400 of monthly earnings plus 1.75% of monthly earnings in
excess of $400 for the time period from May 1, 1963 through April 30, 1967 and
(iii) 1.25% of the first $550 of monthly earnings plus 1.75% of monthly earnings
in excess of $550 for each year and completed month of credited service,
beginning May 1, 1967. There is a reduction for benefits accrued under the
Retirement Plan for Simmons Employees, a predecessor plan that was terminated in
1987. A somewhat different formula applies to certain employees who are
represented by IAM Local 315 in New Jersey and UFWA Local 262 in California.
This plan is fully funded and accruals have been frozen. None of the named
executive officers benefits under the plan.
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<PAGE> 47
Multi-employer Plans. Certain union employees participate in
multi-employer pension plans sponsored by their respective unions. Amounts
charged to pension cost, representing the Company's required contributions to
these plans for the year ended December 27,1997, the periods ended March 21,
1996 and December 28, 1996 combined, and the year ended December 30, 1995 were
$1,439, $1,495, and $1,366, respectively.
Nonqualified Plans.
Simmons Company Nonqualified Employee Stock Ownership Plan. In 1989,
the Company instituted this nonqualified plan to provide benefits to eligible
employees similar to those benefits provided under the ESOP, described above.
This plan covers certain employees who are not eligible to participate in the
ESOP because of restrictions imposed by the ESOP on employees who elected
favorable income tax treatment under Code Section 1402 with respect to the sale
of employer securities to the ESOP. Benefits are to be paid in cash and are
computed based on the value of shares the participants would have received had
they participated in the ESOP. Participants are entitled to receive accrued
benefits upon termination of employment with the Company, retirement, death or
permanent disability. The nonqualified plan provides for bookkeeping entries to
be provided on account of each designated employee, to be credited with the
shares of stock which would have been allocated to the designated employee's
accounts under the ESOP but for the fact that the ESOP terms restricted such an
allocation. The same vesting schedule and distribution provisions apply as are
described in the ESOP. The Company charged approximately $64, $128, and $405 to
expense for the year ended December 27, 1997, the periods ended March 21, 1996
and December 28, 1996 combined, and the year ended December 30, 1995,
respectively. The accrued benefits under the nonqualified plan were $189 and
$156 at December 27, 1997 and December 28, 1996, respectively, and are included
in other long term liabilities in the accompanying balance sheets. Vested
interests of current participants in the plan were distributed upon consummation
of the Acquisition, resulting in payments in 1996 to Messrs. Barton and
Passaglia of $118,347 and $133,344, respectively.
Retiree Health Coverage.
The Company provides certain health care and life insurance benefits to
eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or non-union employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.
EMPLOYMENT ARRANGEMENTS
Zenon Nie, Chairman of the Board of Directors and Chief Executive
Officer, and the Company have entered into a three-year employment agreement
(which renews automatically on a daily basis, subject to termination upon three
years' notice). Pursuant to that agreement, Mr. Nie is entitled to receive (i) a
base salary, currently $575,000 per year, subject to further increases approved
by the Company's Board of Directors, (ii) an annual cash bonus based upon
achieving specified levels of operating income (the "Annual Incentive Plan") and
(iii) specified fringe benefits, including reimbursement of country club dues
and provision of an automobile.
Martin R. Passaglia, Senior Executive Vice President, and Jonathan C.
Daiker, Executive Vice President-Finance and Administration and Chief Financial
Officer, have entered into employment agreements with the Company, expiring on
January 1, 1997 and March 22, 1998, respectively. Mr. Passaglia's employment
agreement renews automatically for successive one-year terms, subject to
termination upon notice. Pursuant to these agreements, Messrs. Passaglia and
Daiker are entitled to receive a base salary, currently $267,500 and $225,000
per year, respectively (subject to further increases approved by the Company's
Board of Directors), and to participate in all Company incentive and fringe
benefit programs, including the Annual Incentive Plan.
Certain additional executive officers, including named executive
officers Robert K. Barton, Jonathan C. Daiker and Martin R. Passaglia, have
entered into employment agreements pursuant to which such executive officers
will be entitled to continue to receive base salary for up to twelve months plus
pro rata payments under the Annual Incentive Plan in the event that their
employment is terminated other than for cause, death or disability, following a
Change of Control, as defined therein. In the case of Messrs. Daiker and
Passaglia, the agreements specify that payments due
47
<PAGE> 48
upon a termination following a Change in Control will be the greater of amounts
owing pursuant to either these agreements or the agreements referenced in the
preceding paragraph. All executive officers are eligible to participate in the
Annual Incentive Plan, payments under which are based upon the Company's
achievement of targeted levels of operating income, as defined in the plan.
MANAGEMENT STOCK INCENTIVE PLAN
Upon the consummation of the Acquisition, Holdings adopted a Management
Stock Incentive Plan (the "Plan"), in order to provide incentives to employees
and directors of Holdings and the Company by granting them awards tied to the
Class C Stock of Holdings. The Plan is administered by a committee of the Board
of Directors of Holdings (the "Compensation Committee"), which has broad
authority in administering and interpreting the Plan. Awards to employees are
not restricted to any specified form or structure and may include, without
limitation, restricted stock, stock options, deferred stock or stock
appreciation rights (collectively, "Awards"). Options granted under the Plan may
be options intended to qualify as incentive stock options under Section 422 of
the Code or options not intended to so qualify. An Award granted under the Plan
to an employee may include a provision terminating the Award upon termination of
employment under certain circumstances or accelerating the receipt of benefits
upon the occurrence of specified events, including, at the discretion of the
Compensation Committee, any change of control of the Company.
Holdings has granted options to purchase up to 2,440,750 shares of its
Class C Stock to certain members of the Company's senior management and has
granted additional options to purchase an aggregate of up to approximately
481,083 shares of its Class C Stock to other officers and employees of the
Company including 50,000 shares granted during 1997 at an exercise price of
$2.95. The exercise price of each option granted in connection with the
Acquisition is $2.66 per share, which is the same price per share paid by
existing holders of Class C Stock of Holdings to acquire such Class C Stock
while options issued subsequent have an exercise price equal to fair market
value at the time of grant. In addition, Holdings has granted options to
purchase up to an additional 211,744 shares of its Class C Stock to certain
members of the Company's senior management at an exercise price of $3.57 per
share, which are exercisable if an option that has been granted to an affiliate
of Investcorp (the "Investcorp Option") is exercised. Holdings has granted
options to acquire up to an additional 35,926 shares of its Class C Stock to
officers and employees of the Company, at an exercise price of $3.57 per share,
which are also exercisable if the Investcorp Option is exercised. Except as
noted in the preceding sentence, the exercise price of each option granted in
the future will be equal to the fair market value of the Company's common stock
at the time of the grant. Each option will be subject to certain vesting
provisions. To the extent not earlier vested or terminated, all options will
vest on the tenth anniversary of the date of grant and will expire 30 days
thereafter if not exercised.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Board of Directors is responsible for the general compensation
policies of the Company, and in particular is responsible for setting and
administering the policies that govern executive compensation. The Board
evaluates the performance of management and determines the compensation levels
for the Chief Executive Officer (the "CEO"). The CEO determines compensation
levels for all other executive officers subject to the informal approval of the
non-employee members of the Board.
The objective of the Board is to establish policies and programs to
attract and retain key executives, and to reward performance by these executives
which benefit the stockholders. The primary elements of executive compensation
are base salary, annual cash bonus, and stock option awards. The salary is based
on factors such as the individual executive officer's level of responsibility,
and comparison to similar positions in the Company and in comparable companies.
The annual cash bonuses are based on the Company's performance measured against
attainment of financial and other objectives established annually by the Board,
and on individual performance. Stock option awards are intended to align the
executive officer's interests with those of the stockholders in promoting the
long-term growth of the Company, and are determined based on the executive
officer's level of responsibility, number of options previously granted, and
contributions toward achieving the objectives of the Company. Further
information on each of these compensation elements follows.
48
<PAGE> 49
SALARIES
Base salaries are adjusted annually, following a review by the CEO. In
the course of the review, performance of the individual with respect to specific
objectives is evaluated, as are any increases in responsibility, and salaries
for similar positions. The specific objectives for each executive officer are
set by the individual's manager or the CEO, and will vary for each executive
position and for each year. Since this is a base salary review, performance of
the Company does not weigh heavily in the result. When all reviews are
completed, the CEO makes a recommendation to the non-employee members of the
Board for their review and final approval.
With respect to the CEO, the Board reviews and fixes his base salary
primarily on the Board's assessment of his performance and its expectations as
to his future contributions. Competitive compensation data is also a major
factor in establishing the CEO's salary, but no precise formula is applied in
considering this data. The Board's review takes place annually.
ANNUAL CASH BONUSES
For fiscal year 1997, annual cash bonuses were governed by the
Company's Management Incentive Plan which is heavily dependent on the financial
performance of the Company, and less so on individual performance. The Board of
Directors of the Company reviewed the business plan developed by management and
then approved the objectives for the year, capital expenditure plans and other
factors, and set a target amount of earnings. The Board then incorporated this
target into the Management Incentive Plan as a threshold below which no bonus
would be paid. With respect to the CEO's bonus, the Board reviewed this
separately, with the amount allocated by salary ratio as a base. Performance
factors were then considered, such as attainment of objectives in product
development, market share, representation of the Company at investor meetings,
development of management personnel, and other considerations, including in
particular for 1996, the successful completion of the Investcorp transaction.
STOCK OPTION AWARDS
Stock options are an integral part of each executives officer's
compensation and are intended to provide an incentive to continue as employees
of the Company over a long term, and to align the interests of the executive
with those of the stockholders by providing a stake in the Company. The Company
originally granted stock options in connection with the Acquisition. In making
grants the Board takes into account the total number of shares available for
grant, prior grants outstanding, and estimated requirements for future grants.
Individual awards take into account the executive officer's contributions to the
Company, scope of responsibilities, strategies and operational goals, salary and
number of unvested options.
In determining an option grant for the CEO, the Board weighs all of the
above factors, but also recognizes the CEO's critical role in developing
strategies for the long-term benefit of the Company. Stock options are an
important element in attracting and retaining capable executives at all levels,
and this is particularly so in the case of the CEO.
The Board continually reviews the Company's compensation programs to
ensure the overall package is competitive, balanced, and that proper incentives
and rewards are provided. The Board has not formulated a policy on qualifying
executive officer compensation under new Section 162 (m) of the Code (adopted
under the Omnibus Budget and Reconciliation Act of 1993).
Board of Directors
Zenon S. Nie
Jonathan C. Daiker
Martin R. Passaglia
Jon P. Hedley
Christopher J. O'Brien
Charles J. Philippin
Savio W. Tung
49
<PAGE> 50
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL")
authorizes a corporation to indemnify and advance reasonable expenses to any
person who was a party, is a party, or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The Company's Amended and Restated Articles of Incorporation and Bylaws
each include indemnification provisions that mirror the language of the statute.
In addition, the Company's Bylaws provide that, subject to any limitation in the
Company's Articles of Incorporation, the Company may indemnify a director or
officer to the fullest extent permitted by law, including, without limitation,
DGCL Sec.145. Consequently, a director or officer of the Company or a person
serving at the request of the Company in the above-named capacities will be
fully indemnified against such judgments, penalties, fines, settlements and
reasonable expenses actually incurred, except if: (1) the person did not conduct
himself in good faith and did not reasonably believe his conduct was in the
corporation's best interests; or (2) in the case of any criminal action or
proceeding, the person had reasonable cause to believe his conduct was unlawful.
No indemnification may be made in respect of any claim, issue or matter as to
which such person is adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
The Company's Amended and Restated Articles of Incorporation also
contain a provision eliminating liability to the Company or its shareholders for
monetary damages from breach of fiduciary duty as a director. The inclusion of
these indemnification provisions in the Company's Amended and Restated Articles
of Organization and Bylaws is intended to enable the Company to attract
qualified persons to serve as directors and officers who might otherwise be
reluctant to do so.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has two classes of issued and outstanding stock (common
stock and Series A Preferred Stock), both of which possess voting rights. At
December 27, 1997, there were 31,964,452 shares of the Company's common stock
issued and outstanding, representing 84.9% of the outstanding voting securities
of the Company, and 5,670,406 shares of Series A Preferred Stock issued and
outstanding, representing 15.1% of the outstanding voting securities of the
Company. All of the Company's common stock is owned by Holdings and all of the
Series A Preferred Stock is owned by the Simmons ESOP. The address of the
Simmons ESOP is c /o State Street Bank and Trust Company, as Trustee, 200
Newport Avenue, North Quincy, MA 02171.
Of the three classes of issued and outstanding stock of Holdings (Class
A, Class C and Class D stock), only shares of Class D stock currently possess
voting rights. At December 27, 1997, there were 200,000 shares of Holdings'
Class D stock issued and outstanding. Certain of the investors in the equity of
Holdings intend to offer certain members of the Company's management an
opportunity to purchase shares of Class C stock of Holdings, which stock has no
voting rights except in certain limited circumstances. The following table sets
forth the beneficial ownership of each class of issued and outstanding voting
securities of Holdings which currently possess voting rights, as of the date
hereof, by each director of the Company, each of the executive officers of the
Company as a group and each person who beneficially owns more than 5% of the
outstanding shares of any class of voting securities of Holdings.
Class D Voting Stock:
<TABLE>
<CAPTION>
Number of Percent of
Name Shares (a) Class (a)
---- ---------- ---------
<S> <C> <C>
INVESTCORP S.A. (b)(c) 200,000 100.0%
37 rue Notre-Dame,
Luxembourg
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
Number of Percent of
Name Shares (a) Class (a)
---- ---------- ----------
<S> <C> <C>
SIPCO Limited (d) 200,000 100.0%
P.O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands
CIP Limited (e)(f) 184,000 92.0%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Ballet Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Denary Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Gleam Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Highlands Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Noble Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Outrigger Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Quill Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Radial Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
Shoreline Limited (e)(f) 18,400 9.2%
P.O. Box 2197
West Wind Building
George Town, Grand Cayman
Cayman Islands
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
Number of Percent of
Name Shares (a) Class (a)
---- ---------- ----------
<S> <C> <C>
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>
(a) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power to
dispose, or direct the disposition of, a security.
(b) Investcorp does not directly own any stock in Holdings. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (c) below). Investcorp owns no stock in Ballet
Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited,
Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia
Limited, or in the beneficial owners of these entities (see (f) below).
Investcorp may be deemed to share beneficial ownership of the shares of voting
stock held by these entities because the entities have entered into revocable
management services or similar agreements with an affiliate of Investcorp,
pursuant to which each of such entities has granted such affiliate the authority
to direct the voting and disposition of the Holdings voting stock owned by such
entity for so long as such agreement is in effect. Investcorp is a Luxembourg
corporation.
(c) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp.
(d) SIPCO Limited may be deemed to control Investcorp through its ownership of a
majority of a company's stock that indirectly owns a majority of Investcorp's
shares.
(e) CIP Limited ("CIP") owns no stock in Holdings. CIP indirectly owns less than
0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (f) below). CIP may be deemed
to share beneficial ownership of the shares of voting stock of Holdings held by
such entities because CIP acts as a director of such entities and the ultimate
beneficial shareholders of each of those entities have granted to CIP revocable
proxies in companies that own those entities' stock. None of the ultimate
beneficial owners of such entities beneficially owns individually more than 5%
of Holdings' voting stock.
(f) CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands
Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited,
Shoreline Limited and Zinnia Limited each is a Cayman Islands corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holdings was formed to consummate the Acquisition on behalf of
affiliates of Investcorp, management and certain other investors. Financing for
the Acquisition was provided by (i) $85.0 million of capital provided by
affiliates of Investcorp, management and other investors, and (ii) borrowings in
an aggregate principal amount equal to $180.4 million, consisting of $80.4
million under the Senior Credit Facility and all the proceeds of the $100.0
million Subordinated Loan Facility. Invifin S.A., an affiliate of Investcorp
("Invifin"), provided $25.0 million of the $100.0 million Subordinated Loan
Facility. In connection with the Acquisition, the Company paid Investcorp
International Inc. ("International") advisory fees of $5.7 million. The Company
also paid $3.5 million to International for arranging the Senior Credit Facility
and $687,500 to Invifin in commitment fees in connection with the Subordinated
Loan Facility.
In connection with the Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Management
Agreement") with International pursuant to which the Company agreed to pay
52
<PAGE> 53
International $1.0 million per annum for a five-year term. At the closing of the
Acquisition, the Company paid International $3.0 million for the first three
years of the term of the Management Agreement in accordance with its terms.
In connection with the Acquisition, the Company entered into an
agreement with Holdings pursuant to which the Company agreed to reimburse
Holdings for certain expenses incident to Holdings' ownership of the Company's
capital stock for as long as Holdings and the Company file consolidated federal
income tax returns. Such expenses include franchise taxes and other fees
required to maintain Holdings' corporate existence; operating costs incurred by
Holdings attributable to its ownership of the Company's capital stock not to
exceed $250,000 per fiscal year; federal, state and local taxes paid by Holdings
and attributable to income of the company and its subsidiaries other than taxes
arising from the sale or exchange by Holdings of the Company's common stock; the
purchase price of capital stock or options to purchase capital stock of Holdings
owned by former employees of the Company or its subsidiaries not to exceed the
amount permitted under the Senior Credit Facility and the Indenture relating to
the notes; and registration expenses incurred by Holdings incident to a
registration of any capital stock of Holdings under the Securities Act.
In connection with the Acquisition, Holdings purchased options to
acquire common stock of the Company from certain members of management of the
Company for an aggregate purchase price of approximately $6.9 million, of which
approximately $4.3 million was used by certain members of management to purchase
stock of Holdings. In addition, the Company entered into agreements with certain
members of management of the Company, pursuant to which the Company agreed to
pay an aggregate of $3,735,000 of additional compensation in connection with
their investment in Holdings. Of this amount, $2,360,000 was paid at the
Acquisition Closing Date and the balance was paid in late 1996. Of this amount,
$1,575,609, $316,803, $102,070, $264,444 and $316,257 has been received by
Messrs. Nie, Passaglia, Daiker, Ulicny and Barton, respectively.
53
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Simmons Company and
its subsidiaries are included in Part II, Item 8:
Reports of Independent Accountants
Consolidated Balance Sheets at December 27, 1997 and December 28,
1996
Consolidated Statements of Operations for the year ended
December 27, 1997, the period from March 22, 1996 through
December 28, 1996 (Successor Period), period from December 31,
1995 through March 21, 1996 and the year ended December 30,
1995 (Predecessor Periods)
Consolidated Statements of Common Stockholders' Equity for the
year ended December 27, 1997, the period from March 22, 1996
through December 28, 1996 (Successor Period), period from
December 31, 1995 through March 21, 1996 and the year ended
December 30, 1995 (Predecessor Periods).
Consolidated Statements of Cash Flows for the year ended
December 27, 1997, the period from March 22, 1996 through
December 28, 1996 (Successor Period), period from December 31,
1995 through March 21, 1996 and the year ended December 30,
1995 (Predecessor Periods).
Notes to consolidated financial statements
(a)(2) Financial Statement Schedule
Schedule II - Valuation Account
(a)(3) The exhibits to this report are listed in section (c) of Item 14 below.
(b) The Company filed no reports on Form 8-K during the fourth
quarter of its fiscal year ended December 27, 1997.
(c) Exhibits:
Exhibit
Number Exhibit Description
The following exhibits, except as specifically noted, are incorporated by
reference to the Company's Registration Statement on Form S-4 (File No.
333-4841), declared effective on August 1, 1996.
2 Agreement of Merger between Simmons Acquisition Corp. and the
Company, dated March 22, 1996
3(i) Amended and Restated Certificate of Incorporation of the Company
3(ii) By-laws of the Company
10.1 Stock Purchase Agreement among certain management stockholders,
Merrill Lynch Capital Appreciation Partnership No. B-XI, L.P., MLCP
Associates L.P. No. II, ML IBK Position Inc., Offshore LBO
Partnership No. B-XI, Merrill Lynch KECALP L.P. 1987, Merrill Lynch
KECALP L.P. 1989, Merchant Banking L.P. No. IV and the Company,
Simmons Holdings, Inc., Simmons Acquisition Corp. and NationsBank
N.A. (South), solely as Trustee for the Simmons Employee Stock
Ownership Trust, dated March 22, 1996.
54
<PAGE> 55
10.2 Consolidated ESOP Loan Agreement between the Company and the
Employee Stock Ownership Trust dated March 22, 1996.
10.3 Consolidated Pledge Agreement between the Company and the Employee
Stock Ownership Trust dated March 22, 1996.
10.4 Amended Agreement of Trust between the Company and NationsBank N.A.
(South) dated as of March 22, 1996.
10.5 Second Amendment to the ESOP dated March 22, 1996.
10.6 1996 Stockholders' Agreement among the Company, the Simmons Company
Employee Stock Ownership Trust and Simmons Holdings, Inc. dated as
of March 22, 1996.
10.7 Purchase Agreement between the Company and Chase Securities Inc.
dated as of April 15, 1996.
10.8 Credit Agreement among the Company, Chemical Bank, as
Administrative Agent, and lenders party thereto, dated as of March
22, 1996.
10.9 Security Agreement made by the Company in favor of Chemical Bank,
as Administrative Agent, dated March 22, 1996.
10.10 Services and Expenses Agreement between the Company and Holdings,
dated as of March 22, 1996.
10.11 Parent Option Agreement between the Company and Holdings, dated as
of March 22, 1996.
10.12 Agreement for Management Advisory and Consulting Services between
Investcorp International, Inc. and the Company, dated as of March
22, 1996.
10.13* The Management Stock Incentive Plan of Simmons Holdings, Inc.
established as of March 22, 1996.
10.14* Form of Stock Purchase Agreement
10.15* Form of Stock Option Agreement
10.16* Form of Bonus Stock Purchase Agreement
10.17 Form of Anti-Dilution Stock Option Agreement
10.18* Form of Bonus Agreement
10.19* Form of Stock Acquisition Agreement
10.20 Labor Agreement between the Company and the Miscellaneous
Warehousemen, Drivers and Helpers Union, Local No. 986 affiliated
with the International Brotherhood of Teamsters covering warehouse
employees, truck drivers and shipping and receiving clerks for the
period August 1, 1995 to August 1, 1998.
10.21 Labor Agreement between the Company and the United Furniture
Workers of America, Local #262, A.F.L.-C.I.O. covering production
and maintenance employees working at the San Leandro, California
plant for the period August 1, 1995 to August 1, 1998.
10.22 Labor Agreement between the Company and ILWU Local 142 covering all
full-time production and maintenance employees for the period from
January 15, 1996 to January 14, 1999.
55
<PAGE> 56
10.23 Labor Agreement between the Company and Buckeye Local Lodge #55 of
the International Association of Machinists and Aerospace Workers,
Columbus, Ohio covering maintenance technicians for the period from
December 31, 1995 to December 31, 1997.
10.24 Labor Agreement between the Company and The International
Association of Machinists and Aerospace Workers, Local no. 315 of
District No. 15, A.F.L.-C.I.O. covering all mechanics at the
Piscataway, New Jersey plant of the Company for the period from
December 10, 1995 to December 10, 1998.
10.25 Master Multi-Plan Working Agreement between the Company and The
United Steel Workers of America, A.F.L., C.I.O., C.L.C. (Upholstery
Industries Division) through its Locals 63, 424, 422, 420, 425, 173
and 515 covering various employees in the Atlanta, Georgia;
Columbus, Ohio; Dallas, Texas; Piscataway, New Jersey;
Jacksonville, Florida; Kansas City, Missouri; and Los Angeles,
California plants of the Company for the period from October 15,
1994 to October 15, 1997.
10.26 Loan Finance and Advisory Services Agreement dated as of March 22,
1996 between Investcorp International Inc. and the Company.
10.27 Mergers and Acquisitions Advisory Agreement dated as of March 22,
1996 between Investcorp International Inc. and the Company.
10.28 Lease between the Company, as tenant, and Leadership Group, Inc. as
landlord, dated November 4, 1987, for premises in Grove City, Ohio
(i) Amendment dated April 1, 1988.
10.29 Lease between the Company, as tenant, and Security Capital
Industrial Trust, as landlord, dated December 16, 1988, for
premises in Aurora, Colorado.
10.30 Lease between the Company, as tenant, and 365 South Randolphville,
L.P., as assignee of 287 Industrial park, as landlord, dated
September 16, 1988, for premises in Piscataway, New Jersey.
10.31 Lease between the Company, as tenant, and The Prudential Insurance
Company of America, as landlord, dated June 19, 1973, for premises
in Jacksonville, Florida.
10.33 Lease between the Company, as tenant, and 20100 S. Alameda Property
Co. (assignee of Overton, Moore & Associates), as landlord, dated
March 12, 1974 for premises in Compton, California. (i) First
Amendment dated October 2, 1974 (ii) Second Amendment dated as of
September 17, 1984 (iii) Third Amendment dated as of September 18,
1984 (iv) Fourth Amendment dated as of June 28, 1993
10.35 Lease between the Company, as tenant, and Bluefin Associates, as
landlord, dated December 4, 1987, for premises in Agawam,
Massachusetts. (i) First Amendment dated October 5, 1993
10.36 Lease between the Company, as tenant, and Concourse I, Ltd., as
landlord, dated August 1, 1992, for premises in Atlanta, Georgia.
10.37 Lease between the Company, as tenant, and John W. Rooker, as
landlord, dated October 23, 1991, for premises in Mableton,
Georgia. (i) First Amendment dated as of December 10, 1991 (ii)
Second Amendment dated as of July 14, 1992
10.38 Lease between the Company, as tenant, and CK-Childress Klein #8
Limited Partnership, as landlord, dated May 5, 1993, for premises
in Charlotte, North Carolina. (i) First Amendment dated February 6,
1994
56
<PAGE> 57
10.39 Lease between the Company, as tenant, and St. Paul Properties,
Inc., as landlord, dated February 5, 1993, for premises in
Carrollton, Texas.
10.40 Lease between the Company, as tenant, and Moon & Hart, as landlord,
dated November 30, 1992, for premises in Ewa Beach, Hawaii.
10.41 Lease between the Company, as tenant, and 1700 Fairway Drive
Associates, as landlord, dated September 30, 1992, for premises in
San Leandro, California. (i) Amendment to Lease dated July 1, 1993
10.42 Lease between the Company, as tenant, and Hill-Raaum investment
Company, as landlord, dated December 19, 1991, for premises in
Bellevue, Washington.
10.43 Lease between Simmons Caribbean Bedding, Inc., as tenant, and ALFA
Casting Corporation, as landlord, dated May 25, 1989, for premises
in Toa Baja, Puerto Rico. (i) Modification of Lease Agreement dated
April 7, 1994
10.44 Lease between the Company, as tenant, and St. Paul Properties,
Inc., as landlord, dated October 19, 1994 for premises in Gwinnett
County, Georgia.
10.45 Lease between the Company, as tenant, and Liberty Property Limited
Partnership (assignee of Simmons Associates, L.P.), as landlord,
dated as of October 7, 1994 for premises in Spotsylvania County,
Virginia. (i) First Amendment dated as of October 28, 1994
10.46 Lease between the Company and Eagle Warren Properties, successors
to B.F. Saul Real Estate Investment Trust, dated July 15, 1977 for
premises in Norcross, Georgia. (i) Amendment dated August 6, 1992
10.47 Loan Agreement, dated as of November 1, 1982, between the City of
Janesville, Wisconsin and the Company, as successor by merger to
Simmons Manufacturing Company, Inc., relating to $9,700,000 City of
Janesville, Wisconsin Industrial Development Revenue Bond (Simmons
Manufacturing Company, Inc. Project) Series 1982.
10.48 Down Products Trademark License Agreement, dated January 4, 1991
between Simmons, as Licensor, and Louisville Bedding Co., as
Licensee.
10.49 Down Products Trademark License Agreement, dated January 1, 1995
between Simmons, as Licensor, and Louisville Bedding Co., as
Licensee.
10.50 Amended and Restated Trademark License Agreement dated as of April
14, 1986 (as restated November 28, 1990) between Simmons, as
Licensor, and Louisville Bedding Co., as Licensee.
10.51 Trademark License Agreement, dated as of July 13, 1990 between
Simmons, as Licensor, and Simmon Upholstered Furniture Inc., as
Licensee
10.52 Patent and Technology License Agreement, dated as of July 13, 1990
between Simmons, as Licensor and Simmons Upholstered Furniture
Inc., as Licensee
10.53 Agreement dated as of October 30, 1986 between Simmons, as
Licensor, and Simmons Universal Corporation, as Licensee.
10.54 Woolmark License Agreement, dated as of October 21, 1988 between
the Wool Bureau Incorporated and Simmons.
10.55 Licensee Agreement, dated as of June 29, 1990 between Simmons I.P.
Inc., as Licensor, and Simmons Canada Inc., as Licensee.
57
<PAGE> 58
10.56 Industrial Property License Agreement, Area 1-5, dated as of April
9, 1987 between Simmons, and INFO Establishment, as Licensor and
Christie-Tyler PLC, as Licensee.
10.57 Existing Territory License Agreement, dated as of June 30, 1987
between Simmons and SJL Investments Limited.
10.58 Trademark License Agreement, dated as of May 21, 1990 as between
Simmons, as Licensor, and Compania Simmons S.A. de C.V. as
Licensee.
10.59 Master Agreement, dated as of December 7, 1993 between Simmons and
N.V. B Linea.
10.60 Assignment, dated as of December 7, 1993 between Simmons and N.V. B
Linea.
10.61 Security Agreement, dated as of December 7, 1993 between Simmons
and N.V. B Linea.
10.62 Software License Agreement, undated, between Simmons and J.D.
Edwards & Company.
10.63* Employment Agreement dated November 5, 1993 between the Company and
Zenon S. Nie as amended October 5, 1995.
10.64* Employment Agreement dated January 1, 1995 between the Company and
Martin R. Passaglia.
10.65* Employment Agreement dated April 1, 1995 between the Company and
Jonathan C. Daiker.
10.66 Loan Agreement, dated as of December 1, 1996, between the City of
Shawnee, Kansas and the Company, relating to $5,000,000 Private
Activity Revenue Bonds of the City of Shawnee, Kansas (Simmons
Company Project) Series 1996. (Incorporated herein by reference,
Exhibit 10.66, to the Form 10-Q filed May 13, 1997 (File No.
333-04841).)
21 Subsidiaries of the Company
The following exhibits are included in this Form 10-K:
10.34 Form of Lease Agreement between the Company, as tenant, and CP
Reprop Phoenix III Corp., as landlord, for premises in Phoenix,
Arizona dated March 1997.
10.4 Employee Stock Ownership Plan Trust Agreement between the Company
and State Street Bank and Trust Company dated as of September 2,
1997.
10.73 Form of Industrial Lease Agreement between the Company, as tenant,
and DFW Trade Center I Limited Partnership, as landlord, for
premises in Coppell, Texas dated June 1997.
27 Financial Data Schedule
* Identifies each exhibit that is a "management contract or compensatory plan or
arrangement" required to be filed as an exhibit to this Annual Report on Form
10-K pursuant to Item 14(c) of Form 10-K.
58
<PAGE> 59
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, SIMMONS COMPANY HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SIMMONS COMPANY
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
By /s/Zenon S. Nie Chairman of the Board of Directors, Chief Executive
--------------------------------------------
Zenon S. Nie Officer and Director
(Principal Executive Officer)
</TABLE>
Dated: March 27, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
SIMMONS COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
/Zenon S. Nie Chairman of the Board of Directors, Chief March 27,1998
- --------------------------------------------
Zenon S. Nie Executive Officer and Director
(Principal Executive Officer)
/s/ Jonathan C. Daiker Executive Vice President - Finance and March 27, 1998
- --------------------------------------------
Jonathan C. Daiker Administration, Chief Financial Officer
and Director.
(Principal Financial and Accounting Officer)
/s/ Martin R. Passaglia Senior Executive Vice President and Director March 27, 1998
- --------------------------------------------
Martin R. Passaglia
/s/ Jon P. Hedley Director March 27, 1998
- --------------------------------------------
Jon P. Hedley
/s/ Christopher J. O'Brien Director March 27, 1998
- --------------------------------------------
Christopher J. O'Brien
/s/ Charles J. Philippin Director March 27, 1998
- --------------------------------------------
Charles J. Philippin
/s/ Savio W. Tung Director March 27, 1998
- --------------------------------------------
Savio W. Tung
</TABLE>
59
<PAGE> 60
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE
YEAR ENDED DECEMBER 27, 1997,
PERIOD FROM MARCH 22, 1996 THROUGH DECEMBER 28, 1996,
PERIOD FROM DECEMBER 31, 1995 THROUGH MARCH 21, 1996
AND YEAR ENDED DECEMBER 30, 1995
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES AND EXCHANGE ACT OF 1934
FORM 10-K
OF
SIMMONS COMPANY
60
<PAGE> 61
SIMMONS COMPANY
SCHEDULE II - VALUATION ACCOUNT
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Balance at
Beginning End of
Description of Period Additions Deductions Period
----------- ---------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
SUCCESSOR
Fiscal Year Ended December 27, 1997
Allowance for doubtful accounts receivable $5,644 $2,750 $4,456 $3,938
Period from March 22, 1996 through
December 28, 1996
Allowance for doubtful accounts receivable $5,063 $1,273 $692 $5,644
PREDECESSOR
Period from December 31, 1995 through
March 21, 1996
Allowance for doubtful accounts receivable $4,600 $566 $103 $5,063
</TABLE>
61
<PAGE> 62
SUBSIDIARIES
A. DOMESTIC SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- ---------------
<S> <C>
(1) Simmons International Holding Company, Inc. New York
B. FOREIGN SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- ---------------
(1) Simmons Caribbean Bedding, Inc. Puerto Rico
(2) INFO Establishment Liechtenstein
(3) Simmons I.P., Inc. Ontario
(4) 688363 Ontario Limited Ontario
(5) 897701 Ontario Limited Ontario
</TABLE>
62
<PAGE> 1
Exhibit 10.34
LEASE AGREEMENT
BY AND BETWEEN
CP REPROP PHOENIX III CORP., Landlord
- AND -
SIMMONS COMPANY, Tenant
DATED: March ____, 1997
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
Demise of Premises......................................................... 1
ARTICLE II
Term of Lease.............................................................. 1
ARTICLE III
Rent....................................................................... 2
ARTICLE IV
The Demised Premises; Tenant Improvements.................................. 3
ARTICLE V
Use........................................................................ 4
ARTICLE VI
Quiet Enjoyment............................................................ 4
ARTICLE VII
Additional Rent, Taxes, Assessments,
Water Rates, Charges, Etc.................................................. 4
ARTICLE VIII
Insurance.................................................................. 7
ARTICLE IX
Repairs.................................................................... 10
ARTICLE X
Common Area Repair......................................................... 11
ARTICLE XI
Casualty................................................................... 13
ARTICLE XII
Condemnation............................................................... 14
ARTICLE XIII
Compliance With Laws, Etc.................................................. 14
ARTICLE XIV
Subordination/Estoppels.................................................... 16
ARTICLE XV
Defaults, Remedies......................................................... 16
<PAGE> 3
ARTICLE XVI
Assignment and Sublease.................................................... 19
ARTICLE XVII
Notices.................................................................... 21
ARTICLE XVIII
Holding Over............................................................... 22
ARTICLE XIX
Liens...................................................................... 22
ARTICLE XX
Condition of Demised Premises, Loss, Etc................................... 23
ARTICLE XXI
Inspection, For Sale and For Rent Signs.................................... 23
ARTICLE XXII
Signs...................................................................... 23
ARTICLE XXIII
Advance Rent, Security and Late Charge..................................... 24
ARTICLE XXIV
Financial Statements....................................................... 24
ARTICLE XXV
Broker..................................................................... 24
ARTICLE XXVI
Short Form or Memorandum of Lease.......................................... 25
ARTICLE XXVII
Waiver of Trial by Jury.................................................... 25
ARTICLE XXVIII
Personal Liability......................................................... 25
ARTICLE XXIX
Landlord's Retained Rights................................................. 25
ARTICLE XXX
Definitions................................................................ 25
Section 30.1 Common Facilities or Common Area. ...................... 25
Section 30.2 Proportionate Share...................................... 26
Section 30.3 Force Majeure............................................ 26
Section 30.4 Additional Rent.......................................... 26
<PAGE> 4
ARTICLE XXXI
Miscellaneous................................................................ 26
Section 31.1 Partial Invalidity....................................... 26
Section 31.2 Waivers.................................................. 26
Section 31.3 Number, Gender........................................... 27
Section 31.4 Successors, Assigns...................................... 27
Section 31.5 Headings................................................. 27
Section 31.6 Entire Agreement......................................... 27
Section 31.7 Landlord................................................. 27
Section 31.8 Words of Duty............................................ 27
Section 31.9 Cumulative Remedies...................................... 27
Section 31.10 No Option................................................ 27
Section 31.11 Accord and Satisfaction.................................. 27
Section 31.12 Tenant's Corporate Authority............................. 28
Section 31.13 Landlord's Corporate Authority........................... 28
Section 31.14 Applicable Law........................................... 28
Section 31.15 Compliance with Rules and Regulations.................... 28
<PAGE> 5
THIS LEASE, dated the ____ day of March, 1997, between CP REPROP PHOENIX
III CORP., a Delaware corporation, with offices at Cabot Partners, Two Center
Plaza, Suite 200, Boston Massachusetts 02108 (hereinafter referred to as the
"Landlord"), and SIMMONS COMPANY, a Delaware corporation, with offices at One
Concourse Parkway, Suite 600, Atlanta, Georgia 30328 (hereinafter referred to as
the "Tenant").
W I T N E S S E T H:
ARTICLE I
Demise of Premises
Section 1.1 The Landlord, for and in consideration of the rents to be
paid and of the covenants and agreements hereinafter contained to be kept and
performed by the Tenant, hereby demises and leases unto the Tenant, and the
Tenant hereby hires and takes from the Landlord, for the term and the rent and
upon the covenants and agreements hereinafter set forth, the premises described
in Exhibit A attached hereto and made a part hereof (such premises being
hereinafter referred to as the "Demised Premises" and being a part of an
existing building as more particularly defined hereinafter) which is situated on
that certain parcel of land located at 101 North 104th Avenue, Tolleson,
Arizona, in the County of Maricopa, State of Arizona (hereinafter referred to as
the "Real Property"), as described on Exhibit A-1 attached hereto and made a
part hereof (hereinafter called "Building Area"), together with eighty-six (86)
parking spaces (the "Parking Spaces") as shown on Exhibit B attached hereto and
made a part hereof for the exclusive use and enjoyment by the Tenant and the
Tenant's employees, agents and invitees and together with the non-exclusive
right of ingress and egress to and from the Demised Premises and the Parking
Spaces to and from 104th Avenue as shown on Exhibit B attached hereto together
with the right to use in common with all other tenants in the Building the
Common Facilities, defined in Section 31.1.
The Landlord and the Tenant covenant and agree as follows:
ARTICLE II
Term of Lease
Section 2.1 The term of this Lease (the "Term" or "Lease Term") and the
demise of the Demised Premises shall be for ten (10) years and three (3) months
beginning on the "Commencement Date", said term as used herein being defined as
the earlier of the following dates: (A) the date upon which the leasehold
improvements described in Article IV hereof have been constructed and installed
by the Landlord as evidenced by the delivery to the Tenant of both a (i)
statement from the Landlord's architect or space planner or engineer certifying
the said tenant improvements have been completed in accordance with all
applicable federal, state and local laws, statutes and ordinances and
substantially in accordance with the plans and specifications approved by the
Tenant under Article IV and (ii) a certificate of occupancy for the Demised
Premises issued by the appropriate governmental authority (provided, however,
that any delays resulting from changes requested by the Tenant to the plans and
specifications for the Tenant Improvements (as hereinafter defined) shall be
retroactively discounted from such date as set forth in Section 4.2) or (B) the
date upon which the Tenant takes possession of the Demised Premises and
commences operation of the business of the Tenant in the Demised Premises;
provided, that the entry by the Tenant into the Demised Premises or the
installation by the Tenant in the Demised Premises of trade fixtures, equipment
and other personal property necessary to conduct the operation of the business
of the Tenant shall not be deemed taking possession of the Demised Premises by
the Tenant. In the event the Commencement Date has not occurred within one
hundred twenty (120) days following the mutual execution of this Lease by the
Landlord and the Tenant (subject to Force Majeure, as hereinafter defined), the
Tenant may terminate this Lease by written notice to the Landlord within fifteen
(15) days thereafter, and upon such termination, the Advance Rent and the
Security Deposit paid by the Tenant under Sections 23.1 and 23.2
<PAGE> 6
shall be promptly returned by the Landlord to the Tenant, and the parties shall
have no further obligations or liabilities hereunder to one another other than
those obligations or liabilities that expressly survive the termination of this
Lease.
The Tenant shall have the right to extend the Term for one (1) additional
five (5) year period pursuant to the terms and conditions set forth in Exhibit C
attached hereto and made a part hereof.
ARTICLE III
Rent
Section 3.1 The Tenant shall pay to the Landlord, during the Term without
counterclaim, deduction or setoff, except as otherwise provided herein, basic
rent (hereinafter "Term Basic Rent"), calculated in accordance with Section 3.2
and payable in such coin or currency of the United States of America as at the
time of payment shall be legal tender for the payment of public and private
debts.
Section 3.2 The Term Basic Rent shall accrue at the annual rates
(hereinafter referred to as the "Annual Basic Rent"), and shall be payable in
advance on the first day of each calendar month during the Term in the monthly
installments of Term Basic Rent (hereinafter referred to as the "Monthly Basic
Rent"), set forth below, except that a proportionately lesser sum may be paid
for the first and last months of the Term of this Lease if the Lease Term
commences on a date other than the first day of the month, in accordance with
the provisions of this Lease hereinafter set forth. The Monthly Basic Rent, and
any Additional Rent, shall be payable at the office of the Landlord, at the
address above set forth, or as may otherwise be directed by notice from the
Landlord to the Tenant.
Annual Monthly
Months Basic Rent Basic Rent
1- 3 -- --
4- 63 $297,815.04 $24,817.92
64-123 $349,932.72 $29,161.06
Notwithstanding anything contained herein to the contrary, the Tenant
shall be entitled to an abatement of the first three (3) months of Monthly Basic
Rent (but not of Additional Rent or any other sum payable by the Tenant under
this Lease) so long as the Tenant shall fully and faithfully perform all of its
obligations hereunder. If, however, the Tenant shall at any time be in default
hereunder beyond any notice and cure period, the abatement provided for herein
shall no longer be valid and the Tenant shall in addition to any other damages
to which the Landlord shall be entitled to as a result of said default be
obligated to reimburse the Landlord for the full amount of the aforesaid
abatement.
Section 3.3 The Tenant shall, and will, during the Term well and truly
pay, or cause to be paid, to the Landlord, the Monthly Basic Rent as herein
provided and all other sums that may become due and payable by the Tenant to the
Landlord, hereunder, at the time and in the manner herein provided, without
counterclaim, offset or deduction except as otherwise provided herein; and all
other sums due and payable by the Tenant hereunder may, at the Landlord's
option, be deemed to be, and treated as, Additional Rent, and added to any
Monthly Basic Rent due and payable by the Tenant hereunder, and, in the event of
nonpayment of such other sums beyond any notice and cure period, the Landlord
shall have all the rights and remedies herein provided for
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in the case of the nonpayment of Term Basic Rent and Additional Rent, or of a
breach of any covenant to be performed by the Tenant.
Section 3.4 The Basic Rent (Term, Annual and Monthly) payable by the
Tenant pursuant to this Lease is intended to be net to the Landlord, and all
other charges and expenses imposed upon the Demised Premises or incurred in
connection with its use, occupancy, care, maintenance, operation and control,
including but not limited to city or state rental taxes and the charges and
expenses payable pursuant to Articles VII and VIII of this Lease, shall be paid
by the Tenant, excepting liens resulting from acts or omissions of the Landlord
and other payments to be paid or obligations undertaken by the Landlord as
specifically provided in this Lease.
Section 3.5 As used in this Lease, "Basic Rent" shall mean either Term
Basic Rent, Annual Basic Rent or Monthly Basic Rent, as appropriate.
ARTICLE IV
The Demised Premises; Tenant Improvements
Section 4.1 The Demised Premises consist of approximately 103,408 gross
square feet of space in a building containing approximately 279,131 gross square
feet (which building is hereinafter called the "Building") previously erected
thereon. The Tenant shall have a one-time right of first refusal as set forth on
Exhibit D attached hereto and made a part hereof.
Section 4.2 The Landlord shall perform all of the leasehold improvements
to the Demised Premises in substantial compliance with plans and specifications
approved by the Tenant and more particularly described on Exhibit E attached
hereto and made a part hereof (the "Tenant Improvements"). The Tenant
Improvements shall be performed by the Landlord in compliance with all
applicable codes, rules and regulations. The Landlord shall, prior to the
commencement of any of the aforesaid work obtain all permits, approvals and
certificates required by any governmental or quasigovernmental bodies and (upon
completion) certificates of final approval thereof and, upon request, shall
deliver promptly duplicates of all such permits, approvals and certificates to
the Tenant. The Seller shall assign to the Tenant any warranties the Seller has
received relating to the Tenant Improvements and shall provide to Tenant a one
(1)-year general warranty relating to the Tenant Improvements.
If the Tenant requests any changes to the plans and specifications
reflected on Exhibit E, the Landlord shall provide the Tenant with written
notice of any increase in cost and the number of days by which the construction
of the Tenant Improvements will be delayed, which number of days shall be
retroactively added to the Commencement Date, thus making the Lease Commencement
Date earlier by the aggregate number of days delay under this paragraph (but
still subject to earlier Commencement Date if the Tenant takes possession of the
Demised Premises and commences operation of the business of the Tenant in the
Demised Premises prior to completion of the Tenant Improvements as provided in
Section 2.1).
The Landlord hereby agrees to pay for the costs and fees incurred in
connection with the construction of the Tenant Improvements up to a maximum
amount of Three Hundred Ten Thousand Two Hundred Twenty-Four and No/100 Dollars
($310,224.00), which amount is equal to the sum of Three Dollars ($3.00) per
square foot of the Demised Premises (hereinafter referred to as the
"Construction Allowance"), and Tenant shall pay for the cost of the Tenant
Improvements in excess of the Construction Allowance, including any additional
costs resulting from changes requested by the Tenant in the plans and
specifications referred to in Exhibit E. The Landlord and the Tenant agree that
upon receipt of a draw request relating to the construction of the Tenant
Improvements ("Draw Request"), the Landlord shall forward a copy of the Draw
Request to the Tenant along with an invoice from the Landlord for the Tenant's
share of such costs, the parties agreeing that, until the Landlord has paid the
Construction Allowance, each party shall be responsible for fifty percent (50%)
of the sums reflected in each Draw Request. After the Landlord has paid the
Construction Allowance, the Tenant shall be
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responsible for one hundred percent (100%) of all costs reflected by the Draw
Requests. Within ten (10) days of receipt of the Draw Request and an invoice
from the Landlord, the Tenant will pay to the Landlord the invoiced amounts.
Section 4.3 The Demised Premises hereinabove described constitutes a
self-contained unit and nothing in this Lease shall impose upon the Landlord any
obligation to provide any services for the benefit of the Tenant, including but
not limited to water, gas, electricity, heat or janitorial, unless and to the
extent expressly provided in this Lease.
ARTICLE V
Use
Section 5.1 The Demised Premises may be used for the manufacturing and
distribution of mattresses and mattress related products and for related office
use and for no other purpose. Nothing contained herein shall be construed as a
representation on the part of the Landlord that the Tenant's use of the Demised
Premises is a permitted use and, unless otherwise stated in this Lease, it shall
be the Tenant's obligation, at the Tenant's sole cost and expense, to make
application for and to obtain any and all certificates and/or permits (other
than permits required for the construction of the Tenant Improvements which
shall be the Landlord's responsibility) to permit the Tenant's use from any
governmental agencies having jurisdiction over the Demised Premises.
Section 5.2 The aforesaid permitted use does not permit the stacking of
merchandise and/or materials against walls or columns, nor does it permit the
hanging of equipment from (or otherwise loading) the roof or structural members
of the Building; provided, however, that the Tenant shall have the right to
install and hang airlines and electrical drops upon which the Landlord and the
Tenant shall agree.
ARTICLE VI
Quiet Enjoyment
Section 6.1 The Landlord covenants that if, and so long as, no default by
the Tenant exists beyond any notice or cure period, the Landlord shall do
nothing to affect the Tenant's right to peaceably and quietly have, hold and
enjoy the Demised Premises for the Term herein mentioned, subject to the
provisions of this Lease and to any mortgage or deed of trust to which this
Lease shall be subordinate.
ARTICLE VII
Additional Rent, Taxes, Assessments,
Water Rates, Charges, Etc.
Section 7.1 The Landlord covenants that it shall pay in full when due all
Real Estate Taxes, as hereinafter defined, imposed on the Real Property and the
Building of which the Demised Premises are part. The Tenant shall reimburse the
Landlord, before any interest or penalties accrue thereon, its Proportionate
Share of all Real Estate Taxes and all water and sewer rates and charges imposed
during the Term on the Real Property and Building of which the Demised Premises
are a part. Upon request, the Landlord shall exhibit to the Tenant receipted
bills or other proof of payment. There shall be apportioned any tax or charge
relating to the fiscal years in which the Term of this Lease commences and
terminates. Additionally, the Tenant shall pay, in full, all city, county, and
state rental taxes imposed upon the Basic Rent and Additional Rent and all other
sums payable to the Landlord hereunder.
Section 7.2 The Tenant shall not be required to pay any estate,
inheritance, devolution, succession, transfer, legacy or gift tax charged
against the Landlord or the estate or interest of the Landlord in the Demised
Premises or upon the right of any person to succeed to the same or any part
thereof by inheritance, succession,
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transfer or gift, nor any capital stock tax or corporate franchise tax incurred
by the Landlord, nor any income tax upon or against the income of the Landlord
(including any rental income derived by the Landlord from the Demised Premises).
Section 7.3 The Tenant shall reimburse the Landlord its Proportionate
Share of all assessments that may be imposed upon the Real Property by reason of
any specific public improvement (including but not limited to assessments for
street openings, grading, paving and sewer installations and improvements). Any
such benefit, assessment or installment thereof relating to a fiscal period in
which the Term of this Lease begins or ends shall be apportioned.
Section 7.4 The Tenant, if joined by the tenants occupying a majority of
the usable square footage of the Real Property, in its name or the Landlord's
name, shall have the right to contest, or review, by appropriate proceedings, in
such manner as it may deem suitable, at its own expense, and without, expense to
the Landlord, any tax, assessment, water and sewer rents or charges, or other
charges payable by the Tenant pursuant to this Lease, and upon the request of
the Tenant, the Landlord will pay, under protest any tax, assessment, water or
sewer rent or charge, or any other charge payable by the Tenant pursuant to this
Lease, which shall be contested or reviewed by the Tenant. Any refund resulting
from such contest or review shall be assigned to and belong to the Tenant and
shall be paid to the Tenant promptly upon its receipt by the Landlord. If the
refund relates to a tax year that is apportioned between the Landlord and the
Tenant, the refund shall be apportioned between the Landlord and the Tenant.
Section 7.5 Notwithstanding anything contained herein to the contrary,
should the Landlord's mortgagee require at any time, the maintenance of an
escrow reserve for the tax obligations of the Tenant or for any other obligation
of the Tenant as in this Lease contained, the Tenant shall promptly pay to said
escrowee the required amount as the same may be periodically adjusted from time
to time.
Section 7.6 The Tenant shall pay, before delinquency, all taxes,
assessments, license fees, and other charges that are levied or assessed against
the Tenant's personal property located on the Demised Premises. If any taxes on
the Tenant's personal property are levied against the Landlord, Building or the
Real Property, or if the assessed value of the Building is increased by the
inclusion of a value placed on the Tenant's personal property or as a result of
alterations, additions or improvements made to the Demised Premises by or for
the Tenant, the Tenant, on demand, shall immediately pay to the Landlord as
Additional Rent, the sum of taxes levied against the Landlord, or the proportion
of the taxes resulting from such increase in the Landlord's assessment caused
thereby. The Landlord shall be entitled to, in good faith using its reasonable
determination and in consultation with all tenants of the Building, ascertain
the value of the tax attributable to the Tenant's personal property or
alterations, additions or improvements.
Section 7.7 "Real Estate Taxes" shall mean taxes, assessments (special,
betterment, or otherwise), levies, fees, rent taxes, excises, impositions,
charges water and sewer rents and charges, and all other government levies and
charges, general and special, ordinary and extraordinary, foreseen and
unforeseen, which are imposed or levied upon or assessed against the Real
Property or the Building or any Rent or other sums payable by any tenants or
occupants thereof. Real Estate Taxes shall include the Landlord's costs and
expenses of contesting any Real Estate Taxes. If at any time during the term the
present system of ad valorem taxation of real property shall be changed so that
in lieu of the whole or any part of the ad valorem tax on real property, or in
lieu of increases therein, there shall be assessed on the Landlord a capital
levy or other tax on the gross rents received with respect to the Real Property
or the Building or a federal, state, county, municipal, or other local income,
franchise, excise or similar tax, assessment, levy, or charge (distinct from any
now in effect) measured by or based, in whole or in part, upon gross rents, then
all of such taxes, assessments, levies, or charges, to the extent so measured or
based, shall be deemed to be Real Estate Taxes.
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Section 7.8 Within sixty (60) days after the end of the Landlord's fiscal
year, the Landlord shall advise the Tenant in writing of the Tenant's
Proportionate Share of those Additional Rent items enumerated in this Article
VII as estimated for the current calendar year, and for each succeeding calendar
year or proportionate part thereof if the last period prior to the Lease's
termination is less than a full calendar year as then known to the Landlord, and
thereafter, the Tenant shall pay as Additional Rent, its Proportionate Share, as
hereinafter defined, of these costs for the upcoming year in equal monthly
installments on the first day of each month, such new rates being applied to any
months for which the Monthly Basic Rent shall have already been paid which are
affected by the Additional Rent items above referred to, as well as the
unexpired months of the current period, the adjustment for the then expired
months to be made at the payment of the next succeeding Monthly Basic Rent, all
subject to final adjustment at the expiration of each calendar year or
proportionate part thereof, if the last period prior to the Lease's termination
is less than a full calendar year. In the event the last period prior to the
Lease's termination is less than a full calendar year, the Additional Rent costs
during said period shall be proportionately reduced to correspond to the
duration of said final period.
Upon request by the Tenant not more than once per annum, the Landlord will
furnish to the Tenant within sixty (60) days after the end of the Landlord's
fiscal year, a written statement in reasonable detail covering the lease year
just expired showing the total common area costs for such year, the amount of
the Tenant's Proportionate Share thereof and the payments made by the Tenant
with respect thereto. The Tenant, at the Tenant's expense, and at a time
reasonably acceptable to the Landlord, shall have the right, to be exercised by
written notice to the Landlord at any time within one (1) year after receipt of
the Landlord's statement to elect to audit the Landlord's books and records
pertaining to the Landlord's common area costs described in the Landlord's
statement, which audit may be conducted by the Tenant's personnel or an outside
firm of accountants engaged by the Tenant, provided such audit commences within
thirty (30) days after the Tenant's notice to the Landlord and thereafter
proceeds regularly and continuously to conclusion. The Landlord agrees to
cooperate in good faith with the Tenant in the conduct of any such audit. The
Landlord agrees to maintain books and records on the operation of the Building
and the Real Property sufficient to provide reasonable and appropriate backup
materials and such invoices, receipts, ledgers and documents as are customary in
establishing an "audit trail" for operating expenses and all matters addressed
in the Landlord's statement. If the Landlord is unable to provide reasonable and
appropriate evidence of the incurrence or accrual of any cost or expense, the
same may not be treated as a "common area cost". Upon the Tenant completing the
Tenant's audit of the Landlord's books and records, if such audit discloses
discrepancies between the Landlord's statement and the Tenant's audit results,
then the Landlord and the Tenant shall negotiate in good faith to resolve any
such differences. At such time as any dispute is resolved resulting in an
adjustment in the Tenant's additional rental obligations, then within fifteen
(15) days after resolution of such dispute, the Landlord or the Tenant, which
ever party is found to be owing the other, shall pay to the other such
adjustment amount with interest at the prime rate accruing from either (i) the
date the Tenant's additional rental adjustment payment was originally due and
payable, if the Tenant owes additional rental to the Landlord, or (ii) the date
additional rental was paid by the Tenant, if the Landlord owes the Tenant a
refund of such additional rental. If the Tenant's audit, as agreed by the
Landlord, discloses that the Landlord's calculation of the Tenant's additional
rental as set forth in its statement for the audited calendar year was
overstated by more than five percent (5%), then the Landlord shall pay to the
Tenant, within forty-five (45) days after receipt of an invoice therefor, an
amount equal to the Tenant's actual, reasonable out-of-pocket costs and fees
incurred in conducting such audit and/or resolving any disputes thereover with
the Landlord.
Section 7.9 Additional Rent shall include, by way of illustration and not
of limitation, those items for which the Tenant is obligated to pay its
Proportionate Share, including but not limited to the items referred to in this
Article VII, the Landlord's insurance in accordance with Article VIII, Common
Area maintenance and repair in accordance with Article X, and all other charges
required to be paid pursuant to the terms and provisions of this Lease in
addition to Basic Rent.
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ARTICLE VIII
Insurance
Section 8.1 During the Term, the Landlord shall maintain the following
insurance, insuring the Landlord and ground lessor, if any, and any
mortgagee(s), as their respective interests may appear, the cost of which shall
be reimbursed by the Tenant as Additional Rent to the extent of its
Proportionate Share, as herein defined, except rent insurance for which the
Tenant shall reimburse the Landlord for the costs of the rent insurance premium
equal to the proportion of the premium which the Tenant's Term Basic Rent and
Additional Rent bears to the total of all rent and Additional Rent for which
rent insurance is obtained.
(A) Insurance against damage to the Building by all risks of direct
physical loss (at the Landlord's option to include earthquake and flood) with
the policy to contain either the agreed amount endorsement or a replacement cost
endorsement, in amounts sufficient to prevent the Landlord from becoming a
co-insurer, but in no event less than one hundred percent (100%) of the
Building's then replacement value. Policy to include a contingent liability
endorsement and/or demolition and increased cost of construction endorsement in
order for the Building to be constructed in accordance with all requirements and
regulations which may be applicable at the time of loss or damage, of all
governmental agencies having jurisdiction over the Building and construction of
such Building.
(B) If appropriate, boiler and machinery insurance coverage for all
eligible objects, including pressure vessels and air conditioning equipment,
with the electrical apparatus clause, with such limits as may be reasonably
necessary to properly insure the values at risk in the Building.
(C) Rent insurance, with all risk coverage, against the loss of Term
Basic Rent and Additional Rent for no less than one (1) year as provided herein.
Notwithstanding anything else contained herein to the contrary, the Tenant's
share of the cost of the insurance premium for rental income insurance shall be
arrived at by determining the proportion of the Tenant's Monthly Basic Rent in
relation to the monthly rent of all tenants covered by said rent insurance
policy.
(D) INTENTIONALLY DELETED.
(E) Comprehensive general liability insurance against claims for
bodily injury and property damage occurring in or about the Demised Premises and
insurance against such other hazards as, from time to time, are then commonly
insured against for premises similarly situated in amounts normally carried with
respect thereto.
All insurance maintained pursuant to this Section 8.1 may be effected by blanket
insurance policies. The Tenant shall be liable for the payment of its prorata
share of any deductible amount under the Landlord's insurance maintained
pursuant to this Article VIII, in an amount not to exceed Twenty-Five Thousand
and 00/100 Dollars ($25,000.00).
Section 8.2 The Tenant, at its cost, shall provide and keep in force,
during the Term of the Lease:
(A) A comprehensive general liability policy in standard form
(containing the so-called "occurrence clause") against claims for personal
injury and property damage occurring on, in or about the Demised Premises in the
combined single limit amount of Two Million and 00/100 ($2,000,000.00) Dollars,
and include an endorsement naming the Landlord as an additional insured with
respect to liability for ownership, operation, maintenance, use and control, and
provide primary coverage to the Landlord (any policy issued to the Landlord
providing duplicate or similar coverage shall be deemed excess over the Tenant's
policies).
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Notwithstanding anything to the contrary contained in the preceding
paragraph, it is contemplated between the parties hereunder that the Tenant's
insurance shall be primary as the Demised Premises, and the Landlord's insurance
shall be primary as to the Common Areas.
(B) Worker's Compensation Insurance (including Employers' Liability
Insurance) in the statutory amount covering all employees of the Tenant employed
or performing services at the Demised Premises, in order to provide the
statutory benefits required by the laws of the state in which the Demised
Premises are located or employer's indemnity insurance.
(C) Automobile Liability Insurance, including but not limited to,
passenger liability, on all owned, non-owned, and hired vehicles used in
connection with the Demised Premises, with a combined single limit per
occurrence of not less than One Million and 00/100 Dollars ($1,000,000.00) per
vehicle for injuries or death of one or more persons or loss or damage to
property.
(D) Personal Property Insurance covering leasehold improvements paid
for by the Tenant and the Tenant's personal property and fixtures from time to
time in, on, or at the Demised Premises, in an amount not less than 100% of the
full replacement cost, without deduction for depreciation, providing protection
against events protected under "All Risk Coverage," as well as against sprinkler
damage, vandalism, and malicious mischief. Any proceeds from the Personal
Property Insurance shall be used for the repair or replacement of the property
damaged or destroyed, unless this Lease is terminated under an applicable
provision herein. If the Demised Premises are not repaired or restored following
damage or destruction in accordance with other provisions herein, Landlord shall
receive any proceeds from the Personal Property Insurance allocable to the
Tenant's leasehold improvements.
(E) Business Interruption Insurance, providing in the event of
damage or destruction of the Demised Premises an amount sufficient to sustain
the Tenant for a period of not less than one (1) year for: (i) the net profit
that would have been realized had the Tenant's business continued; and (ii) such
fixed charges and expenses as must necessarily continue during a total or
partial suspension of business to the extent to which they would have been
incurred had no business interruption occurred, including, but not limited to,
interest on indebtedness of the Tenant, salaries of executives, foremen, and
other employees under contract, charges under noncancelable contracts, charges
for advertising, legal or other professional services, taxes and rents that may
still continue, trade association dues, insurance premiums, and depreciation.
(F) The policy of insurance shall be from a financially responsible
company reasonably satisfactory to the Landlord. The company shall be licensed
by the State of Arizona and a certificate(s) evidencing the existence of such
policy shall be delivered to the Landlord, together with evidence of the payment
of the premiums therefor, on or before the Commencement Date. At least ten (10)
days prior to the expiration or termination date of any policy, the Tenant shall
deliver a renewal or replacement policy, or certificate(s) evidencing the
existence thereof, to the Landlord together with proof of the payment of the
premium therefor.
(G) If, by reason of changed economic conditions, the insurance
amounts referred to in this Section 8.2 become inadequate, the Tenant agrees to
increase the amounts of such insurance promptly upon the Landlord's reasonable
request. The Landlord agrees to endeavor to provide at least thirty (30) days'
notice to the Tenant of any such increases prior to the assessment of costs
therefor.
Section 8.3 All losses paid under the policy or policies carried pursuant
to Section 8.1 shall, subject to the mortgagee's rights, be adjusted by the
Landlord and the proceeds thereof shall be payable to the Landlord and all
policies shall so provide. Each insurance policy carried by the Landlord and
each insurance policy carried by the Tenant and insuring the Demised Premises
and its fixtures and contents against loss by fire, water and causes covered by
standard extended coverage, shall be written in a manner so as to provide that
the insurance
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company waive all rights of recovery by way of subrogation against the Landlord
or the Tenant in connection with any loss or damage covered by such policies.
Neither party shall be liable to the other for any loss or damage to the
property of the other party to the extent such loss would be covered by the
insurance required to be maintained under this Lease. If such insurance policies
are obtainable only by the payment of an additional premium charge, the same
shall be obtained and such additional premium paid for by the Tenant. If the
release of either the Landlord or the Tenant, as set forth in the third sentence
of this Paragraph, shall contravene any law with respect to exculpatory
agreements, the liability of the party in question shall be deemed not released
but shall be deemed secondary to the latter's insurer.
Section 8.4 Subject to the insurance, waiver of subrogation and release
provisions of this Lease, the Tenant will indemnify, defend and save the
Landlord harmless from any liability on account of any damage to person or
property arising out of the failure of the Tenant to perform and comply, in all
material respects, with any of the requirements and provisions of this Lease or
arising from the Tenant's use and occupancy of the Demised Premises. Subject to
the insurance, waiver of subrogation and release provisions of this Lease, the
Landlord will indemnify and save the Tenant harmless from any liability on
account of any damage to person or property arising out of any failure of the
Landlord to perform and comply, in all material respects, with any of the
requirements and provisions of this Lease or arising from the gross negligence
or willful misconduct of Landlord or its tenants (other than the Tenant),
officers, agents, partners, servants, representatives, employees, contractors,
or invitees. The indemnities set forth in this Section 8.4 of this Lease shall
survive the expiration or earlier termination of this Lease or the Tenant's
non-occupancy of the Demised Premises.
Section 8.5 In the event any mortgagee, ground lessor or trust deed
holder requires an escrow for insurance, taxes or any other recurring charges,
the Tenant shall, within thirty (30) days of receipt of the Landlord's notice of
same, on demand from the Landlord, deposit the Proportionate Share, as
hereinafter defined, of the required escrow as required by any of the aforesaid.
Section 8.6 Any policies required to be furnished by the Tenant pursuant
to this Article VIII shall contain provision for ten (10) days' written notice
by registered mail to the Landlord of any change or cancellation of said policy.
ARTICLE IX
Repairs
Section 9.1 The Tenant shall keep the non-structural elements of the
interior of the Demised Premises in good condition and repair. The Tenant's
repair obligation shall include without limitation the sidewalks in front of the
Demised Premises, all lighting, HVAC, electrical, plumbing and other systems
located within the Demised Premises, all fixtures, equipment, motors and
machinery located within the Demised Premises, all interior walls, partitions,
doors and windows, and all exterior entrances, windows, doors and docks. The
Tenant shall keep the Demised Premises and all parts thereof in a clean and
sanitary condition and free from trash and other objectionable matter. The
Tenant shall pay its Proportionate Share, as hereinafter defined, of the costs
of all required repairs to the Building and Common Area, as hereinafter defined,
which repairs shall be made by the Landlord in accordance with Article X. Should
the Tenant fail to promptly repair the Demised Premises as required hereby after
ten (10) days prior written notice from the Landlord as to the need of such
repairs (except in the case of an emergency as reasonably determined by the
Landlord), the Landlord may make the repair and charge the reasonable actual
cost thereof as Additional Rent, which the Tenant shall pay in full, reserving
the right in the Tenant to assert a claim against the adjoining tenant as
provided for herein.
The Tenant shall replace, at the Tenant's expense, all glass in and on the
Demised Premises which may become broken after the date of the Tenant's
occupancy. When used in this Article, the term "repairs" shall include all
necessary replacements and renewals. All repairs made by the Tenant shall be
equal in quality and
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class to the state of repair of such item as of the Commencement Date, subject
to normal wear and tear. The Tenant shall quit and surrender the Demised
Premises at the end of the Term in as good condition as the reasonable use
thereof will permit and in compliance with the requirements stated herein and,
except for the warehouse floor which shall be professionally cleaned, in a
"broom-clean" condition excepting normal wear and tear and casualty damage not
caused by the Tenant.
Should the Tenant fail to keep the Demised Premises in good condition and
repair, the Landlord, after reasonable notice to the Tenant (or without notice
in the case of an emergency), may, without being obliged, make the repairs, and
the Tenant shall pay to the Landlord, immediately upon demand, the actual and
reasonable cost therefor, which shall constitute Additional Rent due hereunder
and shall be subject to all remedies by law or otherwise for the collection of
Basic Rent and Additional Rent; however, nothing herein shall be construed to
impose a duty on the Landlord to mitigate its damages by undertaking any repair
which is the Tenant's obligation.
Section 9.2 The Landlord shall: (A) maintain, repair, replace, as
necessary, and keep in good working order and condition throughout the Term the
walls, the foundation, the roof and the structural steel of the Demised Premises
and (B) make all repairs made necessary by the negligence or intentionally
wrongful acts or omissions of the Landlord or its tenants (other than the
Tenant), officers, agents, partners, servants, representatives, employees,
contractors, or invitees; and any repairs made necessary by latent defects,
defects in construction, or defects resulting from improper maintenance (which
under this Lease is the responsibility of the Landlord) in the Common Area, the
Demised Premises or the Building.
Section 9.3 The Tenant shall have the right to make any alterations or
improvements to the Demised Premises the cost of which for any single calendar
year does not exceed the aggregate amount of Twenty-Five Thousand and 00/100
Dollars ($25,000.00) without the Landlord's prior written consent, provided such
alterations or improvements do not alter the basic structure of the Building or
the Building systems or affect the soundness or value thereof. The Tenant shall
not make any other alterations, additions or improvements to the Demised
Premises without the prior written consent of the Landlord, which the Landlord
shall not unreasonably withhold. All erections, alterations, additions and
improvements, whether temporary or permanent in character, which may be made
upon or to the Demised Premises either by the Landlord or the Tenant, except
furniture or movable trade fixtures installed at the expense of the Tenant,
shall be the property of the Landlord and shall remain upon and be surrendered
with the Demised Premises as a part thereof at the expiration or sooner
termination of this Lease, without compensation to the Tenant; or, in the
alternative and at the direction of the Landlord, the Tenant shall remove all or
so much of the property therefrom as directed or such property shall be
conclusively deemed abandoned and may be removed by the Landlord, and the Tenant
shall reimburse the Landlord for the cost of such removal. The Landlord may have
any such property stored at the Tenant's risk and expense. The Landlord, at the
Landlord's option, may require as a condition of its consent, that the Tenant
remove, at the expiration or sooner termination of the Lease Term, any
erections, alterations, additions or improvements made by the Tenant, and
restore the Demised Premises to its preexisting condition and that the Tenant
use contractors approved by the Landlord. Notwithstanding anything to the
contrary in the foregoing, the Landlord shall specify at the time the Landlord
consents to any alteration, addition or improvement whether such alteration,
addition or improvement shall remain at the expiration or earlier termination of
this Lease.
ARTICLE X
Common Area Repair
Section 10.1 The Landlord agrees to maintain or repair, or cause to be
maintained or repaired, in good condition and repair during the Term, the Common
Facilities and Common Areas, as hereinafter defined, and, when required, replace
or renew the same, and in addition, the Landlord agrees to provide Common Area
landscaping services, exterior maintenance and repair; and the Tenant shall pay
its Proportionate Share of the costs for all of the aforesaid, unless the need
for said repair resulted from the Tenant's acts or omissions or those
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of its agents, servants, contractors, or invitees, in which case the Landlord
shall nevertheless repair the same but the entire actual and reasonable cost
shall be paid for by the Tenant. Such costs shall include, without limitation,
the yearly amortization of capital costs incurred by the Landlord for
improvements or structural repairs to the Real Property, the Building, or the
Demised Premises required to comply with any application of, or change in, the
laws, rules or regulations of any governmental authority having jurisdiction, or
for the purpose of reducing costs, but only to the extent such costs are
actually reduced by the installation of such item, which costs shall be
amortized on a straight-line basis over the useful life of such improvements or
repairs; provided, however, such costs shall not exceed Twenty-Five Thousand and
00/100 Dollars ($25,000.00) per year as the Tenant's Proportional Share unless
the Tenant consents in writing to a greater amount. For the performance of these
services, the Tenant shall pay the Landlord, as Additional Rent, a management
fee equal to two percent (2%) of the Term Basic Rent and Additional Rent paid
during the initial Term of this Lease and two and two-tenths percent (2.2%) of
the Term Basic Rent paid during any renewal or extension term, said fee to be
payable in equal monthly installments on the first day of every month during the
Lease Term. Notwithstanding anything herein to the contrary, the Landlord shall
not be responsible for the maintenance, replacement, or repair of any windows,
doors, plate glass, or the interior surfaces of any exterior walls in the
Demised Premises, and the Tenant shall perform the same at its cost as part of
the care and repair of the Demised Premises as provided for in Article IX.
Notwithstanding the above, Common Area costs shall not include the
following:
(A) income and corporate or partnership franchise taxes of the
Landlord;
(B) compensation paid to any employee of the Landlord above the
grade of property manager;
(C) operating expenses which are the sole responsibility of the
Tenant or any other tenant in the Building;
(D) costs of electrical energy billed directly to other tenants of
the Building;
(E) costs of any special work or services performed by or at the
request of any tenant and not generally provided or available to all tenants of
the Building;
(F) costs, including legal and other professional fees, incurred by
the Landlord in negotiating other leases or financing, collecting rent, evicting
other tenants or in legal proceedings to enforce the provisions of any other
lease or mortgage or to defend the Landlord against the Tenant or any other
tenant due to the gross negligence or misconduct of the Landlord or as a result
of a breach of this Lease by the Landlord or a breach by any other tenant of its
lease obligations;
(G) increased insurance premiums caused by acts of any other tenant
which are paid directly by such tenant to the Landlord;
(H) costs incurred as a result of the gross negligence or willful
misconduct of the Landlord;
(I) costs or expenses which are reimbursed or paid to the Landlord
by other tenants of the Building (other than by virtue of the pass through of
the Landlord's Common Area costs to other tenants), or pursuant to any insurance
or under any valid manufacturer warranty;
(J) costs and expenses incurred by the Landlord pursuant to any
provision of this Lease which expressly requires the Landlord to perform certain
obligations or services at the Landlord's sole cost and expense and which are
expressly stated not to be passed through as Common Area costs;
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(K) accounting expenses related to special audits not performed in
the ordinary course of the Landlord's business required by or in connection with
disputes with tenants, including the Tenant;
(L) expenses relating to the existence of the Landlord as a
corporation or partnership, including overhead, accounting, auditing and legal
fees, key man disability insurance, and transaction costs relating to a sale,
syndication, financing, mortgaging, hypothecation or change in ownership of the
Building (including, without limitation, an outright sale or refinancing of the
Real Property, or reorganization of any entity comprising the Landlord);
(M) costs relating to any building or land not included within the
Building or the Real Property, including any allocation of cost incurred on a
shared basis such as centralized accounting cost unless the allocation is made
on a reasonable and consistent basis that fairly reflects the share of such cost
actually contributed to the Building; and
(N) the cost of any service provided by the Landlord's agents,
employees or affiliates which exceed a reasonable cost charged by an independent
party for services comparable in type, quality and character in the same general
vicinity.
ARTICLE XI
Casualty
Section 11.1 (A) If the Demised Premises shall be destroyed or rendered
untenantable, either wholly or in part, by fire or other casualty ("Casualty"),
the Tenant shall immediately notify the Landlord in writing upon the occurrence
of such Casualty ("Tenant's Notice"). In the event of any Casualty, the Landlord
may elect either to (i) repair the damage caused by the Casualty as soon as
reasonably possible using due diligence, in which case this Lease shall remain
in full force and effect, or (ii) terminate this Lease as of the date the
Casualty occurred. The Landlord shall notify the Tenant within thirty (30) days
after receipt of Tenant's Notice of the Landlord's election to either (i) repair
the damage (in which event the notice shall provide the Landlord's reasonable
estimate of the time required for such repair) or (ii) terminate this Lease
("Landlord's Notice"). If the Landlord elects to repair the damage, the Tenant
shall pay the Landlord the portion of the "deductible amount" (if any) under the
Landlord's insurance allocable to the damage to the Premises and, if the damage
shall have been due to an act or omission of the Tenant or the Tenant's
employees, agents, contractors or invitees, the difference between the actual
cost of repair and any insurance proceeds received by the Landlord. If the
Landlord fails to repair the Casualty using due diligence within one hundred
eighty (180) days (subject to Force Majeure) after electing not to terminate,
the Tenant shall have the right to terminate this Lease.
(B) If the damage caused by the Casualty cannot reasonably be
repaired within one hundred and eighty (180) days from receipt of Tenant's
Notice, subject to Force Majeure, then, and in such case, this Lease shall be
terminable by either party by written notice to the other party within ten (10)
days of Landlord's Notice.
(C) If the Casualty to the Demised Premises shall occur during the
last six (6) months of the Lease Term and the damage shall be estimated by the
Landlord to require more than thirty (30) days to repair, either the Landlord or
the Tenant may elect to terminate this Lease as of the date the Casualty shall
have occurred, regardless of the sufficiency of any insurance proceeds. The
party electing to terminate this Lease shall give written notification to the
other party of such election within ten (10) days after the Tenant's notice to
the Landlord of the occurrence of the Casualty.
11.2 If the Demised Premises shall be destroyed or damaged by Casualty
and the Landlord shall elect to repair or restore the Demised Premises pursuant
to the provisions of this Article 11, any Rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which the
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Tenant's use of the Premises shall be impaired. Such reduction shall not exceed
the sum of one (1) year's payment of Base Rent, insurance premiums and Real
Estate Taxes. Except for such possible reduction in Base Rent, insurance
premiums and Real Property Taxes, and except for the indemnities of the Landlord
contained in this Lease, the Tenant shall not be entitled to any compensation,
reduction or reimbursement from the Landlord as a result of any damage,
destruction, repair, or restoration of the Demised Premises.
11.3 The Tenant waives the protection of any statute, code or judicial
decision which shall grant a tenant the right to terminate a lease in the event
of the damage or destruction of the leased property, and the provisions of this
Article 11 shall govern the rights and obligations of the Landlord and the
Tenant in the event of any damage or destruction of or to the Demised Premises.
ARTICLE XII
Condemnation
Section 12.1 If all or a portion of the Demised Premises or the Common
Area shall be taken by eminent domain so that the Tenant cannot reasonably
conduct its operations in the Demised Premises as intended by and in the manner
desired by the Tenant, either the Landlord or the Tenant may terminate this
Lease as of the date the condemning authority takes title or possession, by
delivering notice to the other party within ten (10) days after receipt of
written notice of such taking (or in the absence of such notice, within ten (10)
days after the condemning authority shall take title or possession). If neither
the Landlord nor the Tenant elects to terminate this Lease, this Lease shall
remain in effect as to that portion of the Demised Premises not taken, except
that the Basic Rent shall be reduced in proportion to the reduction in the floor
area of the Demised Premises. If this Lease shall be terminated, any
condemnation award or payment shall be distributed to the Landlord. The Tenant
shall have no claim against the Landlord for the value of the unexpired lease
term or otherwise. The Tenant shall have the right, to the extent that same
shall not diminish the Landlord's award, to make a separate claim against the
condemning authority (but not the Landlord) for such compensation as may be
separately awarded or recoverable by the Tenant.
ARTICLE XIII
Compliance With Laws, Etc.
Section 13.1 The Tenant shall not do or permit anything to be done in the
Demised Premises which shall constitute a public nuisance or which will conflict
with the regulations of the Fire Department or with any insurance policy upon
said improvements or any part thereof. To the extent possible, the Landlord
shall provide the Tenant with prior notice of any such action which will
conflict with any such insurance policy.
Section 13.2 The Tenant shall, at its own expense, obtain all necessary
environmental and operating permits and comply with all requirements of law and
with all ordinances or orders, rules and regulations of any Federal, Arizona,
State, Municipal or other public authority affecting the Demised Premises
including, but not limited to laws, ordinance, orders, rules and regulations
which apply to the interior or exterior of the Demised Premises, the structural
or nonstructural parts thereof which impose any duty arising solely out of the
Tenant's use and occupancy of the Demised Premises, and to make all improvements
and repairs required by such laws, ordinances, orders, rules and regulations
which impose any duty arising solely out of the Tenant's use and occupancy of
the Demised Premises.
Section 13.3 The Landlord agrees that, as of the Commencement Date, the
Building and the Common Areas will comply with all applicable laws, rules,
regulations and ordinances of all federal, state, county and municipal
authorities having jurisdiction thereof, including, without limitation, the
Americans with Disabilities Act, fire, health, and safety laws (individually
called "Law" and collectively called "Laws"), and the Landlord agrees to
promptly correct any infractions of Laws in effect as of the Commencement Date
with respect to the
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Building or Common Areas. The Landlord shall promptly comply with all new Laws
or amendments to Laws to which the Building or the Common Areas may be subject
during the Term, including, without limitation, Laws requiring the making of any
structural repairs, modifications, capital expenditures or improvements. The
Tenant shall promptly comply during the Lease Term with all new Laws and
amendments to Laws which impose any duty arising solely out of the Tenant's use
and occupancy of the Demised Premises and which are applicable to the Demised
Premises' internal improvements that do not comprise part of the Building except
as provided elsewhere in this Lease. The Tenant shall not be responsible for
correcting any condition or violation of Law existing as of the Commencement
Date or which is the Landlord's obligation to correct under the terms of this
Lease. The Tenant shall have the right to protest in a proper legal forum the
application to it of any Laws with which it is required to comply pursuant to
this Lease.
Section 13.4 (A) As used in this Lease, the term "Hazardous Material"
shall mean any flammable items, explosives, radioactive materials, oil,
hazardous or toxic substances, material or waste or related materials, including
any substances defined as or included in the definition of "hazardous
substances", "hazardous wastes", "hazardous materials" or "toxic substances" now
or subsequently regulated under any applicable federal, state or local laws or
regulations, including without limitation petroleum-based products, paints,
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia
compounds and other chemical products, asbestos, PCBs and similar compounds, and
including any different products and materials which are subsequently found to
have adverse effects on the environment or the health and safety of persons. The
Tenant shall not cause or permit any Hazardous Material to be generated,
produced, brought upon, used, stored, treated or disposed of in or about the
Real Property by the Tenant, its agents, employees, contractors, sublessees or
invitees without (i) the prior written consent of the Landlord, and (ii)
complying with all applicable federal, state and local laws or ordinances
pertaining to the transportation, storage, use or disposal of such Hazardous
Materials, including but not limited to obtaining proper permits. The Landlord
shall be entitled to take into account such other factors or facts as the
Landlord may reasonably determine to be relevant in determining whether to grant
or withhold consent to the Tenant's proposed activity with respect to Hazardous
Material. In no event, however, shall the Landlord be required to consent to the
installation or use of any storage tanks on the Real Property. The materials set
forth on attached Exhibit G have been approved by the Landlord and are used in
the ordinary course of the Tenant's business in compliance with all governmental
regulations.
(B) If the Tenant's transportation, storage, use or disposal of
Hazardous Materials on the Real Property results in the contamination of the
soil or surface or ground water or loss or damage to person(s) or property, then
the Tenant agrees to: (a) notify the Landlord immediately of any contamination,
claim of contamination, loss or damage, (b) after consultation with the
Landlord, to the extent required by applicable laws, clean up the contamination
in full compliance with all applicable statutes, regulations and standards and
(c) indemnify, defend and hold the Landlord harmless from and against any
claims, suits, causes of action, costs and fees, including reasonable attorney's
fees and costs, arising from or connected with any such contamination, claim of
contamination, loss or damage. The Tenant agrees to fully cooperate with the
Landlord and provide such documents, affidavits and information as may be
requested by the Landlord (i) to comply with any environmental law, (ii) to
comply with the request of any lender, purchaser or tenant, and/or (iii) for any
other reason deemed necessary by the Landlord in its sole discretion. The Tenant
shall notify the Landlord promptly in the event of any release of any Hazardous
Material at, in, on, under or about the Real Property which is required to be
reported to a governmental authority under any environmental law, will promptly
forward to the Landlord copies of any written notices received by the Tenant
relating to alleged violations of any environmental law and will promptly pay
when due any fine or assessment against the Landlord, the Tenant or the Demised
Premises relating to any violation of an environmental law by the Tenant during
the term of this Lease. If a lien is filed against the Real Property by any
governmental authority resulting from the need to expend or the actual expending
of monies arising from an act or omission, whether intentional or unintentional,
of the Tenant, its agents, employees or invitees, or for which the Tenant is
responsible, resulting in the releasing, spilling, leaking, leaching, pumping,
emitting, pouring, emptying or dumping of any Hazardous Material into the waters
or onto land located within
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or without the State where the Real Property is located, then the Tenant shall,
within thirty (30) days from the date that the Tenant is first given notice that
such lien has been placed against the Real Property (or within such shorter
period of time as may be specified by the Landlord if such governmental
authority has commenced steps to cause the Real Property to be sold pursuant to
such lien), either (i) pay the claim and remove the lien, or (ii) furnish a cash
deposit, bond, or such other security with respect thereto as is satisfactory in
all respects to the Landlord and is sufficient to effect a complete discharge of
such lien on the Real Property. The provisions of this Section 13.4 shall
survive the expiration or earlier termination of this Lease.
ARTICLE XIV
Subordination/Estoppels
Section 14.1 Subject to the following conditions precedent, this Lease is
and shall be subject and subordinate to all present and future first mortgages
or first deeds of trust affecting the Demised Premises; provided: (A) the
Landlord delivers Non-Disturbance Agreements substantially as set forth below or
in such form as is otherwise reasonably acceptable to the Tenant and lender; and
(B) as long as the Tenant is not in default under this Lease beyond the
applicable grace or cure periods, any mortgagee, purchaser or transferee in
foreclosure, or any ground lessor in the event of default under any ground lease
(i) shall honor this Lease in accordance with its terms; (ii) shall not disturb
the Tenant in its possession of the Demised Premises; (iii) shall not name the
Tenant in any foreclosure proceedings; and (iv) shall cause the Landlord's
obligations under this Lease to be performed from and after the date of any such
foreclosure, purchase or transfer. The Landlord shall promptly notify the Tenant
of any mortgage, deed of trust or ground lease on the Building or the Real
Property. Upon request by the Tenant, the Landlord shall deliver a properly
executed, acknowledged Non-Disturbance Agreement to the Tenant in the form set
forth in this Section. The Tenant shall execute any instrument which may be
deemed necessary or desirable by the Landlord to further effect or to evidence
the subordination of this Lease to any such first mortgage or first deed of
trust. The Landlord may assign this Lease to any such first mortgagee or first
trust deed holder in connection with any such lien superior to this Lease, and
the Tenant shall execute, at no expense to the Tenant, any instrument which may
be necessary or desirable by the Landlord or the holder of said lien in
connection with said assignment. Any expense incurred in the preparing,
executing or recording of such assignment to any such holder shall be without
expense or cost to the Tenant.
Section 14.2 The Tenant further agrees, within ten (10) days of the
Landlord's written request, to certify by written instrument duly executed and
acknowledged to any first mortgagee, first trust deed holder or purchaser, or
any proposed first mortgage lender, first trust deed holder or purchaser, that
this Lease is in full force and effect, or if not, in what respect it is not,
that this Lease has not been modified, or the extent to which it has been
modified, that there are no existing defaults hereunder to the best of the
knowledge of the party so certifying, or specifying the defaults, if any, and
any other information which the Landlord shall reasonably require. Any such
certification shall be without prejudice as between the Landlord and the Tenant,
it being agreed that any document required hereunder shall not be used in any
litigation between the Landlord and the Tenant.
Section 14.3 Upon request by the Tenant, the Landlord agrees to provide
to the Tenant, or on behalf of the Tenant, an estoppel form stating that this
Lease is in full force and effect, or if not, in what respect it is not, that
this Lease has not been modified, or to the extent it has been modified, that
there are no exiting defaults hereunder to the best of the knowledge of the
party so certifying, or specifying the defaults, if any, and any other
information which the Tenant shall reasonably require.
ARTICLE XV
Defaults, Remedies
Section 15.1 If, during the Term, any one or more of the following acts or
occurrences (any one of such occurrences or acts being hereinafter called an
Event of Default) shall happen:
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(A) The Tenant shall default in making any payment of Basic Rent or
any Additional Rent as and when the same shall become due and payable, and such
default shall continue for a period of ten (10) days after notice from the
Landlord that such payment is due and unpaid; or
(B) The Tenant shall default in the performance of or compliance
with any of the other covenants, agreements, terms or conditions of this Lease
to be performed by the Tenant (other than any default curable by payment of
money), and such default shall continue for a period of thirty (30) days after
written notice thereof from the Landlord to the Tenant, or, in the case of a
default which cannot with due diligence be cured within thirty (30) days, the
Tenant shall fail to proceed promptly (except for unavoidable delays) after the
giving of such notice and with all due diligence to cure such default and
thereafter to prosecute the curing hereof with all due diligence (it being
intended that as to a default not susceptible of being cured with due diligence
within thirty (30) days, the time within which such default may be cured shall
be extended for such period as may be reasonably necessary to permit the same to
be cured with all due diligence); or
(C) The Tenant or any guarantor of this Lease shall file a voluntary
petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall
file any petition or answer seeking any reorganization, composition,
readjustment or similar relief under any present or future bankruptcy or other
applicable law, or shall seek or consent to or acquiesce in the appointment of
any trustee, receiver, or liquidator of the Tenant or any guarantor of this
Lease or of all or any substantial part of its properties or of all or any part
of the Demised Premises; or
(D) If, within sixty (60) days after the filing of an involuntary
petition in bankruptcy against the Tenant or any guarantor of this Lease, or the
commencement of any proceeding against the Tenant or such guarantor seeking any
reorganization, composition, readjustment or similar relief under any law, such
proceeding shall not have been dismissed, or if, within sixty (60) days after
the appointment, without the consent or acquiescence of the Tenant or such
guarantor, of any trustee, receiver or liquidator of the Tenant or such
guarantor, or of all or any part of the Demised Premises, such appointment shall
not have been vacated or stayed on appeal or otherwise, or if, within sixty (60)
days after the expiration of any such stay, such appointment shall have been
vacated, or if, within sixty (60) days after the taking possession, without the
consent or acquiescence of the Tenant or such guarantor, of the property of the
Tenant, or of such guarantor by any governmental office or agency pursuant to
statutory authority for the dissolution or liquidation of the Tenant or such
guarantor, such taking shall not have been vacated or stayed on appeal or
otherwise; or
(E) If the Demised Premises shall be vacated by the Tenant for a
period of thirty (30) consecutive days; provided, however, that such vacating
shall not be considered an Event of Default so long as the Tenant performs its
obligations under this Lease and pays to the Landlord the cost of any insurance
increases resulting from the vacating of the Demised Premises by the Tenant,
then, and in any such event, and during the continuance thereof, the Landlord
may, at its option, then or thereafter while any such Event of Default shall
continue and notwithstanding the fact that the Landlord may have any other
remedy hereunder or at law or in equity, by notice to the Tenant, designate a
date, not less than ten (10) days after the giving of such notice, on which this
Lease shall terminate; and thereupon, on such date the Term of this Lease and
the estate hereby granted shall expire and terminate upon the date specified in
such notice with the same force and effect as if the date specified in such
notice was the date hereinbefore fixed for the expiration of the Term of this
Lease, and all rights of the Tenant hereunder shall expire and terminate, but
the Tenant shall remain liable as hereinafter provided. Additionally, the Tenant
agrees to pay, as Additional Rent, all reasonable and actual attorney's fees and
other expenses incurred by the Landlord in enforcing any of the obligations
under this Lease, this covenant to survive the expiration or sooner termination
of this Lease.
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Section 15.2 On the occurrence of an Event of Default by the Tenant, the
Landlord may (whether or not this Lease is terminated as provided in Section
15.1) at any time thereafter, with or without notice or demand (except as
expressly provided in this Lease) and without limiting the Landlord in the
exercise of any right or remedy which the Landlord may have:
(A) Following termination, without prejudice to other remedies the
Landlord may have by reason of the Tenant's default or of such termination, the
Landlord may (i) peaceably reenter the Demised Premises upon voluntary surrender
by the Tenant or remove the Tenant therefrom and any other persons occupying the
Demised Premises, using such legal proceedings as may be available; (ii)
repossess the Demised Premises or relet the Demised Premises or any part thereof
for such term (which may be for a term extending beyond the Lease Term), at such
rental and upon such other terms and conditions as the Landlord in the
Landlord's sole discretion shall determine, with the right to make alterations
and repairs to the Demised Premises; and (iii) remove all personal property
therefrom. Following termination, the Landlord shall have all the rights and
remedies of a landlord provided at law and in equity. The amount of damages the
Tenant shall pay to the Landlord following termination shall include all Rent
unpaid up to the termination of this Lease, costs and expenses incurred by the
Landlord due to such Event of Default and, in addition, the Tenant shall pay to
the Landlord as damages, at the election of the Landlord (if the Landlord shall
elect subsection (y) below, it may cease such election at any time), either (x)
the discounted present value (at the then Federal Reserve Bank discount rate) of
the aggregate Rent and other charges due during the period commencing with such
termination and ending on the expiration date of this Lease, or (y) amounts
equal to the Rent and other charges which would have been payable by the Tenant
had this Lease or the Tenant's right to possession not been so terminated,
payable upon the due dates therefor specified herein following such termination
and until the expiration date of this Lease; provided, however, that if the
Landlord shall relet the Demised Premises during such period, the Landlord shall
credit the Tenant with the net rents received by the Landlord from such
reletting, such net rents to be determined by first deducting from the gross
rents as and when received by the Landlord from such reletting the expenses
incurred or paid by the Landlord in terminating this Lease, and the expenses of
reletting, including, without limitation, altering and preparing the Demised
Premises for new tenants, brokers' commissions, legal fees and all other similar
and dissimilar expenses properly chargeable against the Demised Premises and the
rental therefrom, it being understood that any such reletting may be for a
period equal to or shorter or longer than the remaining Lease Term; and
provided, further, that (i) in no event shall the Tenant be entitled to receive
any excess of such net rents over the sums payable by the Tenant to the Landlord
hereunder and (ii) in no event shall the Tenant be entitled in any suit for the
collection of damages pursuant to this subsection (y) to a credit in respect of
any net rents from a reletting except to the extent that such net rents are
actually received by the Landlord prior to the commencement of such suit. If the
Demised Premises or any part thereof should be relet in combination with other
space, then proper apportionment on a square foot area basis shall be made of
the rent received from such reletting and of the expenses of reletting. In
calculating the Rent and other charges under subsection (x) above, there shall
be included, in addition to the Rent other considerations agreed to be paid or
performed by the Tenant, on the assumption that all such considerations would
have remained constant (except as herein otherwise provided) for the balance of
the full Term hereby granted. The Landlord shall use reasonable commercial
efforts to relet the Demised Premises or any part thereof for such rent and on
such terms as it shall determine (including the right to relet the Demised
Premises for a greater or lesser term than the Lease Term, the right to relet
the Demised Premises as part of a larger area and the right to change the
character or use made of the Demised Premises); provided, however, that such
obligation shall not obligate the Landlord to relet such space if favor of other
space available in the Building or other property owned by the Landlord
[business issue]. Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by the Landlord from time to time at its
election, and nothing contained herein shall be deemed to require the Landlord
to postpone suit until the date when the Term of this Lease would have expired
if it had not been terminated hereunder.
(B) Maintain the Tenant's right to possession, in which case this
Lease shall continue in effect whether or not the Tenant has abandoned the
Demised Premises. In such event, the Landlord shall be
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entitled to enforce all of the Landlord's rights and remedies under this Lease,
including the right to recover the rent as it becomes due.
(C) Pursue any other remedy now or hereafter available to the
Landlord under the laws or judicial decisions of the state in which the Property
is located.
Section 15.3 If this Lease provides for a postponement of any Base Rent or
Additional Rent, a period of "free" Rent, reduced Rent, early occupancy, or
other Rent concession, such postponed Rent, "free" Rent, reduced Rent or other
Rent concession shall be referred to herein as the "Abated Rent". The Tenant
shall be credited with having paid all of the Abated Rent on the expiration of
the Lease Term only if the Tenant has fully, faithfully, and punctually
performed all of the Tenant's obligations hereunder, including the payment of
all Rent (other than the Abated Rent) and all other monetary obligations and the
surrender of the Demised Premises in the physical condition required by this
Lease. The Tenant acknowledges that its right to receive credit for the Abated
Rent is absolutely conditioned upon the Tenant's full, faithful and punctual
performance of its obligations under this Lease. If an event of default shall
occur, the Abated Rent shall immediately become due and payable in full and this
Lease shall be enforced as if there were no such Rent abatement or other Rent
concession. In such case Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
15.4 Notwithstanding any other term or provision hereof to the contrary,
this Lease shall terminate on the occurrence of any act which affirms the
Landlord's intention to terminate the Lease as provided in this Article 15
hereof, including the filing of an unlawful detainer action against the Tenant.
On any termination, the Landlord's damages for default shall include all costs
and fees, including reasonable attorneys' fees that the Landlord shall incur in
connection with the filing, commencement, pursuing and/or defending of any
action in any bankruptcy court or other court with respect to the Lease, the
obtaining of relief from any stay in bankruptcy restraining any action to evict
the Tenant; or the pursuing of any action with respect to the Landlord's right
to possession of the Demised Premises. All such damages suffered (apart from
Base Rent and other Rent payable hereunder) shall constitute pecuniary damages
which shall be reimbursed to the Landlord prior to assumption of the Lease by
the Tenant or any successor to the Tenant in any bankruptcy or other
proceedings.
Section 15.5 Except as otherwise expressly provided herein, any and all
rights and remedies which the Landlord may have under this Lease and at law and
equity shall be cumulative and shall not be deemed inconsistent with each other,
and any two or more of all such rights and remedies may be exercised at the same
time to the greatest extent permitted by law.
ARTICLE XVI
Assignment and Sublease
Section 16.1 The Tenant may not mortgage, pledge, hypothecate, assign,
transfer, sublet or otherwise deal with this Lease or the Demised Premises in
any manner except as specifically provided for in this Article XVI.
Section 16.2 In the event that the Tenant desires to sublease the whole or
any portion of the Demised Premises or assign the within Lease to any other
party, the Tenant shall give the Landlord written notice of such desire and
furnish the Landlord with an exact copy of the proposed assignment or sublease
not less than twenty (20) business days prior to the effective date on which the
Tenant desires to make such assignment or sublease and the identity of the
subtenant or assignee. The Tenant shall not submit, nor shall the Landlord
accept, any assignment or sublease for review which has a proposed rent less
than the current market value. The Landlord shall require a Five Hundred Dollar
($500.00) payment to cover its handling charges for each request for consent to
any sublet or assignment prior to its consideration of the same.
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Section 16.3 The Landlord shall have a period of twenty (20) business days
following receipt of the aforementioned notice within which to notify the Tenant
in writing that the Landlord elects either:
(A) to terminate this Lease as to the space so affected as of the
date so specified by the Tenant as above (with the same effect as if such date
was the date fixed herein for the expiration of the Term) in which event the
Tenant will be relieved of all further obligation hereunder as to such space; or
(B) to, upon the execution of the proposed sublease or assignment to
the proposed subtenant or assignee, accept the proposed assignment or sublease
so that such prospective sublessee or assignee shall then become the tenant of
the Landlord hereunder; or
(C) to permit the Tenant to assign or sublet such space, subject,
however, to the Tenant remaining liable for the observance of all of the
covenants and provisions of this Lease, including, but not limited to the
payment of Term Basic Rent reserved herein, through the entire Term of this
Lease. In such event the Tenant and any assignee shall promptly pay to the
Landlord one-half (1/2) of any consideration received for any assignment or
one-half (1/2) of the rent (basic and additional), as and when received in
excess of the rent (basic and additional) required to be paid by the Tenant for
the period affected by said assignment or sublease for the area sublet, computed
on the basis of an average square foot rent for the gross square footage the
Tenant has leased; or
(D) to reasonably refuse to consent to the Tenant's assignment or
sublet and to continue this Lease in full force and effect. The Landlord's
refusal to consent shall not be deemed unreasonable if, by way of example and
not by way of limitation, the proposed assignment or sublet is to any
governmental or quasi-governmental agency or to anyone whose use would impose
abnormal or excessive wear and tear on the Demised Premises or expose the Real
Property, Building, Demised Premises or the environment to risk of disposal or
other release of any Hazardous Substance, or whose use would be more
environmentally sensitive than the use made of the Demised Premises by the
original Tenant under this Lease.
If the Landlord should fail to notify the Tenant in writing of such election
within said twenty (20) business day period, the Landlord shall be deemed to
have elected option (C) above. No future assignment or subletting shall be made
except upon compliance with this Section. Any attempted assignment or sublease
by the Tenant in violation of this Section shall be void. This absolute
prohibition against assigning or subletting except in compliance with this
Section shall include those by operation of law or statute.
Section 16.4 In any event, except as otherwise provided in Section 16.3,
the acceptance by the Landlord of any Basic Rent or Additional Rent from the
assignee or from any of the subtenants or the failure of the Tenant to insist
upon a strict performance of any of the terms, conditions and covenants
herein shall not release the Tenant herein, nor any assignee assuming this
Lease, from any and all of the obligations herein during and for the entire Term
of this Lease.
Section 16.5 Notwithstanding anything contained herein to the contrary,
any sublet or assignment to (A) any successor by merger or other reorganization
or (B) any entity acquiring substantially all the assets of the Tenant or (C)
any entity under common control with the Tenant or (D) an Affiliated Company
shall not require the prior notice or written consent of the Landlord. As used
herein, Affiliated Company shall mean any corporation related to such party as a
parent, subsidiary or brother-sister corporation so that such corporation and
such party or such corporation and such party and other corporations constitute
a controlled group as determined under Section 1563 of the Internal Revenue Code
of 1986, as amended and as elaborated by the Treasury Regulations promulgated
thereunder.
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Section 16.6 If the Tenant is a corporation and if at any time during the
Lease Term the persons owning a majority of its "voting stock" at the time of
the execution of this Lease should cease to own a majority of such voting stock
(except as the result of transfers by bequest or inheritance), the Tenant
covenants to notify the Landlord of any such transfer and such transfer shall be
deemed an assignment of this Lease. In the event of such transfer, the Landlord
shall provide the Tenant with its consent or nonconsent within fifteen (15)
business days of receipt of the Tenant's notice of such transfer, or the
Landlord's consent shall be deemed to have been given. In the event of such
transfer, the Landlord may not unreasonably withhold its consent thereto. This
Section shall not apply whenever the Tenant is a corporation, the outstanding
stock of which is listed on a recognized stock exchange. For the purposes of
this Section 16.6, stock ownership shall be determined in accordance with the
principles set forth in Section 544 of the Internal Revenue Code of 1986, as
amended, to and including the date of this Lease, and the term "voting stock"
shall refer to shares of stock regularly entitled to vote for the election of
directors of the corporation.
ARTICLE XVII
Notices
Section 17.1 All notices, demands, consents, approvals, requests and
instruments or documents by this Lease required or permitted to be given to or
served upon the Landlord or the Tenant shall be in writing. Any such notice,
demand, consent, approval, request, instrument or document shall be sufficiently
given or served only if delivered personally or if sent by a recognized
overnight courier service or if sent by certified or registered mail, postage
prepaid, addressed at the address set forth below, or at such other address as
it shall designate by notice, as follows:
If to the Landlord: CP REPROP Phoenix III Corp
Cabot Partners
Attn: Gene Reilly
Two Center Plaza, Suite 200
Boston, Massachusetts 02108
With Copy to: Mayer, Brown & Platt
Attn: Mary Lemuth
700 Louisiana, Suite 3600
Houston, Texas 77002
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If to the Tenant: Simmons Company
Attn: Roger Franklin
One Concourse Parkway, Suite 600
Atlanta, Georgia 30071
With Copy to: Jones, Day, Reavis & Pogue
Attn: Stephen B. Schrock
3500 One Peachtree Center
303 Peachtree Street, N.E.
Atlanta, Georgia 30303
Any notice so sent shall be deemed given or served upon receipt or
rejection thereof.
ARTICLE XVIII
Holding Over
Section 18.1 If the Tenant shall remain in the Demised Premises after the
expiration of the Term without having executed and delivered a new lease with
the Landlord, such holding over shall not constitute a renewal or extension of
this Lease. The Landlord may, at its option, elect to treat the Tenant as one
who has not removed at the end of its Term, and thereupon be entitled to all the
remedies against the Tenant provided by law in that situation, or the Landlord
may elect, at its option, to construe such holding over as a tenancy from month
to month, subject to all the terms and conditions of this Lease, except as to
duration thereof, and in that event the Tenant shall pay one hundred twenty-five
percent (125%) of the Monthly Basic Rent required to be paid for the last month
of the Term of this Lease, as extended or renewed, plus all Additional Rent, in
advance on the first day of the month, for the first month the Tenant holds
over, and thereafter shall pay one hundred fifty percent (150%) of the Monthly
Basic Rent required to be paid for the last month of the Term of this Lease, as
extended or renewed, plus all Additional Rent, in advance on the first day of
each month until such time as the Tenant surrenders occupancy and delivers
possession to the Landlord. The time limitations described in this Article XVIII
shall not be subject to extension for Force Majeure.
ARTICLE XIX
Liens
Section 19.1 The Tenant shall not do any act, or make any contract, which
may create or be the foundation for any lien or other encumbrance upon any
interest of the Landlord or any ground or underlying lessor in any portion of
the Demised Premises. If, because of any act or omission (or alleged act or
omission) of the Tenant, any Notice of Intention, mechanic's or other lien,
charge, or order for the payment of money or other encumbrance shall be filed
against the Landlord and/or any ground or underlying lessor and/or any portion
of the Demised Premises (whether or not such lien, charge, order, or encumbrance
is valid or enforceable as such), the Tenant shall, at its own cost and expense,
cause same to be discharged of record or bonded within fifteen (15) days after
the filing thereof; and the Tenant shall indemnify and save harmless the
Landlord and all ground and underlying lessor(s) against and from all costs,
liabilities, suits, penalties, claims, and demands, including reasonable counsel
fees, resulting therefrom. If the Tenant fails to comply with the foregoing
provisions, the Landlord shall have the option of discharging or bonding any
such lien, charge, order, or encumbrance, and the Tenant agrees to reimburse the
Landlord for all reasonable actual costs, expenses and other sums of money in
connection therewith (as Additional Rent) with interest at Prime plus four
percent (4%) promptly upon demand. All materialmen, contractors, artisans,
mechanics, laborers, and any other persons now or hereafter contracting with the
Tenant or any contractor or subcontractor of the Tenant for the furnishing of
any labor services, materials, supplies, or equipment with respect to any
portion of the Demised Premises, at any time from the date
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hereof until the end of the Lease Term, are hereby charged with notice that they
look exclusively to the Tenant to obtain payment for same.
ARTICLE XX
Condition of Demised Premises, Loss, Etc.
Section 20.1 Other than as expressly set forth in this Lease, after the
commencement of the Tenant's occupancy, the Landlord shall not be responsible
for the loss of, or damage to, the Tenant's property or that under its care,
custody or control or injury to the Tenant occurring in or about the Demised
Premises or for any business interruption loss, for any reason whatsoever, to
include but not be limited to: any existing or future condition, defect, matter
or thing in the Demised Premises; the acts, omissions or negligence of other
persons or tenants in and about the Demised Premises; theft or burglary from the
Demised Premises; the negligence of the Landlord, its agents, servants or
invitees; and defects, errors or omissions in the construction or design of the
Demised Premises and/or the Building including the structural and nonstructural
portions thereof. The Tenant covenants and agrees to make no claim for any such
loss, damage or injury at any time.
The Landlord represents that it holds record title to the Real Property,
and that no third party has any rights in the Demised Premises. The Landlord
agrees that it shall be responsible for the working condition of the Building
systems and the compliance of the Real Property and the Building with all
applicable governmental laws and regulations. Additionally, subject to matters
disclosed in the Phase I environmental report prepared for the Landlord by Smith
Technology Corporation November, 1996, Project No. 05-7937-82 prior to its
acquisition of the Real Property, which report the Landlord has provided to the
Tenant, to the actual knowledge of the Landlord without any independent
investigation, the Real Property is in compliance with all applicable
environmental regulations currently in effect at the date of execution of this
Lease.
ARTICLE XXI
Inspection, For Sale and For Rent Signs
Section 21.1 Upon prior notice to the Tenant (except in cases of emergency
where damage to life or property is imminent), the Landlord, or its agents,
shall have the right to enter the Demised Premises at reasonable business hours
to examine the same, or to exhibit the Demised Premises to prospective
purchasers and to place upon the Demised Premises a suitable "For Sale" sign,
which sign must be approved by the Tenant, which approval shall not be
unreasonably withheld. For six (6) months prior to the expiration of the Term,
the Landlord, or its agents, may exhibit the Demised Premises to prospective
tenants and may place the usual "To Let" signs thereon.
ARTICLE XXII
Signs
Section 22.1 No sign, advertisement or notice shall be affixed to or
placed upon any part of the Demised Premises by the Tenant, except in such
manner, and of such size, design and color as shall be approved in advance in
writing by the Landlord, which approval the Landlord shall not unreasonably
withhold, provided: (i) that the Tenant comply with all applicable governmental
ordinances and regulations and receives all necessary governmental approvals
required for erection and maintenance of the sign and (ii) no later than the
last day of the Term, the Tenant shall, at the Tenant's expense, remove the sign
and repair all injury done by or in connection with the installation or removal
of the sign.
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ARTICLE XXIII
Advance Rent, Security and Late Charge
Section 23.1 Simultaneously herewith, the Tenant has deposited with the
Landlord the sum of Twenty-Four Thousand Eight Hundred Seventeen Dollars
($24,817.00) as advance Monthly Basic Rent for the fourth month of the Tenant's
rental obligation.
Section 23.2 The Tenant has this day deposited with the Landlord the sum
of Twenty-Five Thousand Dollars ($25,000.00) as security for the full and
faithful performance by the Tenant of all of the terms and conditions upon the
Tenant's part to be performed, which said sum shall be returned to the Tenant
after the time fixed as the expiration of the Term herein, provided the Tenant
has fully and faithfully carried out all of the terms, covenants and conditions
on the Tenant's part to be performed. In the event the Landlord uses any of said
security deposit to cure the Tenant's default(s) or meet any of the Tenant's
obligations, the Tenant covenants to upon demand replace the amount so utilized.
In the event of a bona fide sale, subject to this Lease, the Landlord shall have
the right to transfer the security to the vendee, and the Landlord shall be
considered released by the Tenant from all liability for the return of such
security; and the Tenant agrees to look solely to the new landlord for the
return of the said security, and it is agreed that this shall apply to every
transfer or assignment made of the security to a new landlord. The security
deposited under this shall not be mortgaged, assigned or encumbered by the
Tenant without the written consent of the Landlord. Notwithstanding anything to
the contrary in this paragraph, provided that the Tenant is not in default on
the fifth (5th) anniversary of the Commencement Date, the Landlord shall deliver
to the Tenant any amount of the security deposit still held by the Landlord.
Section 23.3 Anything in this Lease to the contrary notwithstanding, at
the Landlord's option, the Tenant shall pay a "Late Charge" of five percent (5%)
of any installment of Monthly Basic Rent or Additional Rent paid more than ten
(10) days after the due date thereof, to cover the extra expense involved in
handling delinquent payments.
ARTICLE XXIV
Financial Statements
Section 24.1 The Tenant agrees, within ninety (90) days after the end of
the Tenant's accounting year, at the request of the Landlord, or at the request
of the holder of any first mortgage upon the Demised Premises, to furnish to the
Landlord or mortgagee, a certified balance sheet and profit and loss statement
for the last accounting year.
ARTICLE XXV
Broker
Section 25.1 The Tenant represents and warrants to the Landlord that Daum
Commercial Real Estate is the sole broker which advised it of the availability
of the Demised Premises for leasing and is the sole broker which introduced it
to the Landlord, and the Landlord shall pay the commission, if any, which may be
due to said broker. The Landlord and the Tenant agree to indemnify and hold each
other harmless from any and all claims of other brokers and expenses in
connection therewith arising out of or in connection with the negotiation of or
the entering into this Lease by the Landlord and the Tenant, except for any such
claim resulting from the actions of the indemnifying party.
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ARTICLE XXVI
Short Form or Memorandum of Lease
Section 26.1 At the request of either party, the Landlord and the Tenant
will execute and deliver, in duplicate original counterparts, a recordable
memorandum of this Lease identifying the Demised Premises and stating the
commencement and termination dates of the Term of this Lease and any other
information concerning this Lease mutually agreed to by the Landlord and the
Tenant.
ARTICLE XXVII
Waiver of Trial by Jury
Section 27.1 The Landlord and the Tenant waive trial by jury in any
action, proceeding or counterclaim brought by either the Landlord or the Tenant
against the other in any matters whatsoever arising out of or in any way
connected with this Lease, the Tenant's use or occupancy of the Demised
Premises, and/or any claim of injury or damage.
ARTICLE XXVIII
Personal Liability
Section 28.1 Notwithstanding anything to the contrary provided in this
Lease, it is specifically understood and agreed, such agreement being a primary
consideration for the execution of this Lease by the Landlord, that there shall
be absolutely no personal liability on the part of the Landlord, its successors,
assigns or any mortgagee in possession (for the purposes of this Paragraph,
collectively referred to as "Landlord"), with respect to any of the terms,
covenants and conditions of this Lease, and that the Tenant shall look solely to
the equity of the Landlord in the Building for the satisfaction of each and
every remedy of the Tenant in the event of any breach by the Landlord of any of
the terms, covenants and conditions of this Lease to be performed by the
Landlord, such exculpation of liability to be absolute and without any
exceptions whatsoever; provided, however, excepted from such exculpation of
liability are damages or losses suffered by the Tenant resulting from the
commitment of any intentionally fraudulent act by or from the willful misconduct
of the Landlord.
ARTICLE XXIX
Landlord's Retained Rights
Section 29.1 The Landlord hereby reserves to itself, its successors and
assigns, the right to grant, construct, maintain and use ingress and egress
easements, railroad easements, utility easements, drainage easements, across,
through, over and under the Demised Premises, Building and Building Area or to
or from other lands and other portions of the Real Property and to construct and
install pipes and other equipment necessitated thereby, provided, however, that
the same be at the cost of the Landlord and does not unreasonably interfere with
the use of or access to the Demised Premises by the Tenant.
ARTICLE XXX
Definitions
Section 30.1 Common Facilities or Common Area. As used herein, Common
Facilities or Common Area shall include those facilities available to all
Building tenants including by way of example and not by way of limitation, the
parking areas whether assigned or not; the means of ingress and egress from and
over the ground level exterior areas of the Building Area; any sidewalks and
curbs; any landscaped areas; all Building and Building Area facilities or
services that service all Building tenants, including but not limited to
exterior utility lines, roof, roof supports, exterior walls, structural steel,
and exterior lighting; provided, however, that the Tenant's proportional share
of any roof maintenance pass-throughs shall be limited each year to the sum of
Five
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Thousand and No/100 Dollars ($5,000). The Landlord may at any time close
temporarily any Common Facilities to make repairs or changes therein or to
effect construction, repairs or changes therein or to effect construction,
repairs or changes within the Building, or to discourage non-tenant parking, and
may do such other acts in and to the Common Facilities as in its judgment may be
desirable to improve the convenience thereof, provided same does not
unreasonably interfere with the Tenant's use of or access to the Demised
Premises.
Notwithstanding anything to the contrary contained herein, the Landlord
shall be responsible for maintaining the exterior utility lines only beyond the
termination of the municipal utility companies' ownership.
Section 30.2 Proportionate Share. The Tenant's Proportionate Share,
wherever that phrase is used, shall be thirty-seven and one tenth percent
(37.1%), which the parties agree reflects and will be continually adjusted to
reflect the ratio of the gross square feet of the area rented to the Tenant
(including an allocable share of all Common Facilities) (which now is 103,408
gsf) as compared with the total number of gross square feet of the entire
Building measured outside wall to outside wall but excluding therefrom any
storage areas (which is now 279,131 gsf). The Landlord shall have the right to
make changes or revisions in the Common Facilities of the Building so as to
provide additional leasing area. The Tenant understands that as a result of
changes in the layout of the Common Facilities from time to time occurring due
to, by way of example and not by way of limitation, the rearrangement of
corridors, the aggregate of all Building tenant proportionate shares may be
equal to, less than or greater than one hundred percent (100%).
Section 30.3 Force Majeure. Force Majeure shall mean and include those
situations beyond either party's control, including by way of example and not by
way of limitation, acts of God; accidents; repairs; strikes; shortages of labor,
supplies or materials; delays in the issuance of governmental permits or
approvals; inclement weather; or, where applicable, the passage of time while
waiting for an adjustment of insurance proceeds. Any time limits required to be
met by either party hereunder, whether specifically made subject to Force
Majeure or not, except those related to the payment of Term Basic Rent or
Additional Rent and except as to the time periods set forth in Article XVIII,
shall, unless specifically stated to the contrary elsewhere in this Lease, be
automatically extended by the number of days by which any performance called for
is delayed due to Force Majeure.
Section 30.4 Additional Rent. Additional Rent shall mean all sums in
addition to Term Basic Rent payable by the Tenant to the Landlord pursuant to
the provisions of this Lease.
ARTICLE XXXI
Miscellaneous
Section 31.1 Partial Invalidity. If any term or provision of this Lease or
the application thereof to any party or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Lease or the application of such
term or provision to parties or circumstances other than those to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and enforced to the fullest extent
permitted by law.
Section 31.2 Waivers. One or more waivers by either party of the
obligation of the other to perform any covenant or condition shall not be
construed as a waiver of a subsequent breach of the same or any other covenant
or condition.
The receipt of Basic Rent or Additional Rent by the Landlord, with
knowledge of any breach of this Lease by the Tenant or of any default on the
part of the Tenant in the observance or performance of any of the conditions or
covenants of this Lease, shall not be deemed to be a waiver of any provision of
this Lease. Neither acceptance of the keys nor any other act or thing done by
the Landlord or any agent or employee during the Term
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herein demised shall be deemed to be an acceptance of a surrender of said
Demised Premises, excepting only an agreement in writing signed by the Landlord
accepting or agreeing to accept such a surrender.
Section 31.3 Number, Gender. Wherever herein the singular number is used,
the same shall include the plural, and the masculine gender shall include the
feminine and neuter genders.
Section 31.4 Successors, Assigns. The terms, covenants and conditions
herein contained shall be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
Section 31.5 Headings. The Article and marginal headings herein are
intended for convenience in finding the subject matters, are not to be taken as
part of this Lease and are not to be used in determining the intent of the
parties to this Lease.
Section 31.6 Entire Agreement. This instrument contains the entire and
only agreement between the parties and no oral statements or representations or
prior written matter not contained in this instrument shall have any force or
effect. This Lease shall not be modified in any way or terminated except by a
writing executed by both parties.
Section 31.7 Landlord. The term "Landlord" as used in this Lease means
only the holder, for the time being, of the Landlord's interest under this Lease
so that in the event of any transfer of title to the Demised Premises the
Landlord shall be and hereby is entirely freed and relieved of all obligations
of the Landlord hereunder accruing after such transfer, and it shall be deemed
without further agreement between the parties that such grantee, transferee or
assignee has assumed and agreed to observe and perform all obligations of the
Landlord hereunder arising during the period it is the holder of the Landlord's
interest hereunder.
Section 31.8 Words of Duty. Whenever in this Lease any words of obligation
or duty are used, such words or expressions shall have the same force and effect
as though made in the form of covenants.
Section 31.9 Cumulative Remedies. The specified remedies to which the
Landlord or the Tenant may resort under the terms of this Lease are cumulative
and are not intended to be exclusive of any other remedies or means of redress
to which the Landlord or the Tenant may lawfully be entitled in case of any
breach or threatened breach of any provision of this Lease.
Section 31.10 No Option. The submission of this Lease Agreement for
examination does not constitute a reservation of, or option for, the Demised
Premises, and this Lease Agreement becomes effective as a Lease Agreement only
upon execution and delivery thereof by the Landlord and the Tenant.
Section 31.11 Accord and Satisfaction. No payment by the Tenant or receipt
by the Landlord of a lesser amount than the Basic Rent and additional charges
payable hereunder shall be deemed to be other than a payment on account of the
earliest stipulated Monthly Basic Rent and Additional Rent, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment for Basic Rent or Additional Rent be deemed an accord and satisfaction,
and the Landlord may accept such check or payment without prejudice to the
Landlord's right to recover the balance of such Basic Rent and Additional Rent
or pursue any other remedy provided herein or by law.
Section 31.12 Tenant's Corporate Authority. If the Tenant is a
corporation, the Tenant represents and warrants that this Lease and the
undersigned's execution of this Lease has been duly authorized and approved by
the corporation's Board of Directors. The undersigned officers and
representatives of the corporation executing this Lease on behalf of the
corporation represent and warrant that they are officers of the corporation with
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authority to execute this Lease on behalf of the corporation, and within fifteen
(15) days of execution hereof, the Tenant will provide the Landlord with a
corporate resolution confirming the aforesaid.
Section 31.13 Landlord's Corporate Authority. If the Landlord is a
corporation, the Landlord represents and warrants that this Lease and the
undersigned's execution of this Lease has been duly authorized and approved by
the corporation's Board of Directors. The undersigned officers and
representatives of the corporation executing this Lease on behalf of the
corporation represent and warrant that they are officers of the corporation with
authority to execute this Lease on behalf of the corporation, and within fifteen
(15) days of execution hereof, the Landlord will provide the Tenant with a
corporate resolution confirming the aforesaid.
Section 31.14 Applicable Law. This Lease shall be interpreted and
construed in accordance with the laws of the State of Arizona (excluding Arizona
conflict of laws) and by the state courts of Arizona.
Section 31.15 Compliance with Rules and Regulations. The Tenant shall
observe and comply with the rules and regulations hereinafter set forth in
Exhibit H attached hereto and made a part hereof and with such further
reasonable rules and regulations as the Landlord may prescribe, on written
notice to the Tenant, for the safety, care and cleanliness of the Building and
Common Area and the comfort, quiet and convenience of other occupants of the
Building provided that such rules and regulations are uniformly enforced by the
Landlord in a non-discriminatory manner as to all tenants.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals the day and year first above written.
CP REPROP PHOENIX III CORP.,
Landlord
By:___________________________
Its________________________
SIMMONS COMPANY,
Tenant
By:___________________________
Its________________________
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EXHIBIT C - RIGHT TO EXTEND TERM
(a) Provided that as of the time of the giving of the Extension Notice and
the Commencement Date of the Extension Term, (x) the Tenant is the Tenant
originally named herein (or a permitted assignee of the Tenant under this
Lease), (y) the Tenant (or a permitted assignee of the Tenant under the Lease)
actually occupies all of the Demised Premises initially demised under this Lease
and any space added to the Demised Premises, and (z) no Event of Default exists
(including the passage of any applicable curative period, if any), then the
Tenant shall have the right to extend the Lease Term for an additional term of
sixty (60) months (such additional term is hereinafter called the "Extension
Term") commencing on the day following the expiration of the Lease Term
(hereinafter referred to as the "Commencement Date of the Extension Term"). The
Tenant shall send the Landlord written notice (hereinafter called the "Extension
Notice") of its election to extend the term of the Lease Term at least nine (9)
months prior to the scheduled expiration date of the Lease Term.
(b) The Basic Rent payable by the Tenant to the Landlord during the
Extension Term shall be equal to the Market Rate (hereinafter defined) as of the
first day of the Extension Term. Within fifteen (15) days after receipt of the
Extension Notice for the extension, the Landlord shall determine and send the
Tenant written notice of the Landlord's good faith estimate of prevailing market
rents for space similar to the Demised Premises for a term similar to the
Extension Term with comparable terms and conditions. The Tenant shall then have
a period of fifteen (15) days within which to in good faith accept or reject in
writing the Landlord's estimate of prevailing market rents. Failure of the
Tenant to send such notice shall be deemed an approval by the Tenant of the
Landlord's estimate. If the Tenant timely notifies the Landlord that the Tenant
in good faith rejects the Landlord's estimate, the Landlord and the Tenant shall
endeavor for a period of fifteen (15) days to reach agreement on prevailing
market rents. If the Landlord and the Tenant are unable to reach agreement on
prevailing market rents within such fifteen (15) day period, the determination
of prevailing market rents shall be resolved by binding arbitration as provided
below. The Landlord's estimate of prevailing market rents, if accepted (or
deemed accepted) by the Tenant as above provided, or prevailing market rents as
determined either by the Landlord and the Tenant jointly, or by binding
arbitration pursuant to this Exhibit C, shall be herein referred to as the
"Market Rent."
(c) If pursuant to the foregoing provisions of this Exhibit C the
determination of prevailing market rents is to be resolved by binding
arbitration, such arbitration shall be conducted in accordance with the terms of
this paragraph. The Landlord and the Tenant shall each select a competent,
qualified arbitrator who shall be an M.A.I. appraiser and, if such arbitrators
are unable to reach agreement within fifteen (15) days, the first two
arbitrators shall: (i) if the recommendations as to the prevailing market rent
of the two arbitrators are amounts within ten percent (10%) of the other, add
the two recommendations and divide by two to get a binding determination or (ii)
if the recommendations are not within ten percent (10%) of the other, appoint a
third arbitrator who shall be an M.A.I. appraiser (or if they are unable to
agree upon a third arbitrator, either may apply to the Chief Judge of the
applicable United States District Court, and such judge shall appoint the third
arbitrator). Within ten (10) days after his appointment, the third arbitrator
shall consult with the first two arbitrators and the third arbitrator shall
choose, as a final resolution of such dispute, the recommendation of one of the
first two arbitrators, without modification, as such third arbitrator may deem
most appropriate under all of the circumstances. The decision of the third
arbitrator shall be binding on the Landlord and the Tenant. All fees and
expenses of the arbitration shall be divided equally.
(d) The determination of Basic Rent does not reduce the Tenant's
obligation to pay or reimburse the Landlord for Additional Rent and other
reimbursable items as set forth in this Lease, and the Tenant shall reimburse
and pay the Landlord as set forth in this Lease with respect to such Additional
Rent and other items with respect to the Demised Premises during the Extension
Term.
28
<PAGE> 33
(e) Except for the Basis Rent as determined above, the Tenant's occupancy
of the Demised Premises during the Extension Term shall be on the same terms and
conditions as are in effect immediately prior to the expiration of the initial
Lease Term; provided, however, the Tenant shall have no further right to any
allowances, credits or abatements or any options to expand, contract, renew or
extend the Lease.
(f) If the Tenant does not send the Extension Notice within the period set
forth in paragraph (a) above, the Tenant's right to extend the Lease Term for
the Extension Term shall automatically terminate. Time is of the essence as to
the sending of the Extension Notice.
(g) The Landlord shall have no obligation to refurbish or otherwise
improve the Demised Premises for the Extension Term. The Premises shall be
tendered on the Commencement Date of the Extension Term in their then "as-is"
condition.
(h) If the Lease is extended for the Extension Term, then the Landlord
shall prepare and the Tenant shall execute an amendment to the Lease confirming
the extension of the Lease Term and the other provisions applicable thereto (the
"Amendment").
(i) If the Tenant exercises its right to extend the term of the Lease for
the Extension Term pursuant to this Exhibit C, the term "Lease Term" as used in
the Lease, shall be construed to include, to the extent applicable, the
Extension Term, as applicable, except as provided in (e) above.
29
<PAGE> 34
EXHIBIT D
RIGHT OF FIRST REFUSAL
(a) "Offered Space" shall mean any space contiguous to the Demised Premises
located within the Building.
(b) Provided that as of the date of the giving of the Landlord's Notice,
(x) the Tenant is the Tenant originally named herein (or a permitted assignee of
the Tenant under the Lease), (y) the Tenant actually occupies all of the Demised
Premises originally demised under this Lease and any premises added to the
Demised Premises, and (z) no Event of Default exists (including the passage of
any applicable curative period, if any), if at any time during the Lease Term
any lease for any portion of the Offered Space shall expire and if the Landlord
intends to enter into a lease (the "Proposed Lease") for such portion of the
Offered Space with anyone (a "Proposed Tenant") other than the tenant then
occupying such space (or its affiliates) or a tenant who, as of the date of this
Lease, is currently a tenant of the Property, the Landlord shall first offer to
the Tenant the right to lease such portion of the Offered Space upon all the
terms and conditions of the Proposed Lease.
(c) Such offer shall be made by the Landlord to the Tenant in a written
notice (hereinafter called the "Offer Notice") which offer shall designate the
space being offered and shall specify the terms for such portion of the Offered
Space which shall be the same as those set forth in the Proposed Lease. The
Tenant may accept the offer set forth in the Offer Notice by delivering to the
Landlord an unconditional acceptance (hereinafter called "Tenant's Notice") of
such offer within 5 business days after delivery by the Landlord of the Offer
Notice to the Tenant. Time shall be of the essence with respect to the giving of
Tenant's Notice. If the Tenant does not accept (or fails to timely accept) an
offer made by the Landlord pursuant to the provisions of this Exhibit with
respect to such portion of the Offered Space designated in the Offer Notice, the
Landlord shall remain obligated with respect to such space by reason of this
Exhibit only if the Proposed Lease is not entered into between the Landlord and
Proposed Tenant. In order to send the Offer Notice, the Landlord does not need
to have negotiated a complete lease with the Proposed Tenant but may merely have
agreed upon the material economic terms for the Proposed Lease, and the Tenant
must make its decision with respect to that portion of the Offered Space covered
by the Proposed Lease as long as it has received a description of such material
economic terms.
(d) The Tenant must accept all Offered Space offered by the Landlord at
any one time if it desires to accept any of such Offered Space and may not
exercise its right with respect to only part of such space. In addition, if the
Landlord desires to lease more than just the Offered Space to one tenant, the
Landlord may offer to the Tenant pursuant to the terms hereof all such space
which the Landlord desires to lease, and the Tenant must exercise its rights
hereunder with respect to all such space and may not insist on receiving an
offer for just the Offered Space.
30
<PAGE> 35
EXHIBIT E
PLANS AND SPECIFICATIONS
Those plans prepared by McCall & Tang architects and planners, Inc., Job #
9703, Plan dated February 7, 1997.
31
<PAGE> 36
EXHIBIT F
INTENTIONALLY DELETED
32
<PAGE> 37
EXHIBIT G
APPROVED MATERIALS
33
<PAGE> 38
EXHIBIT H - RULES AND REGULATIONS
1. No advertisements, pictures or signs of any sort shall be displayed on or
outside the Demised Premises without the prior written consent of the
Landlord. This prohibition shall include any portable signs or vehicles
placed within the parking lot, common areas or on streets adjacent thereto
for the purpose of advertising or display. The Landlord shall have the
right to remove any such unapproved item without notice and at the
Tenant's expense.
2. The Tenant shall not park or store motor vehicles, trailers or containers
outside the Demised Premises after the conclusion of normal daily business
activity except in approved areas specifically designated by the Landlord,
acting reasonably.
3. The Tenant shall not use any method of heating or air-conditioning other
than that supplied by the Landlord without the prior written consent of
the Landlord.
4. All window coverings and window films or coatings installed by the Tenant
and visible from outside of the building require the prior written
approval of the Landlord. Except for dock shelters and seals as may be
expressly permitted by the Landlord, no awnings or other projections shall
be attached to the outside walls of the building.
5. The Tenant shall use, keep or permit to be used or kept any foul or
noxious gas or substance on, in or around the Demised Premises unless
approved by the Landlord. The Tenant shall not use, keep or permit to be
used or kept any flammable or combustible materials without proper
governmental permits and approvals.
6. The Tenant shall not use, keep or permit to be used or kept food or other
edible materials in or around the Demised Premises in such a manner as to
attract rodents, vermin or other pests. The Tenant shall not permit
cooking in or about the Demised Premises other than in microwave ovens.
7. The Tenant shall not use or permit the use of the Demised Premises for
lodging or sleeping, for public assembly, or for any illegal or immoral
purpose.
8. The Tenant shall park motor vehicles only in those parking areas
designated for use by the Tenant on Exhibit B except for active loading
and unloading. During loading and unloading of vehicles or containers, the
Tenant shall not unreasonably interfere with traffic flow within the
industrial park and loading and unloading areas of other tenants.
9. Storage of propane tanks, whether interior or exterior, shall be in secure
and protected storage enclosures approved by the local fire department
and, if exterior, shall be located in areas specifically designated by the
Landlord. Safety equipment, including eye wash stations and approved
neutralizing agents, shall be provided in areas used for the maintenance
and charging of lead-acid batteries. The Tenant shall protect electrical
panels and building mechanical equipment from damage from forklift trucks.
10. The Tenant shall not disturb, solicit or canvas any occupant of the
Building or industrial park and shall cooperate to prevent same.
11. No person shall go on the roof of the Building without the Landlord's
permission except to perform obligations under its lease.
34
<PAGE> 39
12. No animals (other than seeing eye dogs) or birds of any kind may be
brought into or kept in or about the Demised Premises.
13. Machinery, equipment and apparatus belonging to the Tenant which cause
noise or vibration that may be transmitted to the structure of the
Building to such a degree as to be reasonably objectionable to the
Landlord or other tenants or to cause harm to the Building shall be placed
and maintained by the Tenant, at the Tenant's expense, on vibration
eliminators or other devices sufficient to eliminate the transmission of
such noise and vibration. The Tenant shall cease using any such machinery
which causes reasonably objectionable noise and vibration which can not be
sufficiently mitigated.
14. All goods, including material used to store goods, delivered to the
Demised Premises of the Tenant shall be immediately moved into the Demised
Premises and shall not be left in parking or exterior loading areas
overnight.
15. Tractor trailers which must be unhooked or parked with dolly wheels beyond
the concrete loading areas must use steel plates or wood blocks of
sufficient size to prevent damage to the asphalt paving surfaces. No
parking or storing of such trailers will be permitted in the auto parking
areas of the industrial park or on streets adjacent thereto.
16. Forklifts which operate on asphalt paving areas shall not have solid
rubber tires and shall use only tires that do not damage the asphalt.
17. The Tenant shall be responsible for the safe storage and removal of all
pallets. Pallets shall be stored behind screened enclosures at locations
approved by the Landlord.
18. The Tenant shall be responsible for the safe storage and removal of all
trash and refuse. All such trash and refuse shall be contained in suitable
receptacles stored behind screened enclosures at locations approved by the
Landlord. The Landlord reserves the right to remove, at the Tenant's
expense and without further notice, any trash or refuse left elsewhere
outside of the Demised Premises or in the industrial park.
19. The Tenant shall not store or permit the storage or placement of goods or
merchandise in or around the common areas surrounding the Demised
Premises. No displays or sales of merchandise shall be allowed in the
parking lots or other common areas.
20. The Tenant shall appoint an Emergency Coordinator who shall be responsible
for assuring notification of the local fire department in the event of an
emergency, assuring that sprinkler valves are kept open and implementing
the Factory Mutual "Red Tag Alert" system including weekly visual
inspection of all sprinkler system valves on or within the Demised
Premises.
35
<PAGE> 1
EXHIBIT 10.4
EMPLOYEE STOCK OWNERSHIP PLAN
TRUST AGREEMENT
Between
SIMMONS COMPANY
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
RECITALS 1
ARTICLE I DEFINITIONS 2
ARTICLE II ESTABLISHMENT OF THE TRUST 3
ARTICLE II POWERS OF TRUSTEE 5
ARTICLE III ADMINISTRATION 14
ARTICLE V PAYMENTS OF BENEFITS AND EXPENSES 15
ARTICLE VI LIABILITY AND INDEMNIFICATION
OF THE TRUSTEE 18
ARTICLE VII ACCOUNTING OF THE TRUSTEE 20
ARTICLE VIII REMOVAL AND RESIGNATION OF THE TRUSTEE 23
ARTICLE IX AMENDMENT AND TERMINATION 24
ARTICLE X LEVERAGED ACQUISITIONS OF QUALIFYING STOCK 25
ARTICLE XI MISCELLANEOUS 27
</TABLE>
<PAGE> 3
EMPLOYEE STOCK OWNERSHIP PLAN
TRUST AGREEMENT
THIS AGREEMENT has been made as of the second day of September, 1997,
between Simmons Company, a corporation organized under the laws of the State of
Delaware with its principal place of business in Atlanta, Georgia (hereinafter
referred to as the "Company") and State Street Bank and Trust Company, a
Massachusetts trust company with its principal place of business at 225 Franklin
Street, Boston, Massachusetts (hereinafter referred to as the "Trustee").
RECITALS
WHEREAS, the Company has adopted the Employee Stock Ownership Plan (the
"Plan") effective January 31, 1988 for the benefit of certain employees of the
Company and its affiliates; and
WHEREAS, the Plan provides for the establishment of a trust (the
"Trust") to hold, invest and administer amounts contributed under the Plan; and
WHEREAS, in order to effectuate the Plan, the Company has previously
established a Trust, designed to meet the applicable requirement of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"), and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and desires for the
Trustee to serve as successor Trustee thereof; and
WHEREAS, the Plan is intended to qualify as a stock bonus plan under
Section 401(a) of the Internal Revenue Code and a leveraged employee stock
ownership plan under Section 4975(e)(7) of the Internal Revenue Code and to meet
the requirements of Section 4975(d)(3) of the Internal Revenue
<PAGE> 4
Code; and the Trust is intended to be exempt from federal income taxation under
Section 501(a) and the Internal Revenue Code; and
WHEREAS, the authority to manage and control the operation and
administration of the Plan is vested in the Company's Pension Committee, as
named fiduciary as provided in the Plan, which named fiduciary shall have such
authorities and shall be subject to such duties with respect to the Trust as are
specified in this Agreement; and
WHEREAS, cash, property and/or Stock (as hereinafter defined) will from
time to time be contributed to or purchased by the Trustee, which assets, as and
when received by the Trustee, will constitute a trust fund to be held for the
exclusive benefit of the participating employees under the Plan or their
beneficiaries and to defray reasonable expenses of administering the Plan; and
WHEREAS, the Company desires the Trustee to hold and administer such
trust fund and the Trustee is willing to hold and administer such trust fund
pursuant to the terms of this Agreement:
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, and intending to be legally bound hereby, the
Company and the Trustee do hereby covenant and agree as follows:
ARTICLE I
DEFINITIONS
Definitions. The following terms as used in this Agreement have the
meaning indicated unless the context requires otherwise:
1.1 "Board" means the Board of Directors of the Company.
<PAGE> 5
1.2 "Committee" means the Pension Committee designated in accordance
with the terms of the Plan.
1.3 "Company" means Simmons Company or any successor thereto.
1.4 "ERISA" means the Employee Retirement Income Security Act of 1974,
as it has been and may be amended from time to time.
1.5 "Fund" means the contributions of cash or property reasonably
acceptable to the Trustee, including, but not limited to, Stock deposited with
or purchased by the Trustee and held under this Trust by the Trustee, any
property into which the same or any part thereof may from time to time be
converted, and any appreciation therein or income thereon less any depreciation
therein, any losses thereon and any distributions or payments therefrom.
1.6 "Internal Revenue Code" means the Internal Revenue Code of 1986, as
it has been and may be amended from time to time.
1.7 "Loan" means any (i) loan to the Trust or any purchase money Note
issued by the Trust meeting the requirements of Treasury Regulation Section
54.4975-7(b) (1) (iii).
1.8 "Participant" means an employee of the Company or any affiliated
company who has an account balance under the Plan.
1.9 "Prohibited Transaction" means a prohibited transaction under
Sections 406 of ERISA and/or Section 4975(c)(1) of the Internal Revenue Code
which is not exempt under Section 408. of ERISA or Sections 4975(c)(2) or
4975(d) of the Internal Revenue Code, as the case may be.
<PAGE> 6
1.10 "Stock" means shares of stock, common or preferred, issued by the
Company (or a corporation which is a member of the same controlled group) which
meet the requirements of Section 409(l) of the Internal Revenue Code.
ARTICLE II
ESTABLISHMENT OF THE TRUST
2.1 The Company hereby appoints the Trustee as a successor Trustee of a
trust for the purpose of holding and administering the Fund in accordance with
this Agreement. The assets delivered to the Trustee are identified on Schedule A
attached to this Agreement.
2.2 Notwithstanding anything to the contrary in this Agreement, or in
any amendment thereto, except as otherwise provided under ERISA, the Company,
the Committee and the Trustee shall discharge their respective duties with
respect to the Fund for, and the Fund shall be used solely for and not diverted
from, the exclusive purposes of providing benefits for Participants and their
beneficiaries and defraying reasonable expenses of administering the Plan.
Notwithstanding the preceding sentence, however, contributions may be returned
by the Trustee to the Company at the direction of the Committee if the Committee
certifies in writing to the Trustee that one or more of the following
circumstances exist:
2.2.1 if a contribution is made by the Company by reason of a mistake of fact,
the contribution or the then current value thereof, if less, may be returned to
the Company without interest within one year after it was paid to the Trustee;
2.2.2 if a contribution is conditioned upon its deductibility under Section 404
of the Internal Revenue Code, the contribution or the then current value
thereof, if less, to the extent the deduction is disallowed by the Internal
Revenue Service, may be returned to the Company without interest within one year
after the disallowance; and
<PAGE> 7
2.2.3 if a contribution is conditioned upon initial qualification of the Plan
under Sections 401, 409 and 4975(e)(7) of the Internal Revenue Code, the
contribution or the then current value thereof, if less, may be returned to the
Company without interest within one year after such qualification has been
denied.
2.3 The Trustee shall receive any contributions paid to it in cash, in
Stock or in other property acceptable to it. All contributions so received,
together with the income therefrom and any other increment thereon, shall be
held, managed and administered by the Trustee pursuant to the terms of this
Agreement without distinction between principal and income and without liability
for the payment of interest thereon. The Trustee shall not be responsible for
the collection of any contributions to the Plan, or for the determination of the
amount or frequency of any contribution required by the Plan or the provisions
of the Internal Revenue Code or ERISA, which responsibilities shall be borne
solely by the Committee.
ARTICLE III
POWERS OF TRUSTEE
3.1 The Trustee shall maintain books of account and records with
respect to the Fund. The Fund shall be held by the Trustee in trust and dealt
with in accordance with the provisions of this Agreement. The Trustee shall take
all action necessary to implement any written directions received from the
Committee and shall conform to procedures established by the Committee for
disbursement of funds in accordance with the terms of the Plan.
3.2 It shall be the duty of the Trustee (a) to hold, invest and
reinvest the Fund in accordance with the provisions of this Agreement and the
Plan, and (b) to pay moneys therefrom in accordance with the written directions
of the Committee.
<PAGE> 8
3.3 Subject to Paragraph 3.9, at the direction of the Committee, the
Trustee shall invest the assets of the Fund primarily in Stock. To the extent
that Company contributions are made in Stock, the Trustee shall retain such
Stock unless otherwise directed by the Committee. To the extent Company
contributions are made in cash and are not used to pay principal or interest on
a Loan pursuant to Article X or to pay expenses of the Fund, the Trustee shall,
at the direction of the Committee, acquire Stock either from other shareholders
or directly from the Company. If at the time Stock is to be purchased, the
Company has outstanding more than one class of Stock, the Committee shall direct
the Trustee as to which class of Stock shall be purchased. The Trustee may rely
in good faith without liability upon the valuation of Stock as determined by the
Committee. The Trustee may also, at the direction of the Committee, invest the
Fund in temporary investments other than Stock, may hold such portion of the
Fund in such investments as may be required under the investment diversification
provision of the Plan, and hold such portion of the Fund uninvested as the
Committee deems advisable for making distributions under the Plan, may invest
assets of the Fund in short-term investments bearing a reasonable rate of
interest, including without limitation, deposits in, or short-term instruments
of, the Trustee, or in one or more short-term collective investment funds
administered by the Trustee as trustee thereof for the collective investment of
assets of employee pension or profit-sharing trusts, as long as each such
collective investment fund constitutes a qualified trust under the applicable
provisions of the Internal Revenue Code (and while any portion of the Fund is so
invested, such collective investment funds shall constitute part of the Plan to
the extent of such investment, and the instrument creating such funds shall
constitute part of this Agreement).
<PAGE> 9
3.4 The Trustee shall have no duty hereunder to determine or inquire
into whether any directions received from the Committee in accordance with the
terms of this Agreement represent proper and lawful decisions or result in
Prohibited Transactions. The Trustee shall have no duty to review any investment
to be acquired, held or disposed of pursuant to such instructions from the
Committee. If the Trustee does not receive written directions with respect to
any part of the Fund subject to the Committee's direction (including, without
limitation, income, sales proceeds or contributions), the Trustee shall, pending
receipt of such directions, hold and invest such amount in short-term securities
as provided in Paragraph 3.3 hereof.
3.5 In addition to, and not in limitation of, the powers now, or which
may later become, vested in it, the Trustee shall have the following powers;
provided, however, that the Trustee's exercise of such powers shall be
consistent with and subject to all other provisions of this Agreement, and
provided further that subject to the provisions of Paragraph 3.6 and 3.7 the
powers set forth in Paragraphs 3.5.1, 3.5.2, 3.5.3, 3.5.4 and 3.5.10 shall be
exercised by the Trustee only to the extent and in the manner directed by the
Committee in accordance with the terms of this Agreement, except as otherwise
required by ERISA:
3.5.1 Subject to the provisions of Paragraph 3.7, to sell, exchange, convey,
transfer, dispose of, grant options with respect to and otherwise deal with any
property at any time held by it,
3.5.2 Subject to the provisions of Paragraph 3.6, to exercise voting rights
either in person or by proxy, with respect to any securities or other property,
and generally to exercise with respect to the Fund all rights, powers and
privileges as may be lawfully exercised by any person owning similar property in
his own right;
3.5.3 Subject to the provisions of Paragraph 3.6 and 3.7, to exercise any
options, conversion rights, put rights or rights to subscribe for additional
stocks, bonds or other securities appurtenant to any securities
<PAGE> 10
or other property held by it, and to make any necessary payments in connection
with such exercise; and to join in, dissent from, and oppose the reorganization,
consolidation, recapitalization, liquidation, merger or sale of corporate
property with respect to any corporations or property in which it may be
interested as Trustee;
3.5.4 To compromise, compound, and settle any debt or obligation owing to or
from it as Trustee; and to reduce or increase the rate of interest on, extend or
otherwise modify, foreclose upon default, or otherwise enforce any such
obligation;
3.5.5 To sue or defend suits or legal proceedings to enforce or protect any
interest of the Trust; and to represent the Trust in all suits or legal
proceedings in any court or before any other administrative agency, body or
tribunal; provided that the Trustee is indemnified to the Trustee's satisfaction
against liability and expenses;
3.5.6 To hold any property at any place, except that it shall not maintain the
indicia of ownership of any assets of the Fund outside the jurisdiction of the
district courts of the United States except as permitted by regulations issued
by the Secretary of Labor of the United States under ERISA, Section 404(b);
3.5.7 To make, execute, acknowledge and deliver assignments, agreements and
other instruments;
3.5.8 To register any securities held by it hereunder in its own name or in the
name of a nominee with or without the addition of words indicating that such
securities are held in a fiduciary capacity, to permit securities or other
property to be held by or in the name of others, to hold any securities in
bearer form and to deposit any securities or other property in a depository,
clearing corporation or similar corporation, either domestic or foreign;
provided, however, that the records of the Trustee shall at all times show that
any such property held or registered in the name of another is part of the Fund;
3.5.9 To employ legal counsel, brokers and other advisors, agents or employees
to perform services for the Fund or to advise it with respect to its duties and
obligations under this Agreement and in connection with the Trust, and to pay
them from the Fund, to the extent not paid directly by the Company, such
compensation as it deems appropriate;
3.5.10 In accordance with the applicable provisions of the Plan and subject to
Paragraph 3.9, to borrow money from any lender in such amounts upon such terms
and conditions as shall be deemed advisable or proper to carry out the purposes
of the Trust, and for any sum so borrowed, to issue its promissory note as
Trustee, to pledge any securities or other property of the Fund for the
repayment of such loan and to repay from time to time the principal and interest
on, and to take any other action with respect to, such loan, all as directed by
the Committee; provided that if such loan is from, or guaranteed by, a "party in
interest" within the meaning of Section 3(14) of ERISA, the requirements of
Article X shall be satisfied;
3.5.11 In accordance with the applicable provisions of the Plan and subject to
Paragraph 3.9, to issue a promissory note or notes in payment for the
acquisition of Stock and with respect to any such note or
<PAGE> 11
notes to pledge any Stock acquired therewith as collateral for the note or
notes, and to pay from time to time the principal and interest on, and to take
any other appropriate and necessary action with respect to such note; provided
that if such note is payable to, or guaranteed by, a "party in interest" within
the meaning of Section 3(14) of ERISA, the requirements of Article X shall be
satisfied; and
3.5.12 To open and make use of banking accounts including checking accounts,
which accounts, if bearing a reasonable rate of interest or if checking
accounts, may be with the Trustee.
3.5.13 To perform all acts which the Trustee shall deem necessary or appropriate
and exercise any and all powers and authority of the Trustee under this
Agreement.
3.6 Each Participant (or beneficiary of a deceased Participant) to
whose account shares of voting Stock have been allocated shall, as a named
fiduciary within the meaning of Section 403(a)(1) of ERISA and in accordance
with the procedures hereinafter set forth, direct the Trustee with respect to
the votes of the shares of such Stock allocated to his or her account, and the
Trustee shall follow the directions of those Participants (and beneficiaries)
who provide timely instructions to the Trustee. Except as otherwise required by
ERISA, the Trustee shall have the authority to vote that portion of the shares
of voting Stock that have not been allocated to any Participant's (or
beneficiary's) account or for which no instructions were timely received by the
Trustee, whether or not allocated to the account of any Participant (or
beneficiary). Such directions shall be provided directly to the Trustee and
shall be held in confidence and not be divulged or released to any other person
including an officer or employee of the Company or a member of the Committee.
Within a reasonable time prior to each annual or special meeting of holders of
Stock, the Committee shall furnish to all Participants (and beneficiaries)
entitled to direct the Trustee as to the voting of shares of Stock copies of any
proxy solicitation material provided to holders of voting Stock generally
together with appropriate instruction forms or cards and information concerning
the method of providing such instructions to the Trustee.
<PAGE> 12
3.7 The provisions of this Paragraph 3.7 shall apply in the event a
tender or exchange offer including, but not limited to, a tender offer or
exchange offer within the meaning of the Securities Exchange Act of 1934, as
from time to time amended and in effect, (hereinafter, a "tender offer"), for
Stock is commenced by a person or persons. In the event a tender offer for Stock
is commenced, the Committee, promptly after receiving notice of the commencement
of any such tender offer, shall transfer certain of the Committee's record
keeping functions under the Plan to an independent record keeper (which if the
Trustee consents in writing, may be the Trustee). The functions so transferred
shall be those necessary to preserve the confidentiality of any directions given
by the Participants (and beneficiaries) in connection with the tender offer.
Within a reasonable time after a tender offer is commenced, the Committee shall
furnish to all Participants (and beneficiaries) entitled, as hereinafter set
forth, to direct the Trustee with respect to the sale, exchange or transfer of
any Stock, copies of all offering material provided to holders of Stock
generally, together with appropriate instruction forms or cards and information
concerning the method of providing such instructions to the Trustee. Except as
otherwise required by ERISA, the Trustee shall have no discretion or authority
to sell, exchange or transfer of any such shares pursuant to such tender offer
except to the extent, and only to the extent, that the Trustee is timely
directed to do so in writing as follows:
(a) Each Participant (or beneficiary) to whose account
shares of Stock have been allocated, shall, as a named
fiduciary within the meaning of Section 403(a)(1) of ERISA,
direct the Trustee with respect to the sale, exchange or
transfer of the shares of Stock allocated to his or her
account, and the Trustee shall follow the directions of those
Participants (and beneficiaries) who provide timely
instructions to the Trustee.
(b) The Trustee shall exercise its own discretion with
respect to the sale, exchange or transfer of a portion of the
shares of Stock that have not been allocated to any
Participant's (or beneficiary's) account or for which no
instructions were timely received
<PAGE> 13
by the Trustee, whether or not allocated to the account of any
Participant (or beneficiary).
All such instructions from Participants (and beneficiaries) shall be
provided directly to the independent record keeper which, if different from the
Trustee, shall then instruct the Trustee as to the amount of shares to be
tendered in accordance with the above directions.
Following any tender offer that has resulted in the sale or exchange of
any shares of Stock held in the Fund, the record keeper shall continue to
maintain on a confidential basis the accounts of Participants (and
beneficiaries) to whose accounts shares of Stock were allocated at any time
during such offer, until complete distribution of such accounts or such earlier
time as the record keeper determines that the transfer of the record keeping
functions back to the Committee will not violate the confidentiality of the
directions given by the Participants (and beneficiaries). In the event that
there is no sale or exchange of any shares of Stock held in the Fund pursuant to
the tender offer, the record keeper shall transfer back to the Committee and the
record keeping functions; provided, however, the record keeper shall keep
confidential any instructions which it may receive from Participants (and
beneficiaries) relating to the tender offer.
For purposes of allocating the proceeds of any sale or exchange
pursuant to a tender offer, the Committee or the independent record keeper, as
the case may be, shall determine the portion, expressed as a percentage, of
shares tendered by the Trustee that were actually sold or exchanged (the
"applicable percentage"). The Committee or the independent record keeper, as the
case may be, shall then treat as having been sold or exchanged from each of the
individual accounts of Participants (and beneficiaries) that number of shares
(if any) which is obtained by multiplying (i) the applicable percentage times
(ii) the
<PAGE> 14
total number of shares in such account that were directed to be
tendered or exchanged (or, in the case of an account for which timely
instructions were not received, the total number of shares in such account
multiplied by a fraction, the numerator of which is the total number of shares
of Stock tendered by the Trustee and the denominator of which is the total
number of shares of Stock held by the Trustee immediately prior to the tender).
Any proceeds remaining after application of the preceding sentences shall be
treated as proceeds from the sale or exchange of unallocated shares. The
adjustments to individual accounts pursuant to the provisions of the Plan shall
be made by the Committee or the independent record keeper, as the case may be,
on information supplied by the Company, the Committee or the record keeper.
3.8 If the Committee directs the Trustee to dispose of any investment
or security or any part thereof under circumstances which in the opinion of the
counsel for the Trustee require registration under the Securities Act of 1933 or
qualification under state "Blue Sky" laws, then the Company, at its own expense,
shall take or cause to be taken all such action necessary or appropriate to
effect such registration and qualification. The Trustee shall not be required to
dispose of such investment until such registration and qualification are
complete and effective, and shall not be liable for any loss or depreciation of
the Fund resulting from any delay attributable thereto. The Company shall
indemnify and hold the Trustee and its officers and directors harmless with
respect to any liability, reasonable legal counsel fees, and other costs and
expenses incurred as a result of such registration or qualification or as a
result of any information in connection therewith furnished by the Company or
any failure by the Company to furnish any information.
<PAGE> 15
3.9 Notwithstanding any other provisions of this Agreement or the Plan,
any purchase of Stock using a Loan shall be effected by the Trustee without
direction from the Committee pursuant to the Trustee's determination, in the
exercise of its reasonable judgment after consultation with such advisors as it
reasonably deems necessary, that such transaction is in the best interests of
the Participants and beneficiaries and that the purchase transaction and the
terms and conditions of such Loan are in compliance with all applicable
provisions of the Internal Revenue Code and ERISA.
3.10 In addition to, and not in limitation of, the powers vested and to
be vested in it by law or enumerated in this Article III, the Trustee shall have
the power to take any action with respect to the Fund as is appropriate and
helpful in carrying out the purposes of this Agreement, subject to any
directions of the Committee or the Participants (or beneficiaries) as provided
herein.
ARTICLE IV
ADMINISTRATION
4.1 The Committee shall represent the Company in dealing with the
Trustee under this Agreement. Until it receives written notice that a person is
no longer a member of the Committee, the Trustee shall be fully protected in
assuming that the person is still a member of the Committee. The Company shall
cause to be delivered to the Trustee a specimen signature of each member as well
as that of any designee of the Committee appointed pursuant to Paragraph 4.2.
The members of the Committee shall be "named fiduciaries" within the meaning of
ERISA, Section 402(a), with respect to the Plan.
4.2 The Trustee may rely (and shall be fully protected in relying) on
any written communication signed by a majority of the members of the Committee
as being authorized by, and
<PAGE> 16
reflecting the action of, the Committee. If the Trustee is advised in writing by
a majority of the members of the Committee that directives to the Trustee will
be signed by a person or persons designated by the Committee, the Trustee may
rely on communications signed by the person or persons so named as a directive
reflecting the action of the Committee.
4.3 The Trustee shall have only those duties specified in this
Agreement or specified in the Plan and expressly incorporated herein by
reference. In the event of any conflict between the provisions of the Plan and
this Agreement, the provisions of this Agreement shall control. The Trustee
shall have no responsibility to administer or interpret the Plan, to enforce
payment of any contributions to the Fund or to see that the Fund is adequate to
meet the liabilities of the Plan.
4.4 The Company or anyone acting on its behalf may at any time employ
the Trustee in its corporate capacity as agent to perform any act or to keep any
records in connection with the administration of the Plan. Any such agency
relationship shall be established by a separate written agreement between the
Company and the Trustee and the existence of such arrangement shall not affect
its responsibility or liability as Trustee under this Agreement.
4.5 Notwithstanding any provision of the Plan or this Agreement, the
Trustee shall not be obligated to follow the direction of a named fiduciary
unless such direction is in accordance with the terms of the Plan or this
Agreement and is proper and not contrary to ERISA.
ARTICLE V
PAYMENTS OF BENEFITS AND EXPENSES
5.1 Except as otherwise provided in Paragraph 5.3, the Trustee shall
pay benefits and administrative expenses under the Plan only when it receives
(and in accordance with) written
<PAGE> 17
instructions from the Committee, indicating the amount of the payment and the
name and address of the recipient. The Trustee shall have no duty to inquire
into whether any payment the Committee instructs it to make is consistent with
the terms of the Plan or applicable law or otherwise proper. Any payment made by
the Trustee in accordance with such instructions shall be a complete discharge
and acquittance to the Trustee. If the Committee advises the Trustee that
benefits have become payable respecting a Participant's interest in the Fund,
but does not instruct the Trustee as to the manner of payment, the Trustee shall
hold the Participant's interest in the Trust until it receives written
instructions from the Committee as to the manner of payment. The Trustee shall
not pay benefits from the Fund without such instructions, even though it may be
informed from other sources, including, without limitation, a Participant (or
beneficiary), that benefits are payable under the Plan. The Trustee shall have
no responsibility to determine when, to whom, or in what amounts benefits and
expenses are payable under the Plan.
5.2 The Trustee may pay any benefit or expense under the Plan by
mailing certificates representing shares of Stock and/or its check, as directed
by the Committee, for the amount thereof to the person designated by the
Committee as entitled to receive such payment to such address as may have been
furnished to the Trustee by the Committee. If no such address has been so
furnished, benefits or expenses may be mailed by the Trustee to such person in
care of the Committee or the Company.
5.3 The Trustee shall receive as compensation for its services as
Trustee such amounts as may, from time to time, be agreed upon in writing
between the Company and the Trustee. Such compensation and, in accordance with
the applicable provisions of ERISA and the Internal Revenue Code, all reasonable
and proper expenses incurred by the Trustee in the administration of the Trust,
<PAGE> 18
including reasonable legal counsel fees, shall be withdrawn by the Trustee out
of the Fund, unless paid by the Company.
5.4 The Company intends that the Plan shall at all times qualify under
Internal Revenue Code Sections 401(a), 409 and 4975(e)(7) and that the Trust
hereby established shall at all times be tax exempt under Section 501(a) of the
Internal Revenue Code, or successor provisions. However, any taxes that may be
levied upon or in respect of the Fund shall be paid from the Fund. The Trustee
shall promptly notify the Committee of any proposed taxes (other than stock
transfer taxes) of which it receives notice and may assume that any such taxes
are lawfully levied or assessed, unless the Committee advises it in writing to
the contrary within fifteen (15) days after receiving the above notice from the
Trustee. In such case, the Trustee, if requested by the Committee in writing,
shall contest the validity of such taxes in any manner deemed appropriate by the
Committee; the Company may itself contest the validity of any such taxes, in
which case the Committee shall so notify the Trustee and the Trustee shall have
no responsibility or liability respecting such contest. If any party to this
Agreement contests any such proposed levy, the other party shall provide such
information and cooperation as the party conducting the contest shall reasonably
request.
ARTICLE VI
LIABILITY AND INDEMNIFICATION OF THE TRUSTEE
6.1 The Trustee shall not be responsible for computing or collecting
contributions due under the Plan.
6.2 The Trustee in its corporate capacity shall not be liable for
claims of any persons arising under the Plan; such claims shall be limited to
the Fund. The Trustee shall not be liable to make
<PAGE> 19
distributions or payments of any kind unless sufficient funds are available
therefor in the Fund. The Trustee shall be responsible only for such money and
other property as are received by it as Trustee under this Agreement.
6.3 The Trustee may consult with legal counsel with respect to the
meaning and construction of this Agreement or its powers, obligations and
conduct hereunder, and the opinion of such counsel will, to the extent permitted
by law, be full and complete protection in respect of any action taken or
omitted by the Trustee hereunder in good faith and in accordance with the
opinion of such counsel.
6.4 The Trustee shall be under no liability for any loss of any kind
which may result (i) by reason of any action taken by it in accordance with any
direction of the Company, the Committee, or any Participant (or beneficiary of a
deceased Participant) acting as a named fiduciary pursuant to Paragraph 3.6 or
Paragraph 3.7 (hereinafter collectively referred to as the "directing
fiduciaries"), (ii) by reason of its failure to exercise any power or authority
or to take any action hereunder because of the failure of any such directing
fiduciary to give directions to the Trustee, as provided for in this Agreement,
or (iii) by reason of any act or omission of any of the directing fiduciaries
with respect to its duties under this Plan and Trust, or (iv) by reason of any
other act or omission of the Trustee except such as are due to its own
negligence, willful misconduct or failure to act in good faith.
6.5 The Trustee shall be fully protected in acting upon any instrument,
certificate, or paper delivered by the Company, the Committee, any Participant
or beneficiary (acting as a named fiduciary) and believed by the Trustee to be
genuine and to be signed or presented by the proper person or persons, and the
Trustee shall be under no duty to make any investigation or inquiry as to any
statement contained
<PAGE> 20
in any such writing, but may accept the same as conclusive evidence of the truth
and accuracy of the statements therein contained.
6.6 The Company agrees, to the fullest extent permitted by law, to
indemnify and hold harmless the Trustee from and against any and all losses,
claims, damages, liabilities or expenses (including, without limitation, any and
all expenses reasonably incurred in investigating, preparing or defending
against any litigation or proceeding, whether civil, criminal, administrative,
or investigative, commenced or threatened), incurred by or imposed on the
Trustee and arising either with respect to the investment in, or any other
action taken with respect to, Stock held by the Fund, or with respect to any
matter as to which the Trustee is not liable pursuant to Paragraph 6.4 of this
Agreement.
6.7 All notices, requests, demands and other communications hereunder
or with respect hereto shall be in writing and shall be deemed to have been
fully given if telegraphed, telecopied or telefaxed, mailed by registered or
certified mail, or personally delivered (or delivered by courier) as follows:
If to the Company, to:
Roger W. Franklin
Vice President - Finance, Treasurer
Simmons Company
One Concourse Parkway, Suite 600
Atlanta, GA 30328-5369
If to the Trustee, to:
State Street Bank and Trust Company
Retirement Investment Services Division
200 Newport Avenue
North Quincy, MA 02171
Attention: Simmons ESOP Investment Services Officer
<PAGE> 21
or to such other address or addresses as any party hereto may furnish to the
other party in writing.
6.8 Whenever the Trustee shall deem it desirable for a matter to be
proved or established before taking, permitting or omitting any act, the matter
(unless other evidence in respect thereof is specifically prescribed in this
Agreement) may be deemed to be conclusively established by a certification
signed by a majority of the members of the Committee and delivered to the
Trustee, and the Trustee shall be fully protected in relying on such an
instrument.
6.9 If a dispute arises as to the payment of any funds or delivery of
any assets by the Trustee, the Trustee may withhold such payment or delivery
until the dispute is determined by a court of competent jurisdiction or finally
settled in writing by the parties concerned.
<PAGE> 22
ARTICLE VII
ACCOUNTING OF THE TRUSTEE
7.1 The Trustee shall keep accurate and detailed accounts of all its
transactions (including receipts and disbursements) under this Agreement. These
records shall be open to inspection and audit during regular business hours of
the Trustee by the Committee or any person or persons designated by the
Committee or the Company in a written instrument filed with the Trustee. If
mutually agreed upon in a separate writing by the Committee and the Trustee, the
Trustee shall establish and maintain accounts for Participants which shall show
their respective interests, determined in accordance with the terms of the Plan,
in the Fund; provided, however, that to the extent that such accounts are kept
by the Trustee on the basis of information furnished or caused to be furnished
to it by the Committee, the Trustee shall have no responsibility for the
accuracy of any information so furnished. All such accounts and records shall be
preserved (in original form, or on microfilm, magnetic tape or any other similar
process) for such period as the Trustee may determine, but the Trustee may
destroy such accounts and records only after first notifying the Committee and
the Company in writing at least ninety (90) days in advance of its intention to
do so and transferring to the Committee or the Company any such accounts and
records requested.
7.2 Within sixty (60) days after the close of each fiscal year of the
Plan, the Trustee's removal or resignation as Trustee hereunder, or the
termination of the Plan or this Agreement, the Trustee shall file with the
Committee an account setting forth all its transactions (including all receipts
and disbursements) under this Agreement during such year, or during the period
from the close of the last preceding fiscal year of the Plan to the effective
date of its removal or resignation or the termination of the Plan or this
Agreement, and showing all property (including its costs and fair market value)
held by it
<PAGE> 23
hereunder at the end of such accounting period; provided, however, that in the
event shares of Stock are then held in the Trust and a final valuation report
with respect to such Stock for any such accounting period is not received by the
Trustee within thirty (30) days of the date the Trustee is required to render an
accounting under the foregoing provision, then the Trustee shall not be required
to render such account until thirty (30) days from the date such valuation
report is received by the Trustee. The Committee and the Trustee may agree in
writing that similar accounts will be prepared by the Trustee and filed with the
Committee at more frequent intervals. No person or persons (including, without
limitation, the Company and the Committee) shall be entitled to any further or
different accounting by the Trustee, except as may be required by law.
7.3 Ninety (90) days after the filing of any account with the Committee
under Paragraph 7.2, the Trustee shall be forever released and discharged from
any liability or accountability to the Company and the Committee with respect to
the transactions shown or reflected on the account, except with respect to any
acts or transactions as to which the Committee, within such ninety (90) day
period, files written objections with the Trustee. The written approval of the
Committee of any account filed by the Trustee, or the Committee's failure to
file written objections within ninety (90) days, shall be a settlement of such
account as against the Company and the Committee, and shall forever release and
discharge the Trustee from any liability or accountability to the Company and
the Committee with respect to the transaction shown or reflected on such
account. If a statement of objection is filed by the Committee and the Committee
is satisfied that its objections should be withdrawn or if the account is
adjusted to its satisfaction, the Committee shall indicate its approval of the
account in a written statement filed with the Trustee and the Trustee shall be
forever released and discharged from all liability and accountability to
<PAGE> 24
the Company and the Committee in accordance with the immediately preceding
sentence. If an objection is not settled by the Committee and the Trustee, the
Trustee may commence a proceeding for a judicial settlement of the account in
any court of competent jurisdiction; the only parties that need be joined in
such a proceeding are the Trustee, the Committee, the Company and such other
parties whose participation is required by law.
ARTICLE VIII
REMOVAL AND RESIGNATION OF THE TRUSTEE
8.1 The Trustee may resign as Trustee under this Agreement at any time
by a written instrument delivered to the Company giving notice of such
resignation, which shall be effective sixty (60) days after receipt or at such
other time as is agreed by the Company and the Trustee. Upon the receipt of
instructions or directions from the Company or the Committee with which the
Trustee is unable or unwilling to comply, the Trustee may resign upon notice in
writing to the Company given within a reasonable time, under the circumstances
then prevailing, after the receipt of such instructions or directions; and,
notwithstanding any other provisions hereof, in that event, the Trustee shall
have no liability to the Company, or any person interested herein, for failure
to comply with such instructions or directions. The Trustee may be removed at
any time by the Company by an instrument in writing and delivered to the
Trustee, which shall be effective sixty (60) days after receipt or at such other
time as is agreed between the Company and the Trustee.
8.2 If a vacancy in the office of trustee of the Trust occurs, the
Company shall appoint a successor trustee and shall deliver to the Trustee
copies of (a) a written instrument executed by the
<PAGE> 25
Company appointing such successor, and (b) a written instrument executed by the
successor in which it accepts such appointment. Such instruments shall indicate
their effective date.
8.3 If the Trustee resigns or is removed, it shall deliver all assets
of the Fund in its possession to a successor trustee as soon as is reasonably
practicable after the settlement of its account or at such earlier time as shall
be agreed on by the Company, the Trustee and the successor trustee.
ARTICLE IX
AMENDMENT AND TERMINATION
9.1 This Agreement may be amended at any time and from time to time by
the Company by a written instrument duly acknowledged and delivered to the
Trustee setting forth the terms of the amendment; provided that no amendment
affecting rights, duties or responsibilities of the Trustee may be made without
the Trustee's consent. The instrument of amendment shall state to the Trustee
that the amendment does not permit any part of the Fund to be used for or
diverted to purposes other than the exclusive benefit of Participants and their
beneficiaries or the payment of reasonable expenses of administering the Plan
and Trust, as specified in Paragraph 2.2 hereof. The instrument of amendment
shall specify its effective date and amendments may, with the Trustee's consent,
if applicable, be made effective retroactively.
9.2 If the Committee certifies to the Trustee that the Plan is or has
been terminated, the Trustee shall hold and/or dispose of the Fund in accordance
with the Committee's written instructions. The Committee shall certify in
writing to the Trustee that the disposition directed: (a) except as provided in
Paragraph 2.2, does not result in any part of the Fund being used for or
diverted to purposes other than the exclusive benefit of Participants and their
beneficiaries and the payment of reasonable expenses
<PAGE> 26
(including the repayment of any outstanding loans) of administering the Plan and
Trust, (b) is in accordance with the applicable provisions of the Internal
Revenue Code, ERISA and any other applicable laws, and (c) does not result in a
Prohibited Transaction. If the Plan is terminated with respect to a group of
persons under the Plan, the portion of the Trust attributable to such group
shall be held and disposed of in accordance with the written instructions of the
Committee which shall be given in conformity with the provisions of the Plan,
the Internal Revenue Code and ERISA. The Trustee may, however, reserve such sum
of money as it deems advisable for payment of its fees and expenses in
connection with its administration of the Trust or the settlement of its account
or for payment of tax that may be assessed on or in respect of the Fund or the
income thereof. This Agreement shall terminate upon the termination of the Plan
as provided herein and the disposition of the Fund as provided herein.
ARTICLE X
LEVERAGED ACQUISITIONS OF STOCK
10.1 It is specifically contemplated that the Trust will operate
pursuant to a leveraged employee stock ownership plan and that the Trustee will
incur indebtedness in connection with the acquisition of Stock or will obtain
assets from its predecessor which are subject to such indebtedness. Any Loan
shall meet all of the requirements necessary to constitute an "exempt loan"
within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iii) and shall
be used primarily for the benefit of the Participants and their beneficiaries.
The proceeds of any Loan shall be used, within a reasonable time after the Loan
is obtained, only to purchase Stock or to repay such Loan or a prior Loan. Any
such Loan shall provide for no more than a reasonable rate of interest and must
be without recourse against the Plan and Trust. The number of years to maturity
under the Loan must be definitely ascertainable at all times. The Loan
<PAGE> 27
may not be payable at the demand of any person, except in the case of a default.
The only assets of the Trust that may be given as collateral for a Loan are
shares of Stock acquired with the Loan and shares of Stock that were used as
collateral on prior Loans repaid with the proceeds of the current Loan. In the
event that Stock is used as collateral for a Loan, such Stock shall be released
from such encumbrance in accordance with the provisions of the Plan and
applicable Treasury Regulations. No person entitled to payment under a Loan
shall be entitled to payment from the Trust other than from shares of Stock
acquired with the Loan which are collateral for the Loan, Company contributions
made under the Plan for the purpose of satisfying the Loan obligation, earnings
attributable to such Stock and such Company contributions (other than
contributions of Stock), and such other assets, if any, as to which recourse may
be permitted under Section 4975 of the Internal Revenue Code. Payments of
principal and interest on any such Loan shall be made by the Trustee (as
directed by the Committee) only from (1) Company contributions (other than
contributions of Stock) made under the Plan for the purpose of satisfying such
Loan obligation, earnings on such contributions and earnings on shares of Stock
acquired with the proceeds of such Loan, including, but not limited to, cash
dividends received by the Trust with respect to the shares of Stock held by it,
whether or not allocated to the accounts of Participants (or beneficiaries), (2)
the proceeds of a subsequent Loan made to repay the prior Loan, and/or (3)
unless otherwise agreed to in the definitive documentation pertaining to such
Loan, the proceeds of the sale of any collateralized shares of Stock acquired
with the proceeds of such Loan; provided, however, that the Trustee shall in no
event be required to apply such proceeds of sale to repay principal and interest
on a Loan if, in the opinion of counsel to the Trustee, such action would
constitute a Prohibited Transaction or a breach of the Trustee's fiduciary
duties under ERISA. In the event of a default under a Loan, the value of Trust
<PAGE> 28
assets transferred to the lender shall not exceed the amount of the default,
provided further that if the lender is a "party in interest" within the meaning
of ERISA Section 3(14) or a "disqualified person" within the meaning of Section
4975(e)(2) of the Internal Revenue Code, a transfer of Trust assets upon default
shall be made only if, and to the extent of, the Trust's failure to meet the
Loan's payment schedule.
ARTICLE XI
MISCELLANEOUS
11.1 This Agreement shall be binding upon, and the powers granted to
the Company and the Trustee, respectively, shall be exercisable by, the
respective successors and assigns of the Company and the Trustee. Any
corporation which shall, by merger, consolidation, purchase or otherwise,
succeed to substantially all the trust business of the Trustee shall, upon such
succession and without any appointment or other action by the Company, be and
become successor trustee hereunder, upon notification to the Company.
11.2 No right or claim in or to the Fund or any assets thereof shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge, and any attempt to so anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge shall be void and shall not be
recognized by the Trustee, except to such extent as may be legally required
(e.g., as otherwise provided in the Plan with respect to qualified domestic
relations orders). No such right or claim shall be liable for or subject to the
debts, contracts, liabilities, engagements or torts of the person entitled
thereto.
11.3 This Agreement shall be administered, construed and enforced in
accordance with ERISA, and to the extent not governed by ERISA, in accordance
with the laws of the Commonwealth of Massachusetts.
<PAGE> 29
11.4 One or more of the several subsidiary and affiliated companies
which are controlled by or under common control with the Company may, with the
approval of the Board, by resolution of its own board of directors adopt the
Trust if such subsidiary shall have adopted the Plan or any part thereof. Each
such subsidiary and affiliate which has adopted this Trust ("Related Company")
shall be deemed a party to this Agreement and all references herein to "Company"
shall be deemed to include such Related Company, except as the context may
otherwise require.
11.5 For all purposes of the Plan and Trust, all valuations of Stock
which is not readily tradable on an established securities market will be made
by an "independent appraiser" within the meaning of Section 401(a)(28)(C) of the
Internal Revenue Code.
11.6 Headings of Articles are inserted for convenience of reference.
They are not part of this Agreement and shall not be considered in construing
it.
11.7 This Agreement may be executed in any number of counterparts, each
of which shall be considered an original even though no others are produced. IN
WITNESS WHEREOF, the Company and the Trustee have caused this Agreement to be
executed by their duly authorized officers and their respective corporate seals
to be hereunto affixed as of the day and year first above written.
SIMMONS COMPANY
By:_________________________________
Its:________________________________
Attest:
______________________________
<PAGE> 30
STATE STREET BANK AND TRUST COMPANY
By:_________________________________
Its: _______________________________
Attest:
______________________________
<PAGE> 1
EXHIBIT 10.73
VERSION 6/97
INDUSTRIAL LEASE AGREEMENT
BETWEEN
DFW TRADE CENTER I LIMITED PARTNERSHIP
AS LANDLORD
AND
SIMMONS COMPANY
AS TENANT
<PAGE> 2
LEASE INDEX
<TABLE>
<CAPTION>
Section Subject
------- -------
<S> <C>
1 Basic Lease Provisions
2 Demised Premises
3 Term
4 Base Rent
5 Security Deposit
6 Operating Expenses and Additional Rent
7 Use of Demised Premises
8 Insurance
9 Utilities
10 Maintenance and Repairs
11 Tenant's Personal Property; Indemnity
12 Tenant's Fixtures
13 Signs
14 Landlord's Lien
15 Governmental Regulations
16 Environmental Matters
17 Construction of Demised Premises
18 Tenant Alterations and Additions
19 Services by Landlord
20 Fire and Other Casualty
21 Condemnation
22 Tenant's Default
23 Landlord's Right of Entry
24 Lender's Rights
25 Estoppel Certificate
26 Landlord's Liability
27 Notices
28 Brokers
29 Assignment and Subleasing
30 Termination or Expiration
31 Intentionally Deleted
32 Late Payments
33 Rules and Regulations
34 Quiet Enjoyment
35 Miscellaneous
36 Special Stipulations
37 Lease Date
38 Authority
39 No Offer Until Executed
</TABLE>
Exhibit "A" Demised Premises
Exhibit "B" Preliminary Plans and Specifications
Exhibit "C" Special Stipulations
Exhibit "D" Rules and Regulations
Exhibit "E" Certificate of Authority
Exhibit "F" Confidentiality Covenant
<PAGE> 3
INDUSTRIAL LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") is made as of the "Lease Date" (as
defined in Section 37 herein) by and between DFW TRADE CENTER I LIMITED
PARTNERSHIP, a Texas limited partnership ("Landlord"), and SIMMONS COMPANY, a
Delaware corporation ("Tenant") (the words "Landlord" and "Tenant" to include
their respective legal representatives, successors and permitted assigns where
the context requires or permits).
<TABLE>
<CAPTION>
W I T N E S S E T H:
1. Basic Lease Provisions. The following constitute the basic provisions of this Lease:
<S> <C> <C>
(a) Demised Premises Address: 4255 Patriot Drive
Coppell, Texas 75019
(b) Demised Premises Square Footage: approximately 140,981 sq. ft.
(c) Building Square Footage: approximately 503,074 sq. ft.
(d) Annual Base Rent:
Lease Year 1 $324,612.00
Lease Years 2 - 4 $432,816.00
Lease Year 5 $481,452.00
Lease Years 6 - 10 $497,664.00
Lease Year 11 (3 months) $124,416.00
(e) Monthly Base Rent Installments:
Lease Year 1
Months 1 - 3 $ -0-
Months 4 - 12 $36,068.00
Lease Years 2 - 4 $36,068.00
Lease Year 5
Months 1 - 3 $36,068.00
Months 4 - 12 $41,472.00
Lease Years 6 - 10 $41,472.00
Lease Year 11 (3 months) $41,472.00
</TABLE>
(f) Lease Commencement Date: March 8, 1998 (as such date
may be adjusted pursuant to Section 17(b) hereof)
(g) Base Rent Commencement Date: June 8, 1998 (as such
date may be adjusted pursuant to Section 17(b)
hereof)
(h) Expiration Date: June 7, 2008 (as such date may be
adjusted pursuant to Section 17(b) hereof)
(i) Term: 123 months
(j) Tenant's Operating Expense Percentage: 28.02%
(k) Security Deposit: $36,068.00
(l) Permitted Use: Manufacturing, storage, distribution
and retail or wholesale sale of mattresses and
related items and office uses ancillary thereto; or
such other use that (i) is permitted by all
applicable laws, rules, ordinances or restrictive
covenants now or hereafter affecting the Demised
Premises, and (ii) will not negatively affect the
value or marketability of the Building or the
Project, as determined by Landlord in its reasonable
discretion.
(m) Address for notice:
<PAGE> 4
<TABLE>
<S> <C>
Landlord: DFW Trade Center I Limited Partnership
c/o Industrial Developments International, Inc.
3424 Peachtree Road, N.E., Suite 1500
Atlanta, Georgia 30326
Attn: Vice President - Operations
Tenant: Simmons Company
One Concourse Parkway
Suite 600
Atlanta, Georgia 30328
Attn: Vice President of Finance and Treasurer
With a copy to: Jones, Day, Reavis & Pogue
3500 SunTrust Plaza
303 Peachtree Street
Atlanta, Georgia 30308-3242
Attn: Scott A. Specht
(n) Address for rental payments:
DFW Trade Center I Limited Partnership
c/o IDI Services Group, Inc.
P. O. Box 930190
Atlanta, Georgia 31193
(o) Broker(s): N/A
</TABLE>
2. Demised Premises. For and in consideration of the rent hereinafter
reserved and the mutual covenants hereinafter contained, Landlord does hereby
lease and demise unto Tenant, and Tenant does hereby hire, lease and accept,
from Landlord all upon the terms and conditions hereinafter set forth the
following premises, referred to as the "Demised Premises", as outlined on
Exhibit A attached hereto and incorporated herein: approximately 140,981 square
feet of space, approximately 9,100 square feet of which is office space, having
an address as set forth in Section 1(a), located within Building E (the
"Building"), which contains a total of approximately 503,074 square feet and is
located within DFW Trade Center (the "Project"), located in Coppell, Texas. The
exact rentable square footage in the Demised Premises and the Building shall be
subject to verification by Tenant's architect within ninety (90) days after the
Lease Commencement Date. In the event Tenant's computation differs from the
square footage set forth in the Section 2, Landlord and Tenant shall cause their
respective architects to meet and use their good faith efforts to agree to the
square footage in the Demised Premises and the Building. The Demised Premises
and the Building shall be measured in each case to the dripline of any outside
wall and to the centerline of any demising wall. Notwithstanding anything herein
to the contrary, the Base Rent shall not change based on the results of any such
verification, the parties hereto agreeing that the Base Rent is not dependent on
the square footage of the Demised Premises. The parties agree that the Tenant's
Operating Expense Percentage shall be changed based on any changes in the
calculation of the square footage of the Demised Premises and the Building
resulting from the verification procedure described herein. Tenant shall have,
as an appurtenant to the Demised Premises, the right to use on a non-exclusive
basis the common walkways and driveways necessary for access to the Demised
Premises and the Building. During the Term, Landlord shall make available to
Tenant, its employees, customers and visitors a total of 140 automobile parking
spaces (on an unassigned, non-exclusive basis) in the parking areas of the
Project. Such parking shall be at no additional cost to Tenant.
3. Term. To have and to hold the Demised Premises for a preliminary
term (the "Preliminary Term") commencing on the Lease Date and ending on the
Lease Commencement Date as set forth in Section 1(f), and a primary term (the
"Term") commencing on the Lease Commencement Date and terminating on the
Expiration Date as set forth in Section 1(h), as the Lease Commencement Date and
the Expiration Date may be revised pursuant to Section 17(b). The term "Lease
Year" shall mean each one (1) year period of the Term (or portion thereof if the
last Lease Year of the Term is less than one (1) full year) beginning on the
Lease Commencement Date, and each anniversary thereof, and ending on the day
immediately prior to the next succeeding anniversary of the Lease Commencement
Date.
4. Base Rent. Tenant shall pay to Landlord at the address set forth
in Section 1(n), as base rent for the Demised Premises, commencing on the Base
Rent Commencement Date and continuing throughout the Term in lawful money of the
United States, the annual amount set forth in Section 1(d) payable in equal
monthly installments as set forth in Section 1(e) (the "Base Rent"), payable in
advance, without demand and without abatement, reduction, set-off or deduction
except as otherwise set forth herein, on the first day of each calendar month
during the Term. If the Base Rent Commencement Date shall fall on a day other
than the first day of a calendar month, the Base Rent shall be apportioned pro
rata on a per diem basis for the period between the Base Rent Commencement Date
and the first day of the following calendar month. No payment by Tenant or
receipt by Landlord of rent hereunder shall be deemed to be other than on
account of the amount due, and no endorsement or statement on any check or
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<PAGE> 5
any letter accompanying any check or payment of rent shall be deemed an accord
and satisfaction, and Landlord may accept such check as payment without
prejudice to Landlord's right to recover the balance of such installment or
payment of rent or pursue any other remedies available to Landlord.
5. Security Deposit. Upon Tenant's execution of this Lease, Tenant
will pay to Landlord the sum set forth in Section 1(k) (the "Security Deposit")
as security for the full and faithful performance by Tenant of each and every
term, covenant and condition of this Lease. The acceptance by Landlord of the
Security Deposit paid by Tenant shall not render this Lease effective unless and
until Landlord shall have executed and delivered to Tenant a fully executed copy
of this Lease. As long as Tenant provides Landlord with Tenant's federal
taxpayer identification number, Landlord shall deposit the Security Deposit in a
separate interest bearing account selected by Landlord, with interest earned
thereon to be additional Security Deposit funds. In the event that Tenant is in
default under this Lease, Landlord may retain the Security Deposit for the
payment of any sum due Landlord or which Landlord may expend or be required to
expend by reason of Tenant's default or failure to perform; provided, however,
that any such retention by Landlord shall not be or be deemed to be an election
of remedies by Landlord or viewed as liquidated damages, it being expressly
understood and agreed that Landlord shall have the right to pursue any and all
other remedies available to it under the terms of this Lease or otherwise. In
the event all or any portion of the Security Deposit is so retained by Landlord,
Tenant shall, within five (5) days of demand therefor from Landlord, replenish
the Security Deposit to the full amount set forth in Section 1(k). So long as
Tenant has complied with all of the terms, covenants and conditions of this
Lease, Landlord shall refund the Security Deposit with all interest earned
thereon to Tenant at the end of Lease Year 4. In the event of a sale of the
Building, Landlord shall have the right to transfer the Security Deposit to the
purchaser, and upon acceptance by such purchaser, Landlord shall be released
from all liability for the return of the Security Deposit. Tenant shall not
assign or encumber the money deposited as security, and neither Landlord nor its
successors or assigns shall be bound by any such assignment or encumbrance.
6. Operating Expenses and Additional Rent.
(a) Tenant agrees to pay as Additional Rent (as defined in
Section 6(b) below) its proportionate share of Operating Expenses (as
hereinafter defined). "Operating Expenses" shall be defined as all reasonable
expenses for operation, repair, replacement and maintenance as necessary to keep
the Building and the common areas, driveways, and parking areas associated
therewith (collectively, the "Building Common Area") in good order, condition
and repair, including but not limited to, utilities for the Building Common
Area, expenses associated with the driveways and parking areas (including
sealing and restriping, and snow, trash and ice removal), security systems, fire
detection and prevention systems, lighting facilities, landscaped areas,
walkways, painting and caulking, directional signage, curbs, drainage strips,
sewer lines, all charges assessed against or attributed to the Building pursuant
to any applicable easements, covenants, restrictions, agreements, declaration of
protective covenants or development standards, property management fees, all
real property taxes and special assessments imposed upon the Building, the
Building Common Area and the land on which the Building and the Building Common
Area are constructed, all costs of insurance paid by Landlord with respect to
the Building and the Building Common Area, and costs of improvements to the
Building and the Building Common Area required by any law, ordinance or
regulation applicable to the Building and the Building Common Area generally
(and not because of the particular use of the Building or the Building Common
Area by a particular tenant), which cost shall be amortized on a straight line
basis over the useful life of such improvement, as determined by Generally
Accepted Accounting Principals ("GAAP") consistently applied. Operating Expenses
shall also include the operating expenses of the common areas of the Project, if
any, which expenses shall be proportionately allocated among the completed
buildings of the Project, based on the square footage of each building or as
otherwise provided by the applicable covenants, restrictions, agreements or
declaration of protective covenants for the Project. Operating Expenses shall
not include expenses for the costs of any maintenance and repair required to be
performed by Landlord at its own expense under Section (10)(b). Further,
Operating Expenses shall not include the costs for capital improvements unless
such costs are incurred for the purpose of causing a material decrease in the
Operating Expenses of the Building (provided, however, that prior to incurring
any capital cost for the purpose of reducing Operating Expenses, Landlord shall
exercise reasonable due diligence in investigating the likelihood of whether
such improvement will reduce operating costs) or the Building Common Area or are
made with respect to improvements made to comply with laws, ordinances or
regulations as described above. Operating Expenses shall not include (1) the
cost of installing, operating and maintaining any specialty service, such as an
observatory, broadcasting facilities, luncheon club, or athletic, fitness or
recreational club; (2) the cost of any repairs, alterations, additions, changes,
replacements and other items which are made for another tenant's premises or in
order to prepare for that tenant's occupancy or renewal; (3) all leasing
expenses, including any legal or professional service fees or any real estate
brokerage commissions incurred with regard to any tenants in the Project and any
advertising and promotional expenses related to leasing or marketing; (4) any
costs included in Operating Expenses representing an amount paid to a
corporation related to Landlord which is in excess of the amount which would
have been paid in the absence of such relationship (provided, however, that a
property management fee of 3% shall be deemed to be acceptable, even if paid to
a corporation related to Landlord); (5) the cost of any repair in accordance
with the provisions hereof relating to casualty or condemnation; (6) any
expenses of procuring service contracts or warranties and any expenses for
repairs or maintenance which were covered by warranties or service contracts in
existence on the Lease Commencement Date and in effect at the time such repair
or maintenance was made; (7) any costs of
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<PAGE> 6
management, accounting or administration other than as is specifically set forth
herein; (8) the cost of correcting any defects in the initial construction of
the Building or any other improvements in the Project; (9) the cost of the
removing any asbestos or hazardous materials from the Building or the Demised
Premises; (10) principal, interest and other costs directly related to financing
of the Building or the Project and rental costs under any capital lease or
ground lease; (11) depreciation, amortization and other non-cash items; (12) the
cost of repairs, alterations and general maintenance necessitated by the gross
negligence or willful misconduct of Landlord or its agents, employees, officers,
contractors or subcontractors; (13) the cost of the salaries and other
compensation paid to officers and executives of Landlord above that of building
manager; (14) the cost of electricity provided to other tenants of the Project
which are reimbursed by such other tenants over base rent; (15) the cost of
services or utilities, exceeding the services or utilities provided to Tenant,
that are provided to other tenants or for portions of the Building or Project
not including the Demised Premises, and are not provided to Tenant; (16) fines
or penalties incurred by Landlord for the failure to timely comply with or pay
amounts with respect to any contract requirement, legal requirement, building
code, ordinance, governmental rule, regulation, law or other governmental
authority, not caused by Tenant; (17) the costs of complying with any
governmental rules, regulations and statutes applicable to the Building or the
Demised Premises promulgated prior to the Lease Date (provided that Tenant is
responsible for compliance requirements arising from Tenant's particular use of
the Demised Premises as addressed in Section 15 below); and (18) taxes shall not
include (i) profits, intangible, documentary stamp, corporate, capital stock,
gift taxes, rent taxes or taxes substituted for or in lieu of the foregoing
exclusions; (ii) taxes on gross receipts of Landlord from the Building or the
Project; or (iii) impact fees or taxes associated with Landlord's development
costs. The cost of any work or service performed jointly for the Building and
any other building in the Project, or for a facility jointly serving the
Building and any other building, shall be reasonably apportioned and allocated
so that such portion of such cost as is fairly attributable to the Building, but
only such portions, is included in Operating Expenses. The proportionate share
of Operating Expenses to be paid by Tenant shall be a percentage of the
Operating Expenses based upon the proportion that the square footage of the
Demised Premises bears to the total square footage of the Building (such figure
referred to as "Tenant's Operating Expense Percentage" and set forth in Section
1(j)). Prior to or promptly after the beginning of each calendar year during the
Term, Landlord shall estimate the total amount of Operating Expenses to be paid
by Tenant during each such calendar year and Tenant shall pay to Landlord
one-twelfth (1/12) of such sum on the first day of each calendar month during
each such calendar year, or part thereof, during the Term. Within a reasonable
time after the end of each calendar year, Landlord shall submit to Tenant a
statement (prepared in reasonable detail and certified by Landlord as being true
and correct and accompanied by reasonable supporting documentation) of the
actual amount of Operating Expenses for such calendar year, and the actual
amount owed by Tenant, and within thirty (30) days after receipt of such
statement, Tenant shall pay any deficiency between the actual amount owed and
the estimates paid during such calendar year, or in the event of overpayment,
Landlord shall remit such overpayment to Tenant if the Term has expired or has
been terminated and no Event of Default exists hereunder. The obligations in the
immediately preceding sentence shall survive the expiration or any earlier
termination of this Lease. If the Lease Commencement Date shall fall on other
than the first day of the calendar year, and/or if the Expiration Date shall
fall on other than the last day of the calendar year, Tenant's proportionate
share of the Operating Expenses for such calendar year shall be apportioned
prorata. See Special Stipulations 2, 3 and 4 on Exhibit C hereto.
(b) Any amounts required to be paid by Tenant hereunder
(in addition to Base Rent) and any charges or expenses incurred by Landlord on
behalf of Tenant under the terms of this Lease shall be considered "Additional
Rent" payable in the same manner and upon the same terms and conditions as the
Base Rent reserved hereunder except as set forth herein to the contrary. Any
failure on the part of Tenant to pay such Additional Rent when and as the same
shall become due shall entitle Landlord to the remedies available to it for
non-payment of Base Rent. Tenant's obligations for payment of Additional Rent
shall begin to accrue on the Lease Commencement Date regardless of the Base Rent
Commencement Date.
(c) If applicable in the jurisdiction where the Demised
Premises are located, Tenant shall pay and be liable for all rental, sales, use
and inventory taxes or other similar taxes, if any, on the amounts payable by
Tenant hereunder levied or imposed by any city, state, county or other
governmental body having authority, such payments to be in addition to all other
payments required to be paid Landlord by Tenant under the terms of this Lease.
Such payment shall be made by Tenant directly to such governmental body if
billed to Tenant, or if billed to Landlord, such payment shall be paid
concurrently with the payment of the Base Rent, Additional Rent, or such other
charge upon which the tax is based, all as set forth herein.
7. Use of Demised Premises.
(a) The Demised Premises shall be used for the Permitted
Use set forth in Section 1(l) and for no other purpose.
(b) Tenant will permit no liens to attach or exist against
the Demised Premises, and shall not commit any waste.
(c) The Demised Premises shall not be used for any illegal
purposes, and Tenant shall not allow, suffer, or permit any vibration, noise,
odor, light or other effect to occur within or around
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<PAGE> 7
the Demised Premises that could constitute a nuisance or trespass for Landlord
or any occupant of the Building or an adjoining building, its customers, agents,
or invitees. Upon notice by Landlord to Tenant that any of the aforesaid
prohibited uses are occurring, Tenant agrees to promptly remove or control the
same.
(d) Tenant shall not in any way violate any law, ordinance
or restrictive covenant affecting the Demised Premises, and shall not in any
manner use (such use being particular to Tenant, its customers, agents,
employees, contractors, or invitees) the Demised Premises so as to cause
cancellation of, prevent the use of, or increase the rate of, the fire and
extended coverage insurance policy required hereunder. Landlord makes no (and
does hereby expressly disclaim any) covenant, representation or warranty as to
the Permitted Use being allowed by or being in compliance with any applicable
laws, rules, ordinances or restrictive covenants now or hereafter affecting the
Demised Premises, and any zoning letters, copies of zoning ordinances or other
information from any governmental agency or other third party provided to Tenant
by Landlord or any of Landlord's agents or employees shall be for informational
purposes only, Tenant hereby expressly acknowledging and agreeing that Tenant
shall conduct and rely solely on its own due diligence and investigation with
respect to the compliance of the Permitted Use with all such applicable laws,
rules, ordinances and restrictive covenants and not on any such information
provided by Landlord or any of its agents or employees.
(e) In the event insurance premiums pertaining to the
Demised Premises, the Building, or the Building Common Area, whether paid by
Landlord or Tenant, are increased over the least hazardous rate available due to
the particular nature of the use of the Demised Premises by Tenant, Tenant shall
pay such additional amount as Additional Rent.
8. Insurance.
(a) Tenant covenants and agrees that from and after the
Lease Commencement Date or any earlier date upon which Tenant enters or occupies
the Demised Premises or any portion thereof, Tenant will carry and maintain, at
its sole cost and expense, the following types of insurance, in the amounts
specified and in the form hereinafter provided for:
(i) Liability insurance in the Commercial General
Liability form (or reasonable equivalent thereto) covering the Demised Premises
and Tenant's use thereof against claims for bodily injury or death, property
damage and product liability occurring upon, in or about the Demised Premises,
such insurance to be written on an occurrence basis (not a claims made basis),
to be in combined single limits amounts not less than $3,000,000.00 and to have
general aggregate limits of not less than $5,000,000.00 for each policy year.
The insurance coverage required under this Section 8(a)(i) shall, in addition,
extend to any liability of Tenant arising out of the indemnities provided for in
Section 11 and, if necessary, the policy shall contain a contractual endorsement
to that effect.
(ii) Insurance covering (A) all of the items
included in the leasehold improvements constructed in the Demised Premises by or
at the expense of Landlord (collectively, the "Improvements"), including but not
limited to demising walls and the heating, ventilating and air conditioning
system and (B) Tenant's trade fixtures, merchandise and personal property from
time to time in, on or upon the Demised Premises, in an amount not less than one
hundred percent (100%) of their full replacement value from time to time during
the Term, providing protection against perils included within the standard form
of "all-risks" fire and casualty insurance policy, together with insurance
against sprinkler damage, vandalism and malicious mischief. Any policy proceeds
from such insurance relating to the Improvements shall be used solely for the
repair, construction and restoration or replacement of the Improvements damaged
or destroyed unless this Lease shall cease and terminate under the provisions of
Section 20.
(b) All policies of the insurance provided for in Section
8(a) shall be issued in form reasonably acceptable to Landlord by insurance
companies with a rating of not less than "A," and financial size of not less
than Class XII, in the most current available "Best's Insurance Reports", and
licensed to do business in the state in which the Building is located. Each and
every such policy:
(i) shall name Landlord, Lender (as defined in
Section 24), and any other party reasonably designated by Landlord, as an
additional insured. In addition, the coverage described in Section 8(a)(ii)(A)
relating to the Improvements shall also name Landlord as "loss payee";
(ii) shall be delivered to Landlord, in the form
of an insurance certificate acceptable to Landlord as evidence of such policy,
prior to the Lease Commencement Date and thereafter within fifteen (15) days
prior to the expiration of each such policy, and, as often as any such policy
shall expire or terminate. Renewal or additional policies shall be procured and
maintained by Tenant in like manner and to like extent;
(iii) shall contain a provision that the insurer
will give to Landlord and such other parties in interest at least ten (10) days
notice in writing in advance of any material change, cancellation, termination
or lapse, or the effective date of any reduction in the amounts of insurance;
and
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<PAGE> 8
(iv) shall be written as a primary policy which
does not contribute to and is not in excess of coverage which Landlord may
carry.
(c) In the event that Tenant shall fail to carry and
maintain the insurance coverages set forth in this Section 8, Landlord may upon
thirty (30) days written notice to Tenant (unless such coverages will lapse in
which event no such notice shall be necessary) procure such policies of
insurance and Tenant shall promptly reimburse Landlord therefor. See Special
Stipulation 7 on Exhibit C hereto.
(d) Landlord and Tenant hereby waive any rights each may
have against the other on account of any loss or damage occasioned to Landlord
or Tenant, as the case may be, their respective property, the Demised Premises,
its contents or to the other portions of the Building, arising from any risk
covered by all risks fire and extended coverage insurance of the type and amount
required to be carried hereunder, provided that such waiver does not invalidate
such policies or prohibit recovery thereunder. The parties hereto shall cause
their respective insurance companies insuring the property of either Landlord or
Tenant against any such loss, to waive any right of subrogation that such
insurers may have against Landlord or Tenant, as the case may be.
9. Utilities. During the Term, Tenant shall promptly pay as billed to
Tenant all rents and charges for water and sewer services and all costs and
charges for gas, steam, electricity, fuel, light, power, telephone, heat and any
other utility or service used or consumed in or servicing the Demised Premises
and all other costs and expenses involved in the care, management and use
thereof. To the extent reasonably possible, such utilities shall be separately
metered and billed to Tenant. Any utilities which are not separately metered
shall be billed to Tenant by Landlord at Landlord's actual cost. In the event
Tenant's use of any utility not metered is in excess of the average use by other
tenants, Landlord shall have the right to install a meter for such utility, at
Tenant's expense, and bill Tenant for Tenant's actual use. If Tenant fails to
pay any utility bills or charges, Landlord may, at its option and upon
reasonable notice to Tenant, pay the same and in such event, the amount of such
payment, together with interest thereon at the Interest Rate as defined in
Section 32 from the date of such payment by Landlord, will be added to Tenant's
next due payment as Additional Rent.
10. Maintenance and Repairs.
(a) Tenant shall, at its own cost and expense, maintain in
good condition and repair the interior of the Demised Premises, including but
not limited to the heating, air conditioning and ventilation systems, glass,
windows and doors, sprinkler, all plumbing and sewage systems, fixtures,
interior walls, floors (including floor slabs), ceilings, storefronts, plate
glass, skylights, all electrical facilities and equipment including, without
limitation, lighting fixtures, lamps, fans and any exhaust equipment and
systems, electrical motors, and all other appliances and equipment of every kind
and nature located in, upon or about the Demised Premises, except as to such
maintenance and repair as is the obligation of Landlord pursuant to Section
10(b). During the Term, Tenant shall maintain in full force and effect a service
contract for the maintenance of the heating, ventilation and air conditioning
systems with an entity reasonably acceptable to Landlord. Tenant shall deliver
to Landlord (i) a copy of said service contract prior to the Lease Commencement
Date, and (ii) thereafter, a copy of a renewal or substitute service contract
within thirty (30) days prior to the expiration of the existing service
contract. Tenant's obligation shall exclude any maintenance and repair required
because of the act or negligence of Landlord, its employees, contractors or
agents, which shall be the responsibility of Landlord.
(b) Landlord shall, at its own cost and expense, maintain
in good condition and repair the roof, foundation (beneath the floor slab),
structural frame of the Building, load-bearing walls, utilities buried outside
the walls of the Demised Premises, the Building Common Areas, and, for the first
Lease Year only, the portions of the Demised Premises covered by Landlord's
warranty contained in Section 17(e) below. Landlord's obligation shall exclude
the cost of any maintenance or repair required because of the act or negligence
of Tenant or Tenant's agents, contractors, employees and invitees (collectively,
"Tenant's Affiliates"), the cost of which shall be the responsibility of Tenant.
(c) Unless the same is caused solely by the negligent
action or inaction of Landlord, its employees or agents, and is not covered by
the insurance required to be carried by Tenant pursuant to the terms of this
Lease, Landlord shall not be liable to Tenant or to any other person for any
damage occasioned by failure in any utility system or by the bursting or leaking
of any vessel or pipe in or about the Demised Premises, or for any damage
occasioned by water coming into the Demised Premises or arising from the acts or
neglects of occupants of adjacent property or the public. See Special
Stipulation 8 on Exhibit C hereto.
11. Tenant's Personal Property; Indemnity. All of Tenant's personal
property in the Demised Premises shall be and remain at Tenant's sole risk.
Landlord, its agents, employees and contractors, shall not be liable for, and
Tenant hereby releases Landlord from, any and all liability for theft thereof or
any damage thereto occasioned by any act of God or by any acts, omissions or
negligence of any persons. Landlord, its agents, employees and contractors,
shall not be liable for any injury to the person or property of Tenant or other
persons in or about the Demised Premises, Tenant expressly agreeing to indemnify
and save Landlord, its agents, employees and contractors, harmless, in all such
cases, except to the extent caused by the negligence or willful misconduct of
Landlord, its agents, employees and contractors. Tenant further agrees to
indemnify and reimburse Landlord for any actual and reasonable costs or
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<PAGE> 9
expenses, including, without limitation, attorneys' fees, that Landlord
reasonably may incur in investigating, handling or litigating any such claim
against Landlord by a third person, unless such claim arose from the negligence
or willful misconduct of Landlord, its agents, employees or contractors. The
provisions of this Section 11 shall survive the expiration or earlier
termination of this Lease with respect to any damage, injury or death occurring
before such expiration or termination.
12. Tenant's Fixtures. Tenant shall have the right to install in the
Demised Premises trade fixtures required by Tenant or used by it in its
business, and if installed by Tenant, to remove any or all such trade fixtures
from time to time during and upon termination or expiration of this Lease,
provided no Event of Default, as defined Section 22, then exists; provided,
however, that Tenant shall repair and restore any damage or injury to the
Demised Premises (to the condition in which the Demised Premises existed prior
to such installation) caused by the installation and/or removal of any such
trade fixtures.
13. Signs. No sign, advertisement or notice shall be inscribed,
painted, affixed, or displayed on the windows or exterior walls of the Demised
Premises or on any public area of the Building, except in such places, numbers,
sizes, colors and styles as are approved in advance in writing by Landlord
(which approval shall not be unreasonably withheld, delayed or conditioned), and
which conform to all applicable laws, ordinances, or covenants affecting the
Demised Premises. Any and all signs installed or constructed by or on behalf
Tenant pursuant hereto shall be installed, maintained and removed by Tenant at
Tenant's sole cost and expense.
14. Landlord's Lien. Notwithstanding any other provision hereof to the
contrary, Tenant does hereby grant to Landlord, and Landlord shall have at all
times, a security interest in and a valid first lien upon all of the personal
property and trade fixtures of Tenant situated in and upon the Demised Premises
to secure the obligations of Tenant for all Base Rent, Additional Rent and other
sums to become due hereunder and the performance by Tenant of each and all of
Tenant's other covenants and obligations hereunder. The security interest and
lien granted herein may be foreclosed in the manner and form provided by law for
the foreclosure of chattel mortgages or in any other manner provided or
permitted by law. Landlord does hereby agree that the lien granted herein, as
well as any statutory lien granted to Landlord, is subordinate to the lien of
any lender providing financing to Tenant that is secured by Tenant's trade
fixtures, equipment, inventory or other personal property located at the Demised
Premises.
15. Governmental Regulations. Tenant shall promptly comply throughout
the Term, at Tenant's sole cost and expense, with all present and future laws,
ordinances and regulations of all applicable governing authorities relating to
(a) all or any part of the Demised Premises, and (b) to the use or manner of use
of the Demised Premises and the Building Common Area. In the event that such
law, ordinance or regulation requires a renovation, improvement or replacement
to the Demised Premises or the Building Common Area, then Tenant shall be
required to make such renovation, improvement or replacement at Tenant's sole
cost and expense and in compliance with Section 18 hereof only if such law,
ordinance or regulation is applicable because of Tenant's particular use of the
Demised Premises or the Building Common Area, and is not applicable to the
Project in general. If the renovation, improvement or replacement is required to
comply with a law, ordinance or regulation that was in effect and required
compliance at the time the leasehold improvements were constructed in the
Demised Premises pursuant to Section 17, then Landlord shall be responsible for
the cost of such renovation, improvement or replacement. If the renovation,
improvement or replacement is required to comply with a law, ordinance or
regulation that was not in effect or did not require compliance at the time the
leasehold improvements were constructed in the Demised Premises pursuant to
Section 17 and is not related to Tenant's particular use of the Demised
Premises, then the cost of such renovation, improvement or replacement shall be
amortized on a straight-line basis over the useful life of the item in question,
as determined by GAAP, and Tenant shall be obligated to pay for the portion of
such costs attributable to the remainder of the Term, including any extensions
thereof. Tenant shall also observe and comply with the requirements of all
policies of public liability, fire and other policies of insurance at any time
in force with respect to the Demised Premises.
16. Environmental Matters.
(a) For purposes of this Lease:
(i) "Contamination" as used herein means the
presence of or release of Hazardous Substances (as hereinafter defined) into any
environmental media from, upon, within, below, into or on any portion of the
Demised Premises, the Building, the Building Common Area or the Project so as to
require remediation, cleanup or investigation under any applicable Environmental
Law (as hereinafter defined).
(ii) "Environmental Laws" as used herein means
all federal, state, and local laws, regulations, orders, permits, ordinances or
other requirements, concerning protection of human health, safety and the
environment, all as may be amended from time to time.
(iii) "Hazardous Substances" as used herein means
any hazardous or toxic substance, material, chemical, pollutant, contaminant or
waste as those terms are defined by any applicable Environmental Laws
(including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA") and the
Resource
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Conservation and Recovery Act, 42 U.S.C. 6901 et seq. ["RCRA"]) and any solid
wastes, polychlorinated biphenyls, urea formaldehyde, asbestos, radioactive
materials, radon, explosives, petroleum products and oil.
(b) Landlord represents that, except as revealed to Tenant
in writing by Landlord prior to the execution of this Lease, to Landlord's
actual knowledge, Landlord has not treated, stored or disposed of any Hazardous
Substances upon or within the Demised Premises, nor, to Landlord's actual
knowledge, has any predecessor owner of the Demised Premises.
(c) Tenant covenants that all its activities, and the
activities of Tenant's Affiliates (as defined in Section 10(b)), on the Demised
Premises, the Building, or the Project during the Term will be conducted in
compliance with Environmental Laws. Tenant warrants that, for the business it
will operate on the Demised Premises, to the best of its knowledge it is
currently in substantial compliance with all applicable Environmental Laws and
that there are no pending or threatened notices of deficiency, notices of
violation, orders, or judicial or administrative actions involving alleged
violations by Tenant of any Environmental Laws. Tenant, at Tenant's sole cost
and expense, shall be responsible for obtaining all permits or licenses or
approvals under Environmental Laws necessary for Tenant's operation of its
business on the Demised Premises and shall make all notifications and
registrations required by any applicable Environmental Laws, and Landlord agrees
to reasonably cooperate with Tenant to enable Tenant to obtain such permits,
licenses or approvals. Tenant, at Tenant's sole cost and expense, shall at all
times comply with the terms and conditions of all such permits, licenses,
approvals, notifications and registrations and with any other applicable
Environmental Laws. Tenant covenants that prior to the Lease Commencement Date
it shall obtain all such permits, licenses or approvals and made all such
notifications and registrations required by any applicable Environmental Laws
necessary for Tenant's operation of its business on the Demised Premises.
(d) Tenant shall not cause or permit any Hazardous
Substances to be brought upon, kept or used in or about the Demised Premises,
the Building, or the Project without the prior written consent of Landlord,
which consent shall not be unreasonably withheld; provided, however, that the
consent of Landlord shall not be required for the use at the Demised Premises of
cleaning supplies, toner for photocopying machines and other similar materials,
in containers and quantities reasonably necessary for and consistent with normal
and ordinary use by Tenant in the routine operation or maintenance of Tenant's
office equipment or in the routine janitorial service, cleaning and maintenance
for the Demised Premises. For purposes of this Section 16, Landlord shall be
deemed to have reasonably withheld consent if Landlord determines that the
presence of such Hazardous Substance within the Demised Premises could result in
a risk of harm to person or property or otherwise negatively affect the value or
marketability of the Building or the Project.
(e) Tenant shall not cause or permit the release of any
Hazardous Substances by Tenant or Tenant's Affiliates into any environmental
media such as air, water or land, or into or on the Demised Premises, the
Building or the Project in any manner that violates any Environmental Laws. If
such release shall occur, Tenant shall (i) take all steps reasonably necessary
to contain and control such release and any associated Contamination, (ii) clean
up or otherwise remedy such release and any associated Contamination to the
extent required by, and take any and all other actions required under,
applicable Environmental Laws and (iii) notify and keep Landlord reasonably
informed of such release and response.
(f) Regardless of any consents granted by Landlord
pursuant to Section 16(d) allowing Hazardous Substances upon the Demised
Premises, Tenant shall under no circumstances whatsoever cause or permit (i) any
activity on the Demised Premises which would cause the Demised Premises to
become subject to regulation as a hazardous waste treatment, storage or disposal
facility under RCRA or the regulations promulgated thereunder, (ii) the
discharge of Hazardous Substances into the storm sewer system serving the
Project or (iii) the installation of any underground storage tank or underground
piping on or under the Demised Premises.
(g) Tenant shall and hereby does indemnify Landlord and
hold Landlord harmless from and against any and all actual expense, loss, and
liability suffered by Landlord (with the exception of those expenses, losses,
and liabilities arising from the negligence or willful act of Landlord or that
of its agents, employees, or contractors), by reason of the storage, generation,
release, handling, treatment, transportation, disposal, or arrangement for
transportation or disposal, of any Hazardous Substances (whether accidental,
intentional, or negligent) by Tenant or Tenant's Affiliates or by reason of
Tenant's breach of any of the provisions of this Section 16. Such expenses,
losses and liabilities shall include, without limitation, (i) any and all
expenses that Landlord may incur to comply with any Environmental Laws; (ii) any
and all costs that Landlord may incur in studying or remedying any Contamination
at or arising from the Demised Premises, the Building, or the Project; (iii) any
and all costs that Landlord may incur in studying, removing, disposing or
otherwise addressing any Hazardous Substances; (iv) any and all fines, penalties
or other sanctions assessed upon Landlord; and (v) any and all legal and
professional fees and costs incurred by Landlord in connection with the
foregoing. The indemnity contained herein shall survive the termination or
expiration of this Lease.
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17. Construction of Demised Premises.
(a) Landlord and Tenant have agreed to plans and
specifications and/or construction drawings (collectively, the "Plans and
Specifications") as generally described on Exhibit B attached hereto and
incorporated herein, covering all work to be performed by Landlord in
constructing the Improvements (as defined in Section 8(a)(ii)). If Tenant
requests any changes to the Plans and Specifications after the Lease Date, and,
as a result thereof, completion of construction of the Improvements is delayed
beyond the Lease Commencement Date, the Term and Tenant's obligation to pay rent
hereunder shall nevertheless begin on the Lease Commencement Date and the Base
Rent Commencement Date, as the case may be. After the Lease Date, any changes to
the Plans and Specifications requested by Tenant shall be at Tenant's sole cost
and expense and subject to Landlord's written approval.
(b) Landlord shall use reasonable speed and diligence to
substantially complete (as defined below) the Improvements, at Landlord's sole
cost and expense in accordance with the Plans and Specifications and in
compliance with all laws, statutes, codes and ordinances of the applicable
governmental authorities, and have the Demised Premises ready for occupancy on
or before the Lease Commencement Date set forth in Section 1(f). If the Demised
Premises are not substantially complete on the Lease Commencement Date, such
failure to complete shall not in any way affect the obligation of Tenant
hereunder except that the Lease Commencement Date, the Base Rent Commencement
Date, and the Expiration Date shall be postponed one day for each day
substantial completion is delayed until the Demised Premises are substantially
complete, unless the delay is caused by change orders requested by Tenant after
the Lease Date. No liability whatsoever shall arise or accrue against Landlord
by reason of its failure to deliver or afford possession of the Demised
Premises, and Tenant hereby releases and discharges Landlord from and of any
claims for damage, loss, or injury of every kind whatsoever as if this Lease
were never executed. For purposes of this Lease, the term "substantial
completion" or any grammatical variation thereof shall mean sufficient
completion of construction of the Demised Premises in accordance with the Plans
and Specifications so that Tenant can lawfully occupy the Demised Premises for
the uses permitted herein, subject only to minor punchlist items, the completion
of which will not interfere with such permitted uses by Tenant, as evidenced by
the delivery by Landlord to Tenant of (i) a Certificate of Occupancy or its
equivalent (or Temporary Certificate of Occupancy or its equivalent) for the
Demised Premises issued by the appropriate governmental authority if so required
by applicable law, and (ii) a Certificate of Substantial Completion on standard
AIA Form G-704 certified by Landlord's architect. See Special Stipulation 5 on
Exhibit C hereto.
(c) Upon substantial completion of the Demised Premises, a
representative of Landlord and a representative of Tenant together shall inspect
the Demised Premises and generate a punchlist of defective or uncompleted items
relating to the completion of construction of the Improvements (the
"Punchlist"). Landlord shall, within a reasonable time after the Punchlist is
prepared and agreed upon by Landlord and Tenant, complete such incomplete work
and remedy such defective work as is set forth on the Punchlist, and to the
extent reasonably possible, Landlord shall complete such work without
interfering with Tenant's operations on the Demised Premises. Subject to
Landlord's warranty in Section 17(e) below, all construction work performed by
Landlord shall be deemed approved by Tenant in all respects except for items of
said work which are not completed or do not conform to the Plans and
Specifications and which are included on the Punchlist.
(d) Upon substantial completion of the Demised Premises
and the creation of the Punchlist, Tenant shall execute and deliver to Landlord
a letter of acceptance in which Tenant (i) accepts the Demised Premises subject
only to Landlord's completion of the items listed on the Punchlist and (ii)
confirms that the Lease Commencement Date, the Base Rent Commencement Date and
the Expiration Date remain as set forth in Section 1, or if revised pursuant to
the terms hereof, setting forth such dates as so revised.
(e) Landlord hereby warrants to Tenant that the materials
and equipment furnished by Landlord's contractors in the completion of the
Improvements will be of good quality and new, that during the one (1) year
period following the Lease Commencement Date, such materials and equipment and
the work of such contractors shall be free from defects not inherent in the
quality required or permitted hereunder, and that such work will conform to the
Plans and Specifications. This warranty shall exclude damages or defects caused
by Tenant or Tenant's Affiliates, improper or insufficient maintenance, improper
operation, or normal wear and tear under normal usage.
18. Tenant Alterations and Additions. Except for (i) non-structural
changes costing $25,000 or less per change (on a total project basis) and not
more than $250,000 for all changes in the aggregate, or (ii) any decorative
change including wall or floor coverings, Tenant shall not make or permit to be
made any alterations, improvements, or additions to the Demised Premises (a
"Tenant's Change"), without first obtaining on each occasion Landlord's prior
written consent (which consent Landlord agrees not unreasonably to withhold) and
Lender's prior written consent (if such consent is required). As part of its
approval process, Landlord may require that Tenant submit plans and
specifications to Landlord, for Landlord's approval or disapproval, which
approval shall not be unreasonably withheld. All Tenant's Changes shall be
performed in accordance with all legal requirements applicable thereto and in a
good and workmanlike manner with first-class materials. Tenant shall maintain
insurance reasonably satisfactory to Landlord during the construction of all
Tenant's Changes. For any Tenant's Change not requiring Landlord's prior
approval, unless Landlord agrees that any of such Tenant Changes may be left
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in the Demised Premises upon the termination or expiration of this Lease, and
for any Tenant's Change requiring Landlord's approval, if Landlord at the time
of giving its approval to any Tenant's Change notifies Tenant in writing that
approval is conditioned upon restoration, then Tenant shall, at its sole cost
and expense and upon the termination or expiration of this Lease, remove the
same and restore the Demised Premises to its condition prior to such Tenant's
Change. No Tenant's Change shall be structural in nature or impair the
structural strength of the Building or reduce its value. Tenant shall pay the
full cost of any Tenant's Change and shall give Landlord such reasonable
security as may be requested by Landlord to insure payment of such cost. Except
as otherwise provided herein and in Section 12, all Tenant's Changes and all
repairs and all other property attached to or installed on the Demised Premises
by or on behalf of Tenant shall immediately upon completion or installation
thereof be and become part of the Demised Premises and the property of Landlord
without payment therefor by Landlord and shall be surrendered to Landlord upon
the expiration or earlier termination of this Lease.
19. Services by Landlord. Landlord shall be responsible for providing
for maintenance of the Building Common Area, and, except as required by Section
10(b) hereof, Landlord shall be responsible for no other services whatsoever.
Tenant, by payment of Tenant's share of the Operating Expenses, shall pay
Tenant's pro rata share of the expenses incurred by Landlord hereunder.
20. Fire and Other Casualty. In the event the Demised Premises are
damaged by fire or other casualty insured by Landlord, Landlord agrees to
promptly restore and repair the Demised Premises at Landlord's expense,
including the Improvements to be insured by Tenant but only to the extent
Landlord receives insurance proceeds therefor, including the proceeds from the
insurance required to be carried by Tenant on the Improvements. Notwithstanding
the foregoing, in the event that the Demised Premises are (i) in the reasonable
opinion of Landlord, so destroyed that they cannot be repaired or rebuilt within
two hundred forty (240) days after the date of such damage; or (ii) destroyed by
a casualty which is not covered by Landlord's insurance, or if such casualty is
covered by Landlord's insurance but Lender or other party entitled to insurance
proceeds fails to make such proceeds available to Landlord in an amount
sufficient for restoration of the Demised Premises, then Landlord shall give
written notice to Tenant of such determination (the "Determination Notice")
within sixty (60) days of such casualty. Either Landlord or Tenant may terminate
and cancel this Lease effective as of the date of such casualty by giving
written notice to the other party within fifteen (15) days after Tenant's
receipt of the Determination Notice. Upon the giving of such termination notice,
all obligations hereunder with respect to periods from and after the effective
date of termination shall thereupon cease and terminate. If no such termination
notice is given, Landlord shall, to the extent of the available insurance
proceeds, make such repair or restoration of the Demised Premises to the
approximate condition existing prior to such casualty, promptly and in such
manner as not to unreasonably interfere with Tenant's use and occupancy of the
Demised Premises (if Tenant is still occupying the Demised Premises). In the
event that Landlord is unable to so repair or restore the Demised Premises for
occupancy by Tenant on or before the date which is two hundred forty (240) days
after the date of such damage, as extended by Restoration Delay (as defined
below), Tenant may, at its option and as its sole remedy, terminate this Lease
by written notice to Landlord given within thirty (30) days following the
expiration of such two hundred forty (240)-day period (provided that substantial
completion has not occurred prior to Landlord's receipt of said termination
notice), and thereafter neither Landlord nor Tenant shall have any further
obligation hereunder. For purposes hereof, "Restoration Delay" shall mean delays
incurred by reason of Tenant's failure to provide information reasonably
necessary to assist in the repair or restoration as requested by Landlord,
changes requested by Tenant, and for such additional time as is equal to the
time lost by Landlord or Landlord's contractors or suppliers in connection with
the performance of Landlord's work and/or the construction of the Demised
Premises and related improvements due to strikes or other labor troubles,
governmental restrictions and limitations, war or other national emergency,
non-availability of materials or supplies, delay in transportation, accidents,
floods, fire, damage or other casualties, weather or other conditions, or acts
or omissions of Tenant. In the event that Landlord is unable to so repair or
restore the Demised Premises for occupancy by Tenant on or before the date which
is three hundred (300) days after the date of such damage, Tenant may, at its
option and as its sole remedy, terminate this Lease by written notice to
Landlord given within thirty (30) days following the expiration of such three
hundred (300)-day period (provided that substantial completion has not occurred
prior to Landlord's receipt of said termination notice), and thereafter neither
Landlord nor Tenant shall have any further obligation hereunder. Base Rent and
Additional Rent shall proportionately abate during the time that the Demised
Premises or any part thereof are unusable by reason of any such damage thereto.
21. Condemnation.
(a) If all of the Demised Premises is taken or condemned
for a public or quasi-public use, or if a material portion of the Demised
Premises is taken or condemned for a public or quasi-public use and the
remaining portion thereof is not usable by Tenant with the result that Tenant
cannot conduct its business in the remaining Demised Premises as it was
conducted prior to such taking or condemnation in the reasonable opinion of
Landlord, this Lease shall terminate as of the earlier of the date title to the
condemned real estate vests in the condemnor or the date on which Tenant is
deprived of possession of the Demised Premises. In such event, the Base Rent
herein reserved and all Additional Rent and other sums payable hereunder shall
be apportioned and paid in full by Tenant to Landlord to that date, all Base
Rent, Additional Rent and other sums payable hereunder prepaid for periods
beyond that date shall forthwith be repaid by Landlord to Tenant, and neither
party shall thereafter have any liability hereunder, except that
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<PAGE> 13
any obligation or liability of either party, actual or contingent, under this
Lease which has accrued on or prior to such termination date shall survive.
(b) If only part of the Demised Premises is taken or
condemned for a public or quasi-public use and this Lease does not terminate
pursuant to Section 21(a), Landlord shall, to the extent of the award it
receives, restore the Demised Premises to a condition and to a size as nearly
comparable as reasonably possible to the condition and size thereof immediately
prior to the taking (provided that to the extend allowed by the award, the
Demised Premises shall be a complete and tenantable building with operational
mechanical, electrical and plumbing systems), and there shall be an equitable
adjustment to the Base Rent and Additional Rent according to the value of the
Demised Premises before and after the taking.
(c) Landlord shall be entitled to receive the entire award
in any proceeding with respect to any taking provided for in this Section 21,
without deduction therefrom for any estate vested in Tenant by this Lease, and
Tenant shall receive no part of such award. Nothing herein contained shall be
deemed to prohibit Tenant from making a separate claim, against the condemnor,
to the extent permitted by law, for the value of Tenant's moveable trade
fixtures, machinery, Tenant's alterations or improvements, loss of business
income, and moving expenses, provided that the making of such claim shall not
and does not adversely affect or diminish Landlord's award.
22. Tenant's Default.
(a) The occurrence of any one or more of the following
events shall constitute an "Event of Default" of Tenant under this Lease:
(i) if Tenant fails to pay Base Rent or any
Additional Rent hereunder as and when such rent becomes due and such failure
shall continue for more than five (5) days after receipt of written notice from
Landlord of such failure;
(ii) if Tenant fails to pay Base Rent or any
Additional Rent on time more than three (3) times in any period of twelve (12)
months, notwithstanding that such payments have been made within the applicable
cure period;
(iii) if Tenant fails to take possession of the
Demised Premises on the Lease Commencement Date or promptly thereafter;
(iv) if Tenant permits to be done anything which
creates a lien upon the Demised Premises and fails to discharge or bond such
lien, or post security with Landlord acceptable to Landlord within thirty (30)
days after receipt by Tenant of written notice thereof;
(v) if Tenant fails to maintain in force all
policies of insurance required by this Lease and such failure shall continue for
more than ten (10) days after Landlord gives Tenant written notice of such
failure;
(vi) if any petition is filed by or against
Tenant or any guarantor of this Lease under any present or future section or
chapter of the Bankruptcy Code, or under any similar law or statute of the
United States or any state thereof (which, in the case of an involuntary
proceeding, is not permanently discharged, dismissed, stayed, or vacated, as the
case may be, within sixty (60) days of commencement), or if any order for relief
shall be entered against Tenant or any guarantor of this Lease in any such
proceedings;
(vii) if Tenant or any guarantor of this Lease
becomes insolvent or makes a transfer in fraud of creditors or makes an
assignment for the benefit of creditors;
(viii) if a receiver, custodian, or trustee is
appointed for the Demised Premises or for all or substantially all of the assets
of Tenant or of any guarantor of this Lease, which appointment is not vacated
within sixty (60) days following the date of such appointment; or
(ix) if Tenant fails to perform or observe any
other term of this Lease and such failure shall continue for more than thirty
(30) days after Landlord gives Tenant written notice of such failure, or, if
such failure cannot be corrected within such thirty (30) day period, if Tenant
does not commence to correct such default within said thirty (30) day period and
thereafter diligently prosecute the correction of same to completion within a
reasonable time.
(b) Upon the occurrence of any one or more Events of
Default, Landlord may, at Landlord's option, without any demand or notice
whatsoever (except as expressly required in this Section 22):
(i) Terminate this Lease by giving Tenant notice
of termination, in which event this Lease shall expire and terminate on the date
specified in such notice of termination and all rights of Tenant under this
Lease and in and to the Demised Premises shall terminate. Tenant shall
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<PAGE> 14
remain liable for all obligations under this Lease arising up to the date of
such termination, and Tenant shall surrender the Demised Premises to Landlord on
the date specified in such notice; or
(ii) Terminate this Lease as provided in Section
22(b)(i) hereof and recover from Tenant all damages Landlord may incur by reason
of Tenant's default, including, without limitation, an amount which, at the date
of such termination, is calculated as follows: (1) the value of the excess, if
any, of (A) the Base Rent, Additional Rent and all other sums which would have
been payable hereunder by Tenant for the period commencing with the day
following the date of such termination and ending with the Expiration Date had
this Lease not been terminated (the "Remaining Term"), over (B) the aggregate
reasonable rental value of the Demised Premises for the Remaining Term (which
excess, if any shall be discounted to present value at the "Treasury Yield" as
defined below for the Remaining Term); plus (2) the actual and reasonable costs
of recovering possession of the Demised Premises and all other expenses incurred
by Landlord due to Tenant's default, including, without limitation, reasonable
attorney's fees; plus (3) the unpaid Base Rent and Additional Rent earned as of
the date of termination plus any interest and late fees due hereunder, plus
other sums of money and damages owing on the date of termination by Tenant to
Landlord under this Lease or in connection with the Demised Premises. The amount
as calculated above shall be deemed immediately due and payable. The payment of
the amount calculated in subparagraph (ii)(1) shall not be deemed a penalty but
shall merely constitute payment of liquidated damages, it being understood and
acknowledged by Landlord and Tenant that actual damages to Landlord are
extremely difficult, if not impossible, to ascertain. "Treasury Yield" shall
mean the rate of return in percent per annum of Treasury Constant Maturities for
the length of time specified as published in document H.15(519) (presently
published by the Board of Governors of the U.S. Federal Reserve System titled
"Federal Reserve Statistical Release") for the calendar week immediately
preceding the calendar week in which the termination occurs. If the rate of
return of Treasury Constant Maturities for the calendar week in question is not
published on or before the business day preceding the date of the Treasury Yield
in question is to become effective, then the Treasury Yield shall be based upon
the rate of return of Treasury Constant Maturities for the length of time
specified for the most recent calendar week for which such publication has
occurred. If no rate of return for Treasury Constant Maturities is published for
the specific length of time specified, the Treasury Yield for such length of
time shall be the weighted average of the rates of return of Treasury Constant
Maturities most nearly corresponding to the length of the applicable period
specified. If the publishing of the rate of return of Treasury Constant
Maturities is ever discontinued, then the Treasury Yield shall be based upon the
index which is published by the Board of Governors of the U.S. Federal Reserve
System in replacement thereof or, if no such replacement index is published, the
index which, in Landlord's reasonable determination, most nearly corresponds to
the rate of return of Treasury Constant Maturities. In determining the aggregate
reasonable rental value pursuant to subparagraph (ii)(1)(B) above, the parties
hereby agree that, at the time Landlord seeks to enforce this remedy, all
relevant factors should be considered, including, but not limited to, (a) the
length of time remaining in the Term, (b) the then current market conditions in
the general area in which the Building is located, (c) the likelihood of
reletting the Demised Premises for a period of time equal to the remainder of
the Term, (d) the net effective rental rates then being obtained by landlords
for similar type space of similar size in similar type buildings in the general
area in which the Building is located, (e) the vacancy levels in the general
area in which the Building is located, (f) current levels of new construction
that will be completed during the remainder of the Term and how this
construction will likely affect vacancy rates and rental rates and (g)
inflation; or
(iii) Without terminating this Lease, declare
immediately due and payable the sum of the following: (1) the present value
(calculated using the "Treasury Yield") of all Base Rent and Additional Rent due
and coming due under this Lease for the entire Remaining Term (as if by the
terms of this Lease they were payable in advance), plus (2) the cost of
recovering and reletting the Demised Premises (provided, however, that such cost
shall not include the cost of any improvements or alterations to the Demised
Premises that substantially improve or are upgrades to the Improvements) and all
other actual and reasonable expenses incurred by Landlord in connection with
Tenant's default, plus (3) any unpaid Base Rent, Additional Rent and other
rentals, charges, assessments and other sums owing by Tenant to Landlord under
this Lease or in connection with the Demised Premises as of the date this
provision is invoked by Landlord, plus (4) interest on all such amounts from the
date due at the Interest Rate, and Landlord may immediately proceed to distrain,
collect, or bring action for such sum, or may file a proof of claim in any
bankruptcy or insolvency proceedings to enforce payment thereof; provided,
however, that such payment shall not be deemed a penalty or liquidated damages,
but shall merely constitute payment in advance of all Base Rent and Additional
Rent payable hereunder throughout the Term, and provided further, however, that
upon Landlord receiving such payment, Tenant shall be entitled to receive from
Landlord all rents received by Landlord from other assignees, tenants and
subtenants on account of said Demised Premises during the remainder of the Term
(provided that the monies to which Tenant shall so become entitled shall in no
event exceed the entire amount actually paid by Tenant to Landlord pursuant to
this subparagraph (iii)), less all costs, expenses and attorneys' fees of
Landlord incurred but not yet reimbursed by Tenant in connection with recovering
and reletting the Demised Premises; or
(iv) Without terminating this Lease, in its own
name but as agent for Tenant, enter into and upon and take possession of the
Demised Premises or any part thereof. Any property remaining in the Demised
Premises may be removed and stored in a warehouse or elsewhere at the cost of,
and for the account of, Tenant without Landlord being deemed guilty of trespass
or becoming liable for any loss or damage which may be occasioned thereby unless
caused by Landlord's negligence.
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Thereafter, Landlord may, but shall not be obligated to, lease to a third party
the Demised Premises or any portion thereof as the agent of Tenant upon such
terms and conditions as Landlord may deem necessary or desirable in order to
relet the Demised Premises. (This provision shall not be deemed a waiver by
Tenant of any obligation under Texas law, if any, requiring Landlord to mitigate
damages.) The remainder of any rentals received by Landlord from such reletting,
after the payment of any indebtedness due hereunder from Tenant to Landlord, and
the payment of any costs and expenses of such reletting, shall be held by
Landlord to the extent of and for application in payment of future rent owed by
Tenant, if any, as the same may become due and payable hereunder. If such
rentals received from such reletting shall at any time or from time to time be
less than sufficient to pay to Landlord the entire sums then due from Tenant
hereunder, Tenant shall pay any such deficiency to Landlord. Notwithstanding any
such reletting without termination, Landlord may at any time thereafter elect to
terminate this Lease for any such previous default provided same has not been
cured; or
(v) Without terminating this Lease, and with or
without notice to Tenant, enter into and upon the Demised Premises and, without
being liable for prosecution or any claim for damages therefor, maintain the
Demised Premises and repair or replace any damage thereto or do anything or make
any payment for which Tenant is responsible hereunder. Tenant shall reimburse
Landlord immediately upon demand for any actual and reasonable expenses which
Landlord incurs in thus effecting Tenant's compliance under this Lease and
Landlord shall not be liable to Tenant for any damages with respect thereto; or
(vi) Without liability to Tenant or any other
party and without constituting a constructive or actual eviction, suspend or
discontinue furnishing or rendering to Tenant any property, material, labor,
utilities or other service, wherever Landlord is obligated to furnish or render
the same so long as an Event of Default exists under this Lease; or
(vii) With or without terminating this Lease,
allow the Demised Premises to remain unoccupied and collect rent from Tenant as
it comes due; or
(viii) Pursue such other remedies as are
available at law or equity.
(c) If this Lease shall terminate as a result of or while
there exists an Event of Default hereunder, any funds of Tenant held by Landlord
may be applied by Landlord to any damages payable by Tenant (whether provided
for herein or by law) as a result of such termination or default.
(d) Neither the commencement of any action or proceeding,
nor the settlement thereof, nor entry of judgment thereon shall bar Landlord
from bringing subsequent actions or proceedings from time to time, nor shall the
failure to include in any action or proceeding any sum or sums then due be a bar
to the maintenance of any subsequent actions or proceedings for the recovery of
such sum or sums so omitted.
(e) No agreement to accept a surrender of the Demised
Premises and no act or omission by Landlord or Landlord's agents during the Term
shall constitute an acceptance or surrender of the Demised Premises unless made
in writing and signed by Landlord. No re-entry or taking possession of the
Demised Premises by Landlord shall constitute an election by Landlord to
terminate this Lease unless a written notice of such intention is given to
Tenant. No provision of this Lease shall be deemed to have been waived by either
party unless such waiver is in writing and signed by the party making such
waiver. Landlord's acceptance of Base Rent or Additional Rent in full or in part
following an Event of Default hereunder shall not be construed as a waiver of
such Event of Default. No custom or practice which may grow up between the
parties in connection with the terms of this Lease shall be construed to waive
or lessen either party's right to insist upon strict performance of the terms of
this Lease, without a written notice thereof to the other party.
(f) If an Event of Default shall occur, Tenant shall pay
to Landlord, on demand, all actual and reasonable expenses incurred by Landlord
as a result thereof, including reasonable attorneys' fees, court costs and
expenses actually incurred.
23. Landlord's Right of Entry. Tenant agrees to permit Landlord and
the authorized representatives of Landlord and of Lender to enter upon the
Demised Premises at all reasonable times during reasonable business hours for
the purposes of inspecting the Demised Premises and Tenant's compliance with
this Lease, and making any necessary repairs thereto; provided that, except in
the case of an emergency (where there is a threat of injury to persons or damage
to property), Landlord shall give Tenant reasonable prior notice of Landlord's
intended entry upon the Demised Premises. Nothing herein shall imply any duty
upon the part of Landlord to do any work required of Tenant hereunder, and the
performance thereof by Landlord shall not constitute a waiver of Tenant's
default in failing to perform it. Landlord shall not be liable for
inconvenience, annoyance, disturbance or other damage to Tenant by reason of
making such repairs or the performance of such work in the Demised Premises or
on account of bringing materials, supplies and equipment into or through the
Demised Premises during the course thereof, and the obligations of Tenant under
this Lease shall not thereby be affected; provided, however, that Landlord shall
use reasonable efforts not to disturb or otherwise interfere with Tenant's
operations in the Demised Premises in making such repairs or performing such
work. Landlord also shall have the right to enter the Demised Premises at all
reasonable times to exhibit the Demised Premises to any
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<PAGE> 16
prospective purchaser, mortgagee or, during the last six (6) months of the term
of this Lease, to any tenant thereof.
24. Lender's Rights.
(a) For purposes of this Lease:
(i) "Lender" as used herein means the current
holder of a Mortgage;
(ii) "Mortgage" as used herein means any or all
mortgages, deeds to secure debt, deeds of trust or other instruments in the
nature thereof which may now or hereafter affect or encumber Landlord's title to
the Demised Premises, and any amendments, modifications, extensions or renewals
thereof.
(b) This Lease and all rights of Tenant hereunder are and
shall be subject and subordinate to the lien and security title of any Mortgage.
Tenant recognizes and acknowledges the right of Lender to foreclose or exercise
the power of sale against the Demised Premises under any Mortgage. See Special
Stipulation 11 on Exhibit C hereto.
(c) Tenant shall, in confirmation of the subordination set
forth in Section 24(b) and notwithstanding the fact that such subordination is
self-operative, and no further instrument or subordination shall be necessary,
upon demand, at any time or times, execute, acknowledge, and deliver to Landlord
or to Lender any and all instruments requested by either of them to evidence
such subordination.
(d) At any time during the Term, Landlord may, by written
notice to Tenant, make this Lease superior to the lien of any Mortgage. If
requested by Lender, Tenant shall, upon demand, at any time or times, execute,
acknowledge, and deliver to Lender, any and all instruments that may be
necessary to make this Lease superior to the lien of any Mortgage.
(e) If Lender (or Lender's nominee, or other purchaser at
foreclosure) shall hereafter succeed to the rights of Landlord under this Lease,
whether through possession or foreclosure action or delivery of a new lease,
Tenant shall, if requested by such successor, attorn to and recognize such
successor as Tenant's landlord under this Lease without change in the terms and
provisions of this Lease and shall promptly execute and deliver any instrument
that may be necessary to evidence such attornment, provided that such successor
shall not be bound by (i) any payment of Base Rent or Additional Rent for more
than one month in advance, except prepayments in the nature of security for the
performance by Tenant of its obligations under this Lease, and then only if such
prepayments have been deposited with and are under the control of such
successor, (ii) any provision of any amendment to the Lease to which Lender has
not consented, (iii) the defaults of any prior landlord under this Lease, or
(iv) any offset rights arising out of the defaults of any prior landlord under
this Lease. Upon such attornment, this Lease shall continue in full force and
effect as a direct lease between each successor landlord and Tenant, subject to
all of the terms, covenants and conditions of this Lease.
(f) In the event there is a Mortgage at any time during
the Term, Landlord shall use reasonable efforts to cause the Lender to enter
into a subordination, nondisturbance and attornment agreement with Tenant
reasonably satisfactory to Tenant and consistent with this Section 24.
25. Estoppel Certificate. Landlord and Tenant agree, at any time, and
from time to time, within fifteen (15) days after written request of the other,
to execute, acknowledge and deliver a statement in writing in recordable form to
the requesting party and/or its designee certifying that: (i) this Lease is
unmodified and in full force and effect (or, if there have been modifications,
that the same is in full force and effect, as modified), (ii) the dates to which
Base Rent, Additional Rent and other charges have been paid, (iii) whether or
not, to the best of its knowledge, there exists any failure by the requesting
party to perform any term, covenant or condition contained in this Lease, and,
if so, specifying each such failure, (iv) (if such be the case) Tenant has
unconditionally accepted the Demised Premises and is conducting its business
therein, and (v) and as to such additional matters as may be requested, it being
intended that any such statement delivered pursuant hereto may be relied upon by
the requesting party and by any purchaser of title to the Demised Premises or by
any mortgagee or any assignee thereof or any party to any sale-leaseback of the
Demised Premises, or the landlord under a ground lease affecting the Demised
Premises.
26. Landlord Liability. No owner of the Demised Premises, whether or
not named herein, shall have liability hereunder for any matter related to the
period after it ceases to hold title to the Demised Premises; provided, however,
that such owner shall not be relieved from any obligation or liability for
matters related to the period in which it holds title to the Demised Premises.
Neither Landlord nor any officer, director, shareholder, partner or principal of
Landlord, whether disclosed or undisclosed, shall be under any personal
liability with respect to any of the provisions of this Lease. In the event
Landlord is in breach or default with respect to Landlord's obligations or
otherwise under this Lease, Tenant shall look solely to the equity of Landlord
in the Building (including insurance proceeds or any condemnation award to
Landlord) for the satisfaction of Tenant's remedies. It is expressly understood
and agreed that Landlord's liability under the terms, covenants, conditions,
warranties and obligations of this Lease shall in no event exceed the loss of
Landlord's equity interest in the Building.
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<PAGE> 17
27. Notices. Any notice required or permitted to be given or served by
either party to this Lease shall be deemed given when made in writing, and
either (i) personally delivered, (ii) deposited with the United States Postal
Service, postage prepaid, by registered or certified mail, return receipt
requested, or (iii) delivered by licensed overnight delivery service providing
proof of delivery, properly addressed to the address set forth in Section 1(m)
(as the same may be changed by giving written notice of the aforesaid in
accordance with this Section 27). If any notice mailed is properly addressed
with appropriate postage but returned for any reason, such notice shall be
deemed to be effective notice and to be given on the date of mailing.
28. Brokers. Landlord and Tenant each represents and warrants to the
other that neither has employed or otherwise engaged or had any conversations or
negotiations with any broker, finder or other third party concerning the leasing
of the Demised Premises to Tenant who would be entitled to any commission or fee
based on the execution of this Lease. Landlord and Tenant each hereby
indemnifies the other against and from any claims for any brokerage commissions
and all costs, expenses and liabilities in connection therewith, including,
without limitation, reasonable attorneys' fees and expenses, for any breach of
the foregoing. The foregoing indemnification shall survive the termination of
this Lease for any reason.
29. Assignment and Subleasing. (a) Tenant may not assign, mortgage,
pledge, encumber or otherwise transfer this Lease, or any interest hereunder, or
sublet the Demised Premises, in whole or in part, without on each occasion first
obtaining the prior express written consent of Landlord, which consent Landlord
shall not unreasonably withhold. Any change in control of Tenant resulting from
a merger, consolidation, stock transfer or asset sale shall not be considered an
assignment or transfer which requires Landlord's prior written consent if the
resulting entity has a Tangible Net Worth (as defined herein) under Generally
Accepted Accounting Principles ("GAAP") of at least Fifty Million Dollars
($50,000,000.00) or otherwise meets financial criteria reasonably acceptable to
Landlord. For purposes herein, "Tangible Net Worth" is defined as the excess of
the value of tangible assets (i.e. assets excluding those which are intangible
such as goodwill, patents and trademarks) over liabilities. If there is a change
in control of Tenant resulting from a merger, consolidation, stock transfer or
asset sale where the resulting entity has a Tangible Net Worth under GAAP of
less than Fifty Million Dollars ($50,000,000.00), then Landlord's prior written
consent to such change in control shall not be required as long as Tenant
delivers to Landlord prior to such change in control, as additional Security
Deposit, an Irrevocable Letter of Credit (the "L/C") in the amount set forth
below, and shall cause the L/C to be maintained in full force and effect
throughout the Term, as may be extended, in a form and from a financial
institution acceptable to Landlord, as security for the full and faithful
performance by Tenant of each and every term, covenant and condition of this
Lease. The face amount of the L/C shall not be less than six (6) months of Base
Rent calculated beginning with the first full month following the change in
control of Tenant. Landlord agrees that (i) if Tenant's Tangible Net Worth
increases above $50,000,000.00 based on financial information reasonable
required by Landlord, and (ii) as long as no Event of Default has occurred and
is then continuing or any facts or circumstances then exist which, with the
giving of notice or the passage of time, or both, would constitute an Event of
Default, then Landlord shall release, or cause to be released, the L/C. For
purposes of any other assignment or sublease under this Section 29, by way of
example and not limitation, Landlord shall be deemed to have reasonably withheld
consent if Landlord determines that (i) the prospective assignee or subtenant is
not of a financial strength similar to Tenant as of the Lease Date, (ii) that
the prospective assignee or subtenant has a poor business reputation, (iii) that
the proposed use of the Demised Premises by such prospective assignee or
subtenant (including, without limitation, a use involving the use or handling of
Hazardous Substances) will negatively affect the value or marketability of the
Building or the Project or (iv) the prospective assignee or subtenant is a
current tenant in the Project or is a bona-fide third-party prospective tenant.
See Special Stipulation 13 on Exhibit C hereto.
(b) If Tenant desires to assign this Lease or sublet the
Demised Premises or any part thereof, Tenant shall give Landlord written notice
no later than thirty (30) days in advance of the proposed effective date of any
proposed assignment or sublease, specifying (i) the name and business of the
proposed assignee or sublessee, (ii) the amount and location of the space within
the Demised Premises proposed to be subleased, (iii) the proposed effective date
and duration of the assignment or subletting and (iv) the proposed rent or
consideration to be paid to Tenant by such assignee or sublessee. Tenant shall
promptly supply Landlord with financial statements and other information as
Landlord may reasonably request to evaluate the proposed assignment or sublease.
Landlord shall have a period of thirty (30) days following receipt of such
notice and other information requested by Landlord within which to notify Tenant
in writing that Landlord elects: (i) for subleases only that have a term
(including renewal options) equal to the remainer of the Term of this Lease
(including Tenant's option to extend the Term as contained in Special
Stipulation 1 on Exhibit C hereto), to terminate this Lease as to the space so
affected as of the proposed effective date set forth in Tenant's notice, in
which event Tenant shall be relieved of all further obligations hereunder as to
such space, except for obligations under Sections 11 and 28 and all other
provisions of this Lease which expressly survive the termination hereof; or (ii)
to permit Tenant to assign or sublet such space; provided, however, that except
for a subtenant that is an affiliate of Tenant as described in Special
Stipulation 13 on Exhibit C hereto (for which sublease this subparagraph (ii)
shall not apply), if the rent rate agreed upon between Tenant and its proposed
subtenant is greater than the rent rate that Tenant must pay Landlord hereunder
for that portion of the Demised Premises, or if any consideration shall be
promised to or received by Tenant in connection with such proposed assignment or
sublease (in addition to rent), then one half (1/2) of such excess rent and
other consideration (after payment of brokerage commissions, attorneys' fees and
other disbursements reasonably incurred by Tenant
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<PAGE> 18
for such assignment and subletting if acceptable evidence of such disbursements
is delivered to Landlord) shall be considered Additional Rent owed by Tenant to
Landlord, and shall be paid by Tenant to Landlord, in the case of excess rent,
in the same manner that Tenant pays Base Rent and, in the case of any other
consideration, within ten (10) business days after receipt thereof by Tenant; or
(iii) to refuse, in Landlord's reasonable discretion (taking into account all
relevant factors including, without limitation, the factors set forth in the
Section 29(a) above), to consent to Tenant's assignment or subleasing of such
space and to continue this Lease in full force and effect as to the entire
Demised Premises. If Landlord should fail to notify Tenant in writing of such
election within the aforesaid thirty (30) day period, Landlord shall be deemed
to have elected option (iii) above. Tenant agrees to reimburse Landlord for
reasonable legal fees and any other reasonable costs incurred by Landlord in
connection with any requested assignment or subletting, and such payments shall
not be deducted from the Additional Rent owed to Landlord pursuant to subsection
(ii) above. Tenant shall deliver to Landlord copies of all documents executed in
connection with any permitted assignment or subletting, which documents shall be
in form and substance reasonably satisfactory to Landlord and which shall
require such assignee to assume performance of all terms of this Lease on
Tenant's part to be performed.
(c) No acceptance by Landlord of any rent or any other sum
of money from any assignee, sublessee or other category of transferee shall be
deemed to constitute Landlord's consent to any assignment, sublease, or
transfer. Permitted subtenants or assignees shall become liable directly to
Landlord for all obligations of Tenant hereunder, without, however, relieving
Tenant of any of its liability hereunder. No such assignment, subletting,
occupancy or collection shall be deemed the acceptance of the assignee, tenant
or occupant, as Tenant, or a release of Tenant from the further performance by
Tenant of Tenant's obligations under this Lease. Any assignment or sublease
consented to by Landlord shall not relieve Tenant (or its assignee) from
obtaining Landlord's consent to any subsequent assignment or sublease.
30. Termination or Expiration.
(a) No termination of this Lease prior to the normal
ending thereof, by lapse of time or otherwise, shall affect Landlord's right to
collect rent for the period prior to termination thereof.
(b) At the expiration or earlier termination of the Term
of this Lease, Tenant shall surrender the Demised Premises and all improvements,
alterations and additions thereto, and keys therefor to Landlord, clean and
neat, and in the same condition as at the Lease Commencement Date, excepting
normal wear and tear, condemnation and casualty other than that required to be
insured against by Tenant hereunder.
(c) If Tenant remains in possession of the Demised
Premises after expiration of the Term, with or without Landlord's acquiescence
and without any express agreement of the parties, Tenant shall be a
tenant-at-sufferance at the greater of (i) one hundred fifty percent (150%) of
the then current fair market base rental value of the Demised Premises or (ii)
one hundred fifty percent (150%) of the Base Rent in effect at the end of the
Term. Tenant shall also continue to pay all other Additional Rent due hereunder,
and there shall be no renewal of this Lease by operation of law. In addition to
the foregoing, Tenant shall be liable for all damages, direct and consequential,
incurred by Landlord as a result of such holdover. No receipt of money by
Landlord from Tenant after the termination of this Lease or Tenant's right of
possession of the Demised Premises shall reinstate, continue or extend the Term
or Tenant's right of possession.
31. Intentionally Deleted.
32. Late Payments. In the event any installment of rent, inclusive of
Base Rent, or Additional Rent or other sums due hereunder, if any, is not paid
(i) within five (5) days after Tenant's receipt of written notice of such
failure to pay on the first occasion during any twelve (12) month period, or
(ii) as and when due with respect to any subsequent late payments in any twelve
(12) month period, Tenant shall pay an administrative fee equal to two percent
(2%) of such past due amount, plus interest on the amount past due at the lesser
of (i) the maximum interest rate allowed by law or (ii) a rate of fifteen
percent (15%) per annum (the "Interest Rate") to defray the additional expenses
incurred by Landlord in processing such payment.
33. Rules and Regulations. Tenant agrees to abide by the rules and
regulations set forth on Exhibit D attached hereto, as well as other rules and
regulations reasonably promulgated by Landlord from time to time, so long as
such rules and regulations are uniformly enforced against all tenants of
Landlord in the Building.
34. Quiet Enjoyment. So long as Tenant has not committed an Event of
Default hereunder, Landlord agrees that Tenant shall have the right to quietly
use and enjoy the Demised Premises for the Term.
35. Miscellaneous.
(a) The parties hereto hereby covenant and agree that
Landlord shall receive the Base Rent, Additional Rent and all other sums payable
by Tenant hereinabove provided as net income
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<PAGE> 19
from the Demised Premises, without any abatement (except as set forth in Section
20 and Section 21), reduction, set-off, counterclaim, defense or deduction
whatsoever.
(b) If any clause or provision of this Lease is determined
to be illegal, invalid or unenforceable under present or future laws effective
during the Term, then and in that event, it is the intention of the parties
hereto that the remainder of this Lease shall not be affected thereby, and that
in lieu of such illegal, invalid or unenforceable clause or provision there
shall be substituted a clause or provision as similar in terms to such illegal,
invalid or unenforceable clause or provision as may be possible and be legal,
valid and enforceable.
(c) All rights, powers, and privileges conferred hereunder
upon the parties hereto shall be cumulative, but not restrictive to those given
by law.
(d) TIME IS OF THE ESSENCE OF THIS LEASE.
(e) No failure of Landlord or Tenant to exercise any power
given Landlord or Tenant hereunder or to insist upon strict compliance by
Landlord or Tenant with its obligations hereunder, and no custom or practice of
the parties at variance with the terms hereof shall constitute a waiver of
Landlord's or Tenant's rights to demand exact compliance with the terms hereof.
(f) This Lease contains the entire agreement of the
parties hereto as to the subject matter of this Lease and no representations,
inducements, promises or agreements, oral or otherwise, between the parties not
embodied herein shall be of any force and effect. The masculine (or neuter)
pronoun, singular number shall include the masculine, feminine and neuter gender
and the singular and plural number.
(g) This contract shall create the relationship of
landlord and tenant between Landlord and Tenant; no estate shall pass out of
Landlord; Tenant has a usufruct, not subject to levy and sale, and not
assignable by Tenant except as expressly set forth herein.
(h) Landlord and Tenant agree to execute, upon request of
the other, a memorandum of this Lease in recordable form and the requesting
party shall pay the costs and charges for the recording of such memorandum of
lease. Under no circumstances shall Tenant have the right to record this Lease.
(i) The captions of this Lease are for convenience only
and are not a part of this Lease, and do not in any way define, limit, describe
or amplify the terms or provisions of this Lease or the scope or intent thereof.
(j) This Lease may be executed in multiple counterparts,
each of which shall constitute an original, but all of which taken together
shall constitute one and the same agreement.
(k) This Lease shall be interpreted under the laws of the
State where the Demised Premises are located.
(l) The parties acknowledge that this Lease is the result
of negotiations between the parties, and in construing any ambiguity hereunder
no presumption shall be made in favor of either party. No inference shall be
made from any item which has been stricken from this Lease other than the
deletion of such item.
36. Special Stipulations. The Special Stipulations, if any, attached
hereto as Exhibit C, are incorporated herein and made a part hereof, and to the
extent of any conflict between the foregoing provisions and the Special
Stipulations, the Special Stipulations shall govern and control.
37. Lease Date. For purposes of this Lease, the term "Lease Date"
shall mean the later date upon which this Lease is signed by Landlord and
Tenant.
38. Authority. If Tenant is not a natural person, Tenant shall cause
its corporate secretary or general partner, as applicable, to execute the
certificate attached hereto as Exhibit E. Tenant is authorized by all required
corporate or partnership action to enter into this Lease and the individual(s)
signing this Lease on behalf of Tenant are each authorized to bind Tenant to its
terms.
39. No Offer Until Executed. The submission of this Lease to Tenant
for examination or consideration does not constitute an offer to lease the
Demised Premises and this Lease shall become effective, if at all, only upon the
execution and delivery thereof by Landlord and Tenant.
[SIGNATURES ON NEXT PAGE]
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<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seals, the day and year first above written.
LANDLORD:
DFW TRADE CENTER I LIMITED PARTNERSHIP, a Texas
limited partnership
By: ID International (Texas), Inc.,
a Georgia corporation, its Managing General
Partner
Date: By:
Name:
Title:
Attest:
Name:
Title:
[CORPORATE SEAL]
TENANT:
SIMMONS COMPANY, a Delaware corporation
Date: 2/18/98 By: /s/ Roger W. Franklin
Name: Roger W. Franklin
Title: Vice President --
Finance, Treasurer
Attest: /s/ Deborah Y. Negley
Name: Deborah Y. Negley
Title: Admin. Asst.
[CORPORATE SEAL]
-18-
<PAGE> 21
ATTESTATION
Landlord:
STATE OF
COUNTY OF
BEFORE ME, a Notary Public in and for said County, personally appeared
__________________________ and , known to me to be the person(s) who, as
___________________________________ and ____________________________________,
respectively, of ID International (Texas), Inc., a Georgia corporation, the
partnership which executed the foregoing instrument in its capacity as general
partner of Landlord, signed the same, and acknowledged to me that they did so
sign said instrument in the name and upon behalf of said partnership, that the
same is their free act and deed and they were duly authorized thereunto by the
partnership.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed
my official seal, this ____ day of __________________________, 1997.
______________________________
Notary Public
My Commission Expires:
Tenant:
STATE OF GEORGIA
COUNTY OF DE KALB
BEFORE ME, a Notary Public in and for said County, personally appeared
Roger Franklin and Deborah Negley, known to me to be the person(s) who, as V.P.
Finance and Admin. Assistant, respectively, of Simmons Company, the corporation
which executed the foregoing instrument in its capacity as Tenant, signed the
same, and acknowledged to me that they did so sign said instrument in the name
and upon behalf of said corporation as officers of said corporation, that the
same is their free act and deed as such officers, respectively, and they were
duly authorized thereunto by its board of directors; and that the seal affixed
to said instrument is the corporate seal of said corporation.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name, and affixed
my official seal, this 18th day of February, 1998.
/s/ Vanessa Hornbuckle
______________________________
Notary Public
My Commission Expires:
Notary Public, De Kalb County, Georgia
My Commission Expires April 2, 2001
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<PAGE> 22
EXHIBIT A
[SITE PLAN OF DEMISED PREMISES, DFW TRADE CENTER -
BUILDING 'E', GRAPEVINE/COPPELL, TEXAS]
<PAGE> 23
EXHIBIT B
PRELIMINARY PLANS AND SPECIFICATIONS
Those Plans and Specifications for the Demised Premises prepared by MacGregor
and Associates and signed by Tenant on January 9, 1998.
b-1
<PAGE> 24
EXHIBIT C
SPECIAL STIPULATIONS
The Special Stipulations set forth herein are hereby incorporated
into the body of the lease to which these Special Stipulations are attached (the
"Lease"), and to the extent of any conflict between these Special Stipulations
and the preceding language, these Special Stipulations shall govern and control.
1. Option to Extend Term.
(a) Landlord hereby grants to Tenant one (1) option to
extend the Term for a period of five (5) years, such option to be exercised by
Tenant giving written notice of its exercise to Landlord in the manner provided
in this Lease at least two hundred forty (240) days prior to (but not more than
two hundred seventy (270) days prior to) the expiration of the Term, as it may
have been previously extended. No extension option may be exercised by Tenant if
an Event of Default has occurred and is then continuing or any facts or
circumstances then exist which, with the giving of notice or the passage of
time, or both, would constitute an Event of Default either at the time of
exercise of the option or at the time the applicable Term would otherwise have
expired if the applicable option had not been exercised.
(b) If Tenant exercises its option to extend the Term,
Landlord shall, within thirty (30) days after the receipt of Tenant's notice of
such exercise, notify Tenant in writing of Landlord's determination of the Base
Rent for the Demised Premises, which amount shall be 95% of the Market Rent (as
defined below) for such space. The phrase "Market Rent" as used herein shall
mean Landlord's reasonable determination of the then prevailing market rate for
base minimum rental calculated on a per square foot basis for leases covering
buildings in the area of Coppell, Texas comparable to the Building (as adjusted
for any variances between such buildings and the Building) for the applicable
five (5) year option period (the "Market Area"). Tenant shall have thirty (30)
days from its receipt of Landlord's notice to notify Landlord in writing that
Tenant does not agree with Landlord's determination of the Base Rent. If Tenant
does not notify Landlord that Tenant does not agree with Landlord's
determination of the Base Rent within thirty (30) days of its receipt of
Landlord's notice, Base Rent for the Demised Premises for the applicable
extended term shall be the Base Rent set forth in Landlord's notice to Tenant.
If Tenant does notify Landlord that Tenant does not agree with Landlord's
determination of the Base Rent within such 30-day period, Tenant shall in such
notice elect either (i) to determine the Market Rent (if Landlord's
determination of Base Rent is based on the Market Rent), or (ii) to retract its
option to extend the Term, in which case the Term, as it may have been
previously extended, shall expire on its scheduled expiration date and Tenant's
option to extend the Term shall be void and of no further force and effect. If
Tenant elects to determine the Market Rent, the Market Rent shall be determined
by an appraisal procedure as follows:
In the event that Tenant notifies Landlord that Tenant disagrees with
Landlord's determination of the Market Rent and that Tenant elects to
determine the Market Rate, then Tenant shall specify, in such notice
to Landlord, Tenant's selection of a real estate appraiser who shall
act on Tenant's behalf in determining the Market Rent. Within twenty
(20) days after Landlord's receipt of Tenant's selection of a real
estate appraiser, Landlord, by written notice to Tenant, shall
designate a real estate appraiser, who shall act on Landlord's behalf
in the determination of the Market Rent. Within twenty (20) days of
the selection of Landlord's appraiser, the two (2) appraisers shall
render a joint written determination of the Market Rent, which
determination shall take into consideration any differences between
the Building and those buildings comparable to the Building located in
the Market Area, including without limitation (i) typical rent factors
such as tenant improvement allowances, free rent, moving allowances,
and other concessions then available; and (ii) age, location, setting
and type of building. If the two (2) appraisers are unable to agree
upon a joint written determination within said twenty (20) day period,
the two appraisers shall select a third appraiser within such twenty
(20) day period. Within twenty (20) days after the appointment of the
third appraiser, the third appraiser shall render a written
determination of the Market Rent; provided, that the third appraiser's
determination of Market Rent shall not exceed that of Landlord's
appraiser and shall not be less than that of Tenant's appraiser. If
Tenant does not agree with the determination of Market Rent pursuant
to the appraisal procedure, Tenant shall, within three (3) business
days after its notification of the determination of Market Rent
pursuant to the appraisal procedure, notify Landlord in writing that
it elects to retract its option to extend the Term, in which case the
Term, as it may have been previously extended, shall expire on its
scheduled expiration date and Tenant's option to extend the Term shall
be void and of no further force and effect. Unless Tenant retracts its
option in writing within such 3-day period, such determination shall
be final, conclusive and binding. All appraisers selected in
accordance with this subparagraph shall have at least ten (10) years
prior experience in the commercial leasing market of the Market Area
and shall be members of the American Institute of Real Estate
Appraisers or similar professional organization. If either Landlord or
Tenant fails or refuses to select an appraiser, the other appraiser
shall alone determine the Market Rent. Landlord and Tenant agree that
they shall be bound by the determination of Market Rent pursuant to
this paragraph. Landlord shall bear the fee and expenses of its
appraiser; Tenant shall bear the fee and expenses of its appraiser;
and Landlord and Tenant shall share equally the fee and expenses of
the third appraiser, if any.
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<PAGE> 25
(c) Except for the Base Rent, which shall be determined as set forth
in subparagraph (b) above, leasing of the Demised Premises by Tenant for the
applicable extended term shall be subject to all of the same terms and
conditions set forth in this Lease, including Tenant's obligation to pay
Tenant's share of Operating Expenses as provided in this Lease; provided,
however, that any improvement allowances, rent abatements or other concessions
applicable to the Demised Premises during the initial Term shall not be
applicable during any such extended term, nor shall Tenant have any additional
extension options unless expressly provided for in this Lease. Landlord and
Tenant shall enter into an amendment to this Lease to evidence Tenant's exercise
of its renewal option. If this Lease is guaranteed, it shall be a condition of
Landlord's granting the renewal that Tenant deliver to Landlord a reaffirmation
of the guaranty in which the guarantor acknowledges Tenant's exercise of its
renewal option and reaffirms that the guaranty is in full force and effect and
applies to said renewal.
2. Property Management Fees. For the purpose of determining Tenant's
pro rata share of Operating Expenses, Tenant's share of property management fees
for the Building shall not exceed three percent (3.0%) per year of the Annual
Base Rent and annual Additional Rent due under the Lease.
3. Future Governmental Regulations and Cost of Compliance. If, as a
result of one or more laws, ordinances, orders, rules, regulations or
requirements of all federal, state and municipal governments and appropriate
departments, commissions, boards and officers thereof (collectively,
"Governmental Requirements"), it is necessary, from time to time during the
Term, to perform an alteration or modification of the Demised Premises (a "Code
Modification") which (i) would be characterized as a capital expenditure under
generally accepted accounting principles and (ii) is not made necessary as a
result of the specific use being made by Tenant of the Demised Premises (as
distinguished from an alteration or improvement which would be required to be
made by the owner of any warehouse-office building comparable to the Building
irrespective of the use thereof by any particular occupant), Landlord shall have
the obligation to pay the cost of the work which is required to perform the Code
Modification and Tenant shall pay Additional Rent in the manner provided in this
Special Stipulation. If Tenant receives a written notice from a governmental
authority requiring a Code Modification, Tenant shall promptly send a copy of
such notice to Landlord. Any Code Modification which is made necessary as a
result of the specific use being made by Tenant of the Demised Premises shall be
the sole and exclusive responsibility of Tenant in all respects; any such Code
Modification shall be promptly performed by Tenant at its expense in accordance
with the applicable Governmental Requirement. If a Code Modification has been
validly required by a governmental authority and is not the responsibility of
Tenant, Landlord shall, at the expense of Landlord, perform the Code
Modification in accordance with applicable Governmental Requirements. Upon
completion of the Code Modification, Landlord shall provide Tenant with a
written certification of the cost actually incurred by Landlord in performing
the Code Modification, together with documentation substantiating such cost as
Tenant may reasonably require. Tenant shall reimburse Landlord for a portion of
the cost of the Code Modification in the following manner:
(a) The useful life of the Code Modification shall be a
useful life established by agreement of Landlord and Tenant; provided that if no
such agreement can be reached, the applicable recovery period under Section 168
of the United States Internal Revenue Code and related Regulations
(collectively, the "Code" ) for improvements comparable to the Code Modification
shall be the "useful life" of the Code Modification, but in no event shall the
"useful life" be greater than fifteen (15) years. If the Code does not establish
clearly the applicable recovery period, then the useful life shall conclusively
be ten (10) years.
(b) Using such useful life, Tenant shall reimburse
Landlord for a portion of the cost of the Code Modification which will amortize
("Amortized Cost"), with annual interest calculated at three and one-half
percent (3 1/2%) over the interest rate on the ten (10) year Treasury Note at
the time of completion of the Code Modification on a straight line basis, during
the remainder of the initial Term or the renewal Term, as may be in effect and
as may be extended. Commencing on the first day of the first full calendar month
following the month in which the Code Modification is completed, and continuing
thereafter on the first day of each remaining month of the Term, renewal Term,
as may be in effect and as may be extended, Tenant shall pay to Landlord, as
Additional Rent, in equal installments, the Amortized Cost. If installments are
being paid by Tenant under this Special Stipulation at the end of either the
initial Term or the renewal Term and Tenant exercises its right to renew or
extend the Term of this Lease, the monthly installments by Tenant under this
Special Stipulation shall continue without interruption or modification during
the renewal Term irrespective of any adjustment which may be made in Additional
Rent, until such time as the cost of the Code Modification has been fully
amortized.
4. Inspection Rights.
(a) Landlord's books and records pertaining to the
calculation of Operating Expenses for any calendar year within the Term may be
inspected by Tenant at Tenant's expense, at any reasonable time within one (1)
year after Tenant's receipt of Landlord's statement for Operating Expenses;
provided that Tenant shall give Landlord not less than fifteen (15) days' prior
written notice of any such inspection. If Landlord's calculation of Tenant's
share of Operating Expenses for the inspected calendar year was incorrect, then
Tenant shall be entitled to a refund of any overpayment or Tenant shall pay to
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<PAGE> 26
Landlord the amount of any underpayment, as the case may be. If Tenant's
inspection proves that Landlord's calculation of Tenant's share of Operating
Expenses for the inspected calendar year resulted in an overpayment by more than
ten percent (10%) of Tenant's share, Landlord shall also pay the reasonable fees
and expenses of Tenant's independent professionals, if any, conducting said
inspection; provided, however, that if Landlord disagrees with Tenant's
inspection results, the parties shall either agree to a resolution of the
disagreement or submit the disagreement to the Dispute Resolution Procedure, as
defined in Special Stipulation 14 below.
(b) All of the information obtained through Tenant's
inspection with respect to financial matters (including, without limitation,
costs, expenses, income) and any other matters pertaining to Landlord, the
Demised Premises, the Building and/or the Project as well as any compromise,
settlement, or adjustment reached between Landlord and Tenant relative to the
results of the inspection shall be held in strict confidence by Tenant and its
officers, agents, and employees; and Tenant shall cause its independent
professionals and any of its officers, agents or employees to be similarly bound
pursuant to subsection (c) below.
(c) As a condition precedent to Tenant's exercise of its
right to inspect, Tenant must deliver to Landlord a signed covenant from the
inspector (such covenant is annexed hereto as Exhibit F). Tenant understands and
agrees that this provision is of material importance to Landlord and that any
violation of the terms of this provision shall result in immediate and
irreparable harm to Landlord.
(d) Landlord shall have all rights allowed by law or
equity if Tenant, its officers, agents, or employees and/or the inspector
violate the terms of this provision, including, without limitation, the right to
terminate this Lease or the right to terminate Tenant's right to inspect in the
future pursuant to this Special Stipulation 4. Tenant shall indemnify, defend
upon request, and hold Landlord harmless from and against all costs, damages,
claims, liabilities, expenses, losses, court costs, and attorneys' fees suffered
by or claimed against Landlord, based in whole or in part upon the breach of
this Special Stipulation 3 by Tenant, its officers, agents, or employees and/or
its inspector; and shall cause its inspector to be similarly bound.
(e) The obligations within this Special Stipulation 4
shall survive the expiration or earlier termination of the Lease.
5. Construction of Demised Premises.
(a) Notwithstanding the provisions of Section 17 of this
Lease, Landlord shall be responsible for the cost of the construction of the
Improvements (as defined in Section 8(a)(ii) of the Lease) only up to an amount
equal to $1,009,832 (the "Tenant Allowance"). Upon substantial completion of the
Improvements, Landlord shall deliver to Tenant a bill for all amounts in excess
of the Tenant Allowance. Tenant agrees to pay such bill in full to Landlord
within ten (10) calendar days following receipt of such bill.
(b) For purposes of this Special Stipulation, the cost of
the construction of the Improvements shall be deemed to include, but not be
limited to, the cost of the Plans and Specifications, permits and all tenant
buildout, including, without limitation, demising walls, utilities, and the
heating, ventilating and air conditioning system.
(c) Following completion of construction of the Demised
Premises in accordance with Section 17 of this Lease and this Special
Stipulation, upon Landlord's request, Tenant will promptly execute and deliver
an amended and restated version of this Lease as of the Lease Date which will
deleted this Special Stipulation in its entirety.
(d) If the cost of the Leasehold Improvements is less than
the Tenant Allowance (such difference being defined herein as "Savings"), then
the Monthly Base Rent Installments shall be reduced as follows: For any Savings
up to $357,000, then for every increment of $21,000 of Savings, Monthly Base
Rent Installments shall be reduced by $117.49. In no event shall there be a
reduction in Base Rent for Savings exceeding $357,000. The reduction shall apply
on a pro rata basis to any increment of Savings less than $21,000.
6. Landlord Representations. Landlord represents and
warrants to Tenant as follows:
(a) Landlord holds fee simple title to the Building.
(b) To Landlord's actual knowledge, the design and
construction of the Building materially complies with all applicable federal,
state, county and municipal laws, regulations, ordinances and codes in effect as
of the Lease Date, excepting therefrom any requirements related to Tenant's
specific use of the Demised Premises.
(c) No person other than Tenant is entitled to possession
of the Demised Premises.
c-3
<PAGE> 27
(d) The Demised Premises are not subject to any unpaid
special assessments which are due and owing.
(e) To Landlord's actual knowledge, there exists no
pending or contemplated condemnation, eminent domain or rezoning proceeding
affecting the Building, or any pending or contemplated proceeding which could or
might result in the levy of any special tax or assessment against the Building.
(i) There is currently no Mortgage secured by the
Building.
7. Landlord Insurance.
(a) Landlord shall maintain at all times during the Term
of this Lease, with such deductible as Landlord in its sole judgment determines
advisable, insurance on the "All-Risk" or equivalent form on a Replacement Cost
Basis against loss or damage to the Building. Such insurance shall be in the
amount of 80% of the replacement value of the Building (excluding all fixtures
and property required to be insured by Tenant under this Lease).
(b) Landlord shall maintain at all times during the Term
commercial liability insurance with limits at least equal to the amount as
Tenant is required to maintain pursuant to Section 8(a)(i) of this Lease.
8. Landlord Default. If Landlord shall fail to cure any default within
the times permitted for cure and if, in Tenant's reasonable opinion, "self-help"
to cure a default by Landlord is necessary, the parties hereto agree as follows:
(a) For situations where there is an emergency situation
to prevent significant physical damage to the Demised Premises (including
Tenant's property or property of Tenant's customers located within the Demised
Premises) or injury to persons, Tenant may exercise such self-help after giving
Landlord such notice of Tenant's intent to exercise the intended self-help as is
reasonable under the circumstances (it being acknowledged that oral notice may
be appropriate in certain emergency situations, but that any such oral notice
must be followed by written notice given within three (3) days of such oral
notice). Tenant shall be entitled to recover the reasonable cost of self-help in
an emergency situation to prevent significant physical damage to the Demised
Premises (including Tenant's property located within the Demised Premises) or
injury to persons and Landlord shall pay such amount within ninety (90) days
after Tenant's request for reimbursement as described below. Notwithstanding the
foregoing, Tenant may not recover any costs that are otherwise reimbursable to
Tenant under any insurance policies carried by Tenant. In addition, any requests
for reimbursement made by Tenant shall be accompanied by such documentation as
Landlord shall reasonably require showing the actual costs incurred by Tenant.
If Landlord has not paid to Tenant such amount or given Tenant notice of
reasonable objection to such amount within such ninety (90) day period, or if
Landlord's objection to such amount is resolved against Landlord by agreement of
the parties or by a court of competent jurisdiction to which the dispute has
been submitted by the parties, then Tenant may withhold the cost of such
self-help from future Base Rent until Tenant has been reimbursed in full for the
cost of such self-help up to $25,000; provided, however, such set-off rights
shall not limit Tenant's right to otherwise recover from Landlord the full
amount of the reasonable cost of such self-help.
(b) For situations where Landlord's default does not
create an emergency situation where action is necessary to prevent significant
physical damage to the Demised Premises (including Tenant's property or property
of Tenant's customers located within the Demised Premises), injury to persons,
or material interference with Tenant's business operations:
(i) Tenant must give prior written notice to
Landlord that Tenant intends to cure such default under the provisions
of this Special Stipulation.
(ii) If Landlord disagrees with Tenant's
assessment that Landlord has defaulted under this Lease, Landlord may
notify Tenant that Landlord elects to submit the disagreement to the
Dispute Resolution Procedure defined and described in Special
Stipulation 14 below. If Landlord elects the Dispute Resolution
Procedure, Tenant shall not cure such alleged Landlord default unless
and until the Dispute Resolution Procedure determines that an actual
default by Landlord exists.
(iii) If the Dispute Resolution Procedure
determines that a default has occurred and a cure is required,
Landlord shall have a period of fifteen (15) days to begin work to
cure such default. Landlord must act with due speed and in good faith
to sure such default.
(iv) If Landlord does not commence to act to cure
such default within such 15-day period or fails to proceed to cure
with due speed and in good faith, Tenant may cure such default by
incurring only such expenses as are reasonable under the circumstances
to cure the default.
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<PAGE> 28
(v) Tenant shall be entitled to recover the
reasonable costs incurred in curing such default by giving written
notice to Landlord of such costs with supporting documentation
reasonably necessary to show all such actual costs incurred by Tenant.
Notwithstanding the foregoing, Tenant may not recover any costs that
are otherwise reimbursable to Tenant under any insurance policies
carried by Tenant.
(vi) If Landlord does not pay to Tenant such
amount billed by Tenant within fifteen (15) days following receipt of
such notice from Tenant, Tenant may withhold the cost of such
self-help, plus interest on the amount due to Tenant at the lesser of
(i) the maximum interest rate allowed by law or (ii) a rate of fifteen
percent (15%) per annum, from future Base Rent until Tenant has been
reimbursed in full for the cost of such self-help.
9. Environmental Matters. Landlord shall indemnify Tenant and hold
Tenant harmless from and against any and all expenses, losses and liabilities
actually suffered by Tenant (with the sole exception of any and all
consequential damages, including but not limited to the loss of use of the
Demised Premises, lost profits and loss of business, and those expenses, losses,
and liabilities arising from Tenant's own negligence or willful act) as a result
of a governmental authority having jurisdiction ordering a cleanup, removal or
other remediation by Tenant of any Hazardous Substances located on, under or
about the Demised Premises caused by Landlord.
10. Assignment of Landlord Warranties. Landlord shall grant to Tenant,
until the expiration or earlier termination of the Term, without recourse or
warranty, a non-exclusive right during the Term to exercise Landlord's rights
under any warranties obtained with respect to the heating, ventilation and air
conditioning system, or any other portions of the improvements within the
Demised Premises required to be maintained or repaired by Tenant pursuant to
this Lease, which extend beyond the one (1) year warranty period.
11. Lender's Rights. Notwithstanding anything to the contrary
contained in Section 24 of this Lease, this Lease and all rights of Tenant
hereunder are and shall be subject and subordinate to the lien and security
title of any Mortgage created after the Lease Date provided that the holder of
said Mortgage agrees not to disturb Tenant's possession of the Demised Premises
so long as Tenant is not in default hereunder, as evidenced by a subordination
and non-disturbance agreement signed by said holder which agreement may include
(a) the conditions contained in Section 24(e) of this Lease, (b) a requirement
that said holder be given notice and opportunity to cure a landlord default and
(c) other provisions customarily required by lenders. Tenant shall promptly
execute such a subordination and non-disturbance agreement upon Landlord's
request.
12. Landlord Default. For purposes of Section 26 of the Lease,
Landlord's equity interest in the Building shall be deemed to be no less than
twenty percent (20%) of the fair market value of the Building determined as of
the date on which Tenant initiates the applicable action to enforce its rights
under this Lease.
13. Assignment and Subleasing. Notwithstanding the provisions of
Section 29 of this Lease, Tenant may assign its rights and obligations under
this Lease to any entity owning a majority of the outstanding stock of Tenant,
or to any entity under common ownership or control with Tenant, or to any entity
owned by Tenant, without the prior consent of Landlord, provided that Tenant
shall give Landlord prior written notice of such assignment.
14. Dispute Resolution Procedure. In the event that a dispute arises
between Landlord and Tenant under the Lease, and the Lease specifically provides
that the dispute resolution procedure outlined in this Special Stipulation 14
(herein referred to as the "Dispute Resolution Procedure") shall be utilized,
then such dispute shall be resolved by binding arbitration (the "Arbitration")
to be held in front of an arbitrator in Atlanta, Georgia in accordance with this
Special Stipulation 14. The Arbitration may be requested by any party to the
controversy or dispute by giving a written notice of demand for Arbitration to
the other parties. The Arbitration shall be conducted in accordance with the
United States Arbitration Act (9 U.S.C. Section 1-16), notwithstanding any other
choice of law provision in this Agreement, and under the current Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
determination rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator. The parties hereto agree to request an expedited
process for the Arbitration. No provision of, or the exercise of any right
under, these Arbitration terms shall limit the right of any party to obtain
provisional relief such as injunctive relief or other relief to maintain the
status quo from a court having jurisdiction, pending the appointment of the
arbitrator(s), or the maintenance of such provisional relief until the issuance
of a determination by the arbitrator(s). The institution of maintenance of such
an action for provisional judicial relief shall not constitute a waiver of the
right of any party to submit a controversy or claim for Arbitration. Fees,
costs, and expenses of the arbitrator shall be borne by the party against whom
the Arbitration shall be determined, or in such proportions as the arbitrator
shall designate, but each party shall bear the expense of its own counsel,
experts, witnesses, and preparation and presentation of proof.
c-5
<PAGE> 29
15. Landlord's Failure to Deliver Demised Premises.
(a) Notwithstanding the provisions of Section 17(b) of
this Lease, in the event that Landlord is unable to substantially complete the
Demised Premises on or before April 7, 1998, as extended by Construction Delay
(as defined below), Landlord shall give Tenant credit toward Tenant's Monthly
Base Rent Installments in the amount of one (1) days' Base Rent for each day
after April 7, 1998 that Landlord does not substantially complete the Demised
Premises.
(b) Notwithstanding the provisions of Section 17(b) of
this Lease, in the event that Landlord is unable to substantially complete the
Demised Premises on or before June 1, 1998, as extended by delays incurred by
reason of changes requested by Tenant in the Plans and Specifications that
result in a delay in the completion of construction, or by reason of acts or
omissions of Tenant, Tenant may terminate this Lease by written notice to
Landlord given within fourteen (14) days following such date (provided that
substantial completion has not occurred prior to Landlord's receipt of said
termination notice), and thereafter neither Landlord nor Tenant shall have any
further obligation hereunder.
(c) For purposes of this Lease, "Construction Delay" shall
mean delays incurred by reason of changes requested by Tenant in the Plans and
Specifications that result in a delay in the completion of construction, and for
such additional time as is equal to the time lost by Landlord or Landlord's
contractors or suppliers in connection with the performance of Landlord's
completion of the Improvements due to strikes or other labor troubles,
governmental restrictions and limitations, war or other national emergency,
accidents, floods, fire, damage or other casualties, weather or other
conditions, acts or omissions of Tenant, or other delays caused by reasons
beyond Landlord's reasonable control.
c-6
<PAGE> 30
EXHIBIT D
RULES AND REGULATIONS
These Rules and Regulations have been adopted by Landlord for the mutual benefit
and protection of all the tenants of the Building in order to insure the safety,
care and cleanliness of the Building and the preservation of order therein.
1. The sidewalks shall not be obstructed or used for any purpose other
than ingress and egress. No tenant and no employees of any tenant shall go upon
the roof of the Building without the consent of Landlord.
2. No awnings or other projections shall be attached to the outside
walls of the Building.
3. The plumbing fixtures shall not be used for any purpose other than
those for which they were constructed, and no sweepings, rubbish, rags or other
substances, including Hazardous Substances, shall be thrown therein.
4. No tenant shall cause or permit any objectionable or offensive
odors to be emitted from the Demised Premises.
5. The Demised Premises shall not be used for lodging or sleeping or
for any immoral or illegal purposes.
6. No tenant shall make, or permit to be made any unseemly or
disturbing noises, sounds or vibrations or disturb or interfere with tenants of
this or neighboring buildings or premises or those having business with them.
7. Each tenant must, upon the termination of this tenancy, restore to
the Landlord all keys of stores, offices, and rooms, either furnished to, or
otherwise procured by, such tenant, and in the event of the loss of any keys so
furnished, such tenant shall pay to the Landlord the cost of replacing the same
or of changing the lock or locks opened by such lost key if Landlord shall deem
it necessary to make such change.
8. Canvassing, soliciting and peddling in the Building and the Project
are prohibited and each tenant shall cooperate to prevent such activity.
9. Landlord will direct electricians as to where and how telephone or
telegraph wires are to be introduced. No boring or cutting for wires or
stringing of wires will be allowed without written consent of Landlord. The
location of telephones, call boxes and other office equipment affixed to the
Demised Premises shall be subject to the approval of Landlord.
10. Parking spaces associated with the Building are intended for the
exclusive use of passenger automobiles. Except for intermittent deliveries, no
vehicles other than passenger automobiles may be parked in a parking space
without the express written permission of Landlord. Trucks and tractor trailers
may only be parked at designated areas of the Building. Trucks and tractor
trailers shall not block access to the Building.
11. No tenant shall use any area within the Project for storage
purposes other than the interior of the Demised Premises.
d-1
<PAGE> 31
EXHIBIT E
CERTIFICATE OF AUTHORITY
CORPORATION
The undersigned, Secretary of Simmons Company, a Delaware
corporation ("Tenant"), hereby certifies as follows to DFW Trade Center I
Limited Partnership, a Texas limited partnership ("Landlord"), in connection
with Tenant's proposed lease of premises in Building E, at DFW Trade Center,
Coppell, Texas (the "Premises"):
1. Tenant is duly organized, validly existing and in good standing
under the laws of the State of Delaware, and duly qualified to do business in
the State of Texas.
2. That the following named persons, acting individually, are each
authorized and empowered to negotiate and execute, on behalf of Tenant, a lease
of the Premises and that the signature opposite the name of each individual is
an authentic signature:
<TABLE>
<S> <C> <C>
Roger W. Franklin VP-Finance/Treasurer /s/ Roger W. Franklin
- -------------------- -------------------- ---------------------
(name) (title) (signature)
- -------------------- -------------------- ---------------------
(name) (title) (signature)
- -------------------- -------------------- ---------------------
(name) (title) (signature)
</TABLE>
3. That the foregoing authority was conferred upon the person(s)
named above by the Board of Directors of Tenant, at a duly convened meeting held
_____________, 19___.
--------------------------------
Assistant Secretary
[CORPORATE SEAL]
e-1
<PAGE> 32
EXHIBIT F
CONFIDENTIALITY COVENANT
This covenant is executed this ___ day of ______________, 19__, by
[insert name of inspector] whose principal office is located at [insert
inspector's address].
As a condition precedent to my right to inspect the financial
matters (including, without limitation, costs, expenses, income) and any other
matters pertaining to [insert name of landlord] ("Landlord") and/or the [insert
name and address of the project] (the "Project") on behalf of [insert name of
tenant] ("Tenant"), I hereby covenant and agree that I will keep all information
obtained through such inspection with respect to financial matters (including,
without limitation, costs, expense, income) and other matters pertaining to the
Landlord and/or the Project as well as any information regarding a compromise,
settlement, or adjustment reached between Landlord and Tenant in strict
confidence; and I shall not reveal this information in any manner to any person
except (i) Tenant's attorneys, accountants and other reasonable consultants, or
(ii) upon the prior written consent of Landlord, which consent may be withheld
in Landlord's sole discretion, or (iii) if required pursuant to any litigation
between Landlord and Tenant materially related to the facts disclosed by such
inspection, or (iv) if required by law.
I also agree to indemnify, defend upon request, and hold Landlord
harmless from and against all costs, damages, claims, liabilities, expenses,
losses court costs, and attorney's fees suffered by or claimed against Landlord,
based in whole or in part upon the willful breach of this covenant.
The above-mentioned obligations shall survive the expiration or
earlier termination of the lease between Landlord and Tenant.
[Insert inspector's name]
By: __________________________
Title: _______________________
f-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> JUN-28-1997
<EXCHANGE-RATE> 1
<CASH> 9,108
<SECURITIES> 0
<RECEIVABLES> 73,240
<ALLOWANCES> 7,752
<INVENTORY> 19,970
<CURRENT-ASSETS> 111,603
<PP&E> 54,967
<DEPRECIATION> 7,403
<TOTAL-ASSETS> 375,125
<CURRENT-LIABILITIES> 76,235
<BONDS> 173,570
11,230
0
<COMMON> 320
<OTHER-SE> 92,294
<TOTAL-LIABILITY-AND-EQUITY> 375,125
<SALES> 550,085
<TOTAL-REVENUES> 550,085
<CGS> 319,074
<TOTAL-COSTS> 319,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,750
<INTEREST-EXPENSE> 19,088
<INCOME-PRETAX> 12,887
<INCOME-TAX> 6,525
<INCOME-CONTINUING> 6,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,362
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
