<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-76723
SIMMONS COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1007444
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Concourse Parkway, Suite 600, Atlanta, Georgia 30328
- - -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 512-7700
-----------------------
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. [ X ] Yes [ ] No
The number of shares of the registrant's common stock outstanding as of
November 8, 1999 was 31,964,452.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------
September 25, September 26,
1999 1998
---- ----
<S> <C> <C>
Net sales $172,964 $177,000
Costs and expenses:
Cost of products sold 98,133 101,449
Selling, general and administrative expenses 56,249 56,606
ESOP expense 1,792 1,429
Amortization of intangibles 1,907 1,906
Interest expense, net 7,917 4,870
Other expense, net 589 1,038
-------- --------
Income before income taxes 6,377 9,702
Provision for income taxes 2,624 4,728
-------- --------
Net income 3,753 4,974
-------- --------
Other comprehensive income:
Foreign currency translation adjustment (3) (14)
-------- --------
Comprehensive income $ 3,750 $ 4,960
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 3
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
September 25, September 26,
1999 1998
---- ----
<S> <C> <C>
Net sales $467,001 $457,068
Costs and expenses:
Cost of products sold 267,620 268,254
Selling, general and administrative expenses 165,701 157,035
ESOP expense 5,377 4,262
Amortization of intangibles 5,721 5,721
Interest expense, net 23,671 14,408
Other expense, net 1,711 1,833
-------- --------
Income (loss) before income taxes and
extraordinary item (2,800) 5,555
Provision (benefit) for income taxes (1,358) 2,729
-------- --------
Income (loss) before extraordinary item (1,442) 2,826
Extraordinary loss from early extinguishment
of debt, net of income tax benefit of $1,095 2,173 --
-------- --------
Net (loss) income (3,615) 2,826
-------- --------
Other comprehensive income:
Foreign currency translation adjustment 37 (24)
-------- --------
Comprehensive (loss) income $ (3,578) $ 2,802
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,928 $ 6,004
Accounts receivable, less allowance for
doubtful accounts of $3,442 and $4,177 87,711 71,354
Inventories 19,749 20,462
Deferred income taxes 11,432 7,440
Other current assets 10,832 14,792
-------- --------
Total current assets 137,652 120,052
-------- --------
Property, plant and equipment, net 53,826 54,153
Patents, net of accumulated amortization of
$9,762 and $7,666 7,270 9,366
Goodwill, net of accumulated amortization of
$16,915 and $13,290 176,392 180,017
Other assets 49,762 36,473
-------- --------
$424,902 $400,061
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
Simmons Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,240 $ 29,950
Accrued advertising and incentives 24,583 15,321
Accrued taxes 1,923 6,578
Other accrued expenses 18,347 15,632
Current maturities of long-term obligations 589 1,832
-------- --------
Total current liabilities 71,682 69,313
Noncurrent liabilities:
Long-term obligations 333,701 311,637
Other noncurrent liabilities 17,938 19,328
-------- --------
Total liabilities 423,321 400,278
Commitments and contingencies
Redemption Obligation--ESOP, net of related unearned
compensation of $7,485 and $11,400 15,999 12,084
Common stockholders' deficit:
Common stock, $.01 par value; 50,000 shares
authorized 31,964 issued and outstanding 320 320
Paid in capital 1,461 --
Accumulated deficit (16,150) (12,535)
Accumulated other comprehensive loss (49) (86)
-------- --------
Total common stockholders' deficit (14,418) (12,301)
-------- --------
$424,902 $400,061
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
Simmons Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 25, September 26,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ (5,561) $ 3,751
Cash flows from investing activities:
Purchases of property, plant and equipment, net (7,615) (12,221)
-------- --------
Net cash used in investing activities (7,615) (12,221)
-------- --------
Cash flows from financing activities:
Proceeds of 10.25% Senior Subordinated
Notes due 2009 150,000 --
Payments on Senior Bridge Loans (75,000) --
Payments on Junior Simmons Notes (30,391) --
Proceeds of long-term borrowings -- 43,233
Payments on long-term borrowings (24,179) (36,719)
Payments of financing costs (5,367) --
Treasury stock purchases -- (55)
-------- --------
Net cash provided by financing activities 15,063 6,459
-------- --------
Net effect of exchange rate changes on cash 37 (24)
-------- --------
Change in cash and cash equivalents 1,924 (2,035)
Cash and cash equivalents, beginning of period 6,004 9,108
-------- --------
Cash and cash equivalents, end of period $ 7,928 $ 7,073
======== ========
Supplemental cash flow information:
Depreciation $ 7,942 $ 6,777
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE> 7
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
For purposes of this report the "Company" refers to Simmons Company and
its subsidiaries, collectively. The Condensed Consolidated Financial Statements
of the Company have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (the "SEC"). The accompanying
unaudited condensed consolidated financial statements contain all adjustments,
which, in the opinion of management, are necessary to present fairly the
financial position of the Company at September 25, 1999, and its results of
operations and cash flows for the periods presented herein. All adjustments in
the periods presented herein are normal and recurring in nature unless otherwise
disclosed. These condensed consolidated financial statements should be read in
conjunction with the year-end consolidated financial statements and accompanying
notes. Operating results for the period ended September 25, 1999, are not
necessarily indicative of future results that may be expected for the year
ending December 25, 1999.
2. Inventories
Inventories consisted of the following at September 25, 1999 and
December 26, 1998 (in thousands):
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
---- ----
<S> <C> <C>
Raw materials $11,478 $12,823
Work in progress 1,398 1,376
Finished goods 6,873 6,263
------- -------
$19,749 $20,462
======= =======
</TABLE>
7
<PAGE> 8
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
3. Long-Term Obligations
Long-term obligations consisted of the following at September 25, 1999
and December 26, 1998 (in thousands):
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
---- ----
<S> <C> <C>
Senior Credit Agreement:
Tranche A Term Loan $ 48,607 $ 70,000
Tranche B Term Loan 68,657 70,000
Tranche C Term Loan 48,764 50,000
Industrial Revenue Bonds, 7.00%, due 2017 9,700 9,700
Industrial Revenue Bonds, 3.20%, due 2016 5,000 5,000
Banco Santander Loan 3,022 3,164
10.25% Series Subordinated Notes due 2009 150,000 -
Senior Bridge Loans - 75,000
Junior Simmons Notes - 30,000
Other, including capital lease obligations 540 605
-------- --------
334,290 313,469
Less current portion (589) (1,832)
-------- --------
$333,701 $311,637
======== ========
</TABLE>
The Senior Credit Agreement provides for loans of up to $270.0 million,
consisting of the Term Loan Facility of $190.0 million and the Revolving Loan
Facility of $80.0 million. We distributed a portion of the proceeds of the Term
Loan Facility and our initial borrowings under the Revolving Credit Facility to
Simmons Holdings Inc., our parent company ("Simmons Holdings") to provide a
portion of the funds necessary to consummate a recapitalization agreement (as
amended, the "Merger Agreement") with Simmons Holdings and REM Acquisition,
Inc., a transitory Delaware merger corporation ("REM") sponsored by Fenway. The
Merger Agreement provided for REM to merge with and into Simmons Holdings, with
Simmons Holdings being the surviving corporation. Following the prepayments made
from the proceeds of a private offering of 10.25% Series B Senior Subordinated
Notes due 2009, the Term Loan Facility was reduced to approximately $166.0
million and such facility requires no principal amortization payments in 1999.
Our indebtedness under the Senior Credit Agreement bears interest at a floating
rate, is guaranteed by Simmons Holdings and one of our current domestic
subsidiaries and is collateralized by substantially all of our assets.
The interest rates per annum in effect at September 25, 1999 for the
Tranche A term, Tranche B term and Tranche C term loans were 7.9%, 8.4% and
8.7%, respectively.
At September 25, 1999, the amount under the Revolving Credit Facility
that was available to be drawn was $80.0 million.
8
<PAGE> 9
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
On March 16, 1999, we completed a refinancing, which consisted of the
sale of $150.0 million of 10.25% Senior Subordinated Notes due 2009 (the
"Notes") pursuant to a private offering. We used the net proceeds from this
offering to:
(1) repay the indebtedness under the senior bridge loan agreement
and the junior subordinated notes issued by us and accrued
interest;
(2) repay the amounts outstanding under our Revolving Credit
Facility and accrued interest; and
(3) prepay a portion of the amounts outstanding under our Term
Loan Facility and accrued interest.
On September 9, 1999, we issued 10.25% Series B Senior Subordinated
Notes due 2009 (the "New Notes") in exchange for all Notes, pursuant to an
exchange offer whereby holders of the Notes received New Notes which have been
registered under the Securities Act of 1933, as amended, but are otherwise
identical to the Notes.
In November 1998, Simmons Caribbean Bedding, Inc., our wholly owned
subsidiary, entered into a permanent loan facility with Banco Santander in the
amount of $3.2 million accruing interest at a fluctuating rate based on the
London Interbank Offered Rate (or LIBOR) plus an applicable margin; the interest
rate was 7.5% as of September 25, 1999.
Future maturities of long-term obligations as of September 25, 1999 are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999.............................................. $ 292
2000.............................................. 799
2001.............................................. 3,974
2002.............................................. 16,865
2003.............................................. 18,045
Thereafter....................................... 294,315
--------
$334,290
========
</TABLE>
3. Stock Option Plan
On September 23, 1999, the board of directors established the 1999
Stock Option Plan ("1999 Plan"), which provides for the granting of up to
3,456,000 options for shares of Simmons Holdings Common Stock to directors
(including those who are not employees), all executive officers of the Company
and its Subsidiaries and other employees, consultants and advisors. Under the
terms of the 1999 Plan, options may be either incentive or nonqualified.
Generally, the options outstanding under the 1999 Plan: (i) are granted at
prices which equate to or are above the market value of the Common Stock on the
date of grant, and (ii) vest ratably over a five year period based upon the
achievement of an annual Adjusted EBITDA target, as defined in the plan, or as
otherwise established by the Compensation Committee of the Board of Directors.
The 1999 Plan permits the Compensation Committee to grant other incentive
options on terms and conditions established by the Committee.
9
<PAGE> 10
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
As of September 25, 1999 the Company had granted 2,880,000 options
under the 1999 Plan.
4. Recent Developments
Two customers, affiliated through common ownership, are indebted to us
in an amount approximating $15.4 million, relating to notes, certain advances
and trade receivables, excluding current receivables. These customers are in
default of payment and other provisions contained in their dealer and other
agreements and promissory notes issued to us. We have included in other assets
at September 25, 1999 and December 26, 1998, amounts of $15.4 million and $3.4
million, respectively, and have included in current assets at September 25, 1999
and December 26, 1998, amounts of $2.7 million and $6.0 million, respectively,
related to these customers. We are considering a number of alternatives in
pursuing our rights under our agreements with these customers, including the
acquisition of the capital stock of one or both of the customers in return for
an amount equal to the fair market value less obligations owed to us. Based on
our current assessment of the value of the stock of these customers, determined
in accordance with the collateral method set forth in Financial Accounting
Standards Board Opinion No. 114 "Accounting by Creditors for the Impairment of a
Loan," we have recorded $2.0 million as an allowance for credit losses at
September 25, 1999. We believe the value of these customers' businesses exceed
the net amount of the receivable; however, the results and timing of any
eventual transaction between us or exercise of remedies by us is uncertain.
Further, the eventual recovery of our investment in these businesses is
dependent upon our ability to achieve improvements sufficient to generate
profitable operations and positive cash flows including the elimination of
unnecessary and discretionary expenses and closure of certain unprofitable
stores. We currently believe that such improvements are achievable, based upon
our expertise in bedding manufacturing and distribution, our knowledge of these
businesses' markets, and their established presence in such markets. In
addition, the sale of all or a portion of the stock of these customers, or their
underlying assets to a third party may be considered. However, the actual
achievement of such improvements or the realization in respect of the stock or
assets of these customers is not assured.
5. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Financial statements for prior periods need not
be restated. We are currently reviewing the provisions of SFAS No. 133 and we do
not believe that the financial statements will be materially impacted by the
adoption of this pronouncement.
10
<PAGE> 11
Simmons Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
- - --------------------------------------------------------------------------------
6. Contingencies
On April 3, 1998, Serta, Inc. filed a complaint against Simmons in the
United States District Court for the Northern District of Illinois, Eastern
Division, alleging that some Simmons products--including those sold in
connection with the trademarks Connoisseur(R) collection, Crescendo(TM), and
some World Class Beautyrest(R) and BackCare(R) Ultimate models--infringe one of
their U.S. patents and that our use of the term "Crescendo" infringes their
alleged common-law trademark, "Crescendo". Serta seeks compensatory damages in
an unspecified amount, interest, an accounting and disgorgement of profits
derived from allegedly infringing acts, treble damages, an order enjoining
further alleged infringement and requiring destruction of allegedly infringing
items, costs, expenses and attorney's fees. We have denied the material
allegations of the complaint. We also have asserted affirmative defense and/or
counterclaims against Serta alleging non-infringement, invalidity and
unenforceability of the patent-in-suit, and alleging infringement by Serta of
our rights in the term "Crescendo" in various geographic areas to the extent
usage of the term by both Serta and us would be confusingly similar. Serta
requested the Patent and Trademark Office, the PTO, to reexamine the
patent-in-suit. Pending the outcome of the reexamination, and by agreement of
the parties, the pending lawsuit was stayed. In April 1999, the PTO reinstated
Serta's patent and the stay in action was lifted. While we deny that Serta is
entitled to any relief and intend to defend the action vigorously, we cannot
assure you that we will prevail in this action. While management does not
believe it will receive an adverse judgment in this litigation, if determined
adversely to us, this litigation could have a material adverse effect on our
financial condition or results of operations.
From time to time, we have been involved in various legal proceedings.
We believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial condition
or results of operations.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended September 25, 1999 as Compared to Quarter Ended September 26,1998
Net Sales. Net sales for the quarter ended September 25, 1999 declined
2.3%, or $4.0 million, from $177.0 million in 1998 to $173.0 million in 1999.
The decline was due primarily to a 7.3% or $12.0 million decline in bedding unit
sales volume, offset, in part, by a 5.0% or $8.0 million increase in bedding
average unit selling price. The decline in unit shipments is attributable to a
shift in product mix toward higher price point products and the first
anniversary of the BackCare(R) introduction by our largest vendor. The increase
in bedding average unit selling price is attributable to sales of higher price
products, particularly in the BackCare(R) line.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the quarter ended September 25, 1999 decreased 0.6 percentage points
from 57.3% in 1998 to 56.7% in 1999. Our gross margin improvement for the
quarter reflects the shift in product mix toward higher price point products,
raw material cost efficiencies and increased productivity in certain of our
manufacturing facilities.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the quarter ended
September 25, 1999 increased 0.5 percentage points from 32.0% in 1998 to 32.5%
in 1999. We attribute this increase to an increase in cooperative advertising
and promotion costs as we move toward higher price point products which carry
higher promotional rates and to higher costs associated with new system
technologies related to our Y2K initiatives. Offsetting, in part, the increase
in these expenditures were lower distribution costs and various selling and
marketing expenses.
ESOP Expense. ESOP expense increased from $1.4 million for the quarter
ended September 26, 1998 to $1.8 million for the quarter ended September 25,
1999. We attribute this increase to an increase in the appraised value of the
shares subject to the Simmons ESOP in 1999.
Amortization of Intangibles. Amortization of intangibles for the
quarter remained relatively stable at approximately $1.9 million.
Interest Expense, Net. Interest expense, net increased $3.0 million
from $4.9 million for the quarter ended September 26, 1998 to $7.9 million for
the quarter ended September 25, 1999 due primarily to increased indebtedness
resulting from the Fenway acquisition.
Other Expense, Net. Other expense, net declined from $1.0 million for
the quarter ended September 26, 1998 to $0.6 million for the quarter ended
September 25, 1999. We attribute this decline to non-recurring charges incurred
in 1998 related to the pending Fenway transaction, offset, in part, by an
increase in management advisory service fees paid to Fenway.
Provision for Income Taxes. Our effective tax rates for the quarters
ended September 25, 1999 and September 26, 1998 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
12
<PAGE> 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
Net Income. For the reasons set forth above, we had net income of $3.8
million for the quarter ended September 25, 1999 compared to $5.0 million in net
income for the quarter ended September 26, 1998.
Nine Months Ended September 25, 1999 as Compared to Nine Months Ended
September 26, 1998
Net Sales. Net sales for the nine months ended September 25, 1999
increased 2.2%, or $9.9 million, from $457.1 million in 1998 to $467.0 million
in 1999. The increase was due primarily to a 4.0% or $18.2 million increase in
bedding average unit selling price and a 1.8% or $8.3 million decline in bedding
unit sales volume. The increase in bedding average unit selling price is
attributable to sales of higher price products, particularly in the BackCare(R)
line and a higher product mix concentration of Beautyrest(R) products. The
decline in bedding unit sales volume resulted primarily from the third quarter
decline in unit shipments attributable to a shift in product mix toward higher
price point products.
Cost of Products Sold. As a percentage of net sales, cost of products
sold for the nine months ended September 25, 1999 decreased 1.4 percentage
points from 58.7% in 1998 to 57.3% in 1999. Our gross margin improvement for the
nine months reflects the shift in product mix toward higher price point
products, raw material cost efficiencies and increased productivity in certain
of our manufacturing facilities.
Selling, General and Administrative Expenses. As a percentage of net
sales, selling, general and administrative expenses for the nine months ended
September 25, 1999 increased 1.1 percentage points from 34.4% in 1998 to 35.5%
in 1999. We attribute this increase to an increase in cooperative advertising
and promotion costs as we move our mix toward higher price point products which
carry higher promotional rates. Offsetting, in part, the increase in these
expenditures were lower distribution costs and various selling and marketing
expenses.
ESOP Expense. ESOP expense increased from $4.3 million for the nine
months ended September 26, 1998 to $5.4 million for the nine months ended
September 25, 1999. We attribute this increase to an increase in the appraised
value of the shares subject to the Simmons ESOP in 1999.
Amortization of Intangibles. Amortization of intangibles for the nine
months remained relatively stable at approximately $5.7 million.
Interest Expense, Net. Interest expense, net increased $9.3 million
from $14.4 million for the nine months ended September 26, 1998 to $23.7 million
for the nine months ended September 25, 1999 due primarily to increased
indebtedness resulting from the Fenway acquisition.
Other Expense, Net. Other expense, for the nine months ended remained
relatively stable at approximately $1.8 million. An increase in management
advisory service fees paid to Fenway was offset by non-recurring charges
incurred in 1998 related to the pending Fenway transaction.
13
<PAGE> 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
Provision for Income Taxes. Our effective tax rates for the nine months
ended September 25, 1999 and September 26, 1998 differ from the federal
statutory rate primarily because of non tax-deductible amortization of goodwill.
Extraordinary Item. In the first quarter of 1999, we recorded a $3.3
million extraordinary charge representing the remaining unamortized debt
issuance costs related to certain long-term obligations repaid in connection
with the Offering.
Net Loss. For the reasons set forth above, we incurred a net loss of
$3.6 million for the nine months ended September 25, 1999 compared to $2.8
million in net income for the nine months ended September 26, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to fund liquidity needs is net cash
provided by operating activities and availability under the Senior Credit
Agreement. Our primary use of funds consists of payments of principal and
interest, and capital expenditures.
Our operating activities used cash of $5.6 million in the first nine
months of 1999 compared to $3.8 million provided in the first nine months of
1998. The difference is due primarily to a the net loss during the nine months
of 1999, the timing of payments of accounts payable and the timing of accounts
receivable collections.
Our capital expenditures totaled $7.7 million for the nine months ended
September 25, 1999. These capital expenditures consisted primarily of normal
recurring capital expenditures. We expect to spend approximately $9.0 million
for 1999 capital expenditures. We believe that annual capital expenditure
limitations in the Senior Credit Agreement and the indenture for the 10.25%
Senior Subordinated Notes due 2009 will not significantly inhibit us from
meeting our ongoing capital needs.
As of September 25, 1999, we had no borrowings and $80.0 million
available under our Revolving Credit Facility. As of September 25, 1999, we were
in compliance with the financial covenants contained in all our credit
facilities.
RECENT DEVELOPMENTS
Two customers, affiliated through common ownership, are indebted to us
in an amount approximating $15.4 million relating to notes, certain advances and
trade receivables, excluding current receivables. These customers are in default
of payment and other provisions contained in their dealer and other agreements
and promissory notes issued to us. We have included in other assets at September
25, 1999 and December 26, 1998, amounts of $15.4 million and $3.4 million,
respectively, and have included in current assets at September 25, 1999 and
December 26, 1998, amounts of $2.7 million and $6.0 million, respectively,
related to these customers. We are considering a number of alternatives in
pursuing our rights under our agreements with these customers, including the
acquisition of the capital stock of one or both of the customers in return for
an amount equal to the fair market value less obligations owed to us. Based on
our
14
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
current assessment of the value of the stock of these customers, determined in
accordance with the collateral method set forth in Financial Accounting
Standards Board Opinion No. 114 "Accounting by Creditors for the Impairment of a
Loan," we have recorded $2.0 million as an allowance for credit losses at
September 25, 1999. We believe the value of these customers' businesses exceed
the net amount of the receivable; however, the results and timing of any
eventual transaction between us or exercise of remedies by us is uncertain.
Further, the eventual recovery of our investment in these businesses is
dependent upon the ability of the operations to achieve improvements sufficient
to generate profitable operations and positive cash flows including the
elimination of unnecessary and discretionary expenses and the closure of certain
unprofitable stores. We currently believe that such improvements are achievable,
based upon our expertise in bedding manufacturing and distribution, our
knowledge of these businesses' markets, and their established presence in such
markets. In addition, the sale of all or a portion of the stock of these
customers, or their underlying assets to a third party may be considered.
However, the actual achievement of such improvements or the realization in
respect of the stock or assets of these customers is not assured.
SEASONALITY
Our volume of sales is somewhat seasonal, with sales generally lower
during the first quarter of each year than in the remaining three quarters of
the year. Historically, our working capital borrowings have increased during the
first half of each year and have decreased in the second half of each year. We
also experience a seasonal fluctuation in profitability, with our gross profit
percentage during the first quarter of each year slightly lower than the margin
percentages obtained in the remaining part of the year. We believe that
seasonality of profitability is a factor that affects the conventional bedding
industry generally and that it is primarily due to retailers' emphasis in the
first quarter on price reductions and promotional bedding and manufacturers'
emphasis on close-outs of the prior year's product lines. These two factors
together result in lower profit margins.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Financial statements for prior periods need not
be restated. We are currently reviewing the provisions of SFAS No. 133 and we do
not believe that the financial statements will be materially impacted by the
adoption of this pronouncement.
IMPACT OF THE YEAR 2000 ISSUE
Issues relating to the year 2000 are the result of computer programs
and certain embedded-chip systems being written or developed using two digits
rather than four to define the applicable year. Any of our computer programs or
embedded-chip systems that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
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Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
including, among other things, a temporary inability to process transactions,
obtain raw materials, manufacture or ship products, generate invoices, or engage
in similar normal business activities.
We formed a committee consisting of personnel from all of our major
disciplines to address risks associated with the year 2000 issue. The committee
developed a list of all of our information systems and investigated each system
to determine its year 2000 readiness.
With the upgrade of our enterprise wide information system we undertook
in 1995, which is complete today, our information systems are in our opinion
year 2000 compliant. The fiscal year 1999 cost of our year 2000 readiness
program through September 25, 1999 was approximately $1.0 million all of which
was expensed in the first nine months of 1999. Our internal resources to address
the year 2000 issue consist of approximately 5 full-time employees.
We believe that our main system hardware and operating systems, as well
as our networking operating systems are all year 2000 compliant. We also use
manufacturing processes that include computer controlled equipment. We have
completed the assessment and remediation of equipment with embedded chips or
software. We have completed the testing of remediation of our equipment and deem
our equipment compliant.
Our facilities staff also investigated the status of our
non-information systems with respect to year 2000 compliance. These
non-information systems include phones, voicemail, heating/air conditioning,
electricity and security systems. We believe that all of our non-information
systems are year 2000 compliant.
In addition to reviewing our internal systems, we have polled our
significant suppliers, customers and freight carriers to determine whether they
are year 2000 compliant, and, if not, the extent to which our operations may be
adversely affected as a result of their failure to be year 2000 compliant. Of
104 third party sources of goods and services we surveyed, we received 84
responses reflecting approximately 90% of our purchase volume. In particular,
Leggett & Platt, our major supplier, has informed us that all of its critical
central systems have been converted to year 2000 compliant software and
individual system testing is complete. In total, Leggett & Platt management
estimates that the year 2000 systems conversion effort is 100% complete as of
September 1999. We do not anticipate material adverse effects from foreign
suppliers of goods and services as a result of the date change to year 2000. We
have received written confirmations regarding year 2000 compliance from all of
our equipment manufacturers, including foreign manufacturers. Although we have
received assurances from most of our suppliers, customers and freight carriers
we cannot determine the extent to which our operations may be adversely affected
by the failure of our suppliers to be year 2000 compliant or assure you that
such adverse effect will not occur.
Based upon progress made to date in assessing our year 2000 issues and
our compliance with year 2000 issues related to primary business information
systems, we do not foresee significant adverse effects from the date change to
year 2000 at this time.
With respect to the risks associated with our information and
non-information systems, we believe that the most likely worst case scenario is
that we may experience minor system
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Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- - --------------------------------------------------------------------------------
malfunctions and errors in the early days and weeks of the year 2000 that were
not detected during our testing and remediation efforts. We also believe that
these problems will not have a material effect on our financial condition or
results of operations, although if our remediation and testing program is
delayed or inadequate, our financial condition or results of operations could be
materially adversely affected.
With respect to the risks associated with third parties, as our
manufacturing processes rely on the "just-in-time" delivery of raw materials
from our major suppliers, we believe that the most likely worst case scenario is
that some of our suppliers will not be year 2000 compliant and will have
difficulty filling orders and delivering goods. As noted above, we have surveyed
most of our suppliers about their year 2000 readiness postures and, based on
their responses, expect that they will be in substantial compliance with year
2000 protocols. If shipments of raw materials from one or more of our suppliers
are disrupted or delayed in the early days and weeks of year 2000, we intend to
use alternate suppliers. If we are unable to obtain raw materials from alternate
suppliers, or if Leggett & Platt, which provides us several types of materials
that are not available from other suppliers, has its operations disrupted or
delayed in the early days and weeks of year 2000, our financial condition or
results of operations could be materially affected.
SUBSEQUENT EVENT - PENDING ACQUISITIONS
On October 8, 1999, we announced our intent to acquire United Sleep
Products of Denver, Pennsylvania. The acquisition is subject to completion of
due diligence, definitive documentation of the transaction, and other customary
conditions.
FORWARD LOOKING STATEMENTS
Forward looking statements in this Form 10-Q are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
There are certain important factors that could cause results to differ from
those anticipated by some of the statements made above. Investors are cautioned
that all forward looking statements involve risk and uncertainty. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ are the following: consumer spending and debt levels;
continuity of relationships with and purchases by major customers; product mix;
competitive pressure on sales and pricing, and increase in material or
production cost which cannot be recouped in product pricing.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 5 to the Condensed Consolidated Financial Statements,
Part I, Item 1 included herein.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 1999 Stock Option Plan
10.2 1999 Stockholders Agreement
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, Simmons Company has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SIMMONS COMPANY
By: /s/ Zenon S. Nie
------------------------------------------------------
Zenon S. Nie
Chairman of the Board of Directors,
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Jonathan C. Daiker
------------------------------------------------------
Jonathan C. Daiker
Executive Vice President--Finance and Administration,
Chief Financial Officer and Director
(Principal Accounting Officer)
Date: November 9, 1999
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<PAGE> 1
Exhibit 10.1
SIMMONS HOLDINGS, INC.
1999 STOCK OPTION PLAN
1. PURPOSE.
The purpose of this 1999 Stock Option Plan (the "Plan") is to advance
the interests of Simmons Holdings, Inc., a Delaware corporation (the "Company")
by enhancing the ability of the Company and its Subsidiaries (as defined below)
to attract and retain directors, employees, consultants or advisers who are in a
position to make significant contributions to the success of the Company, to
reward such individuals for their contributions and to encourage such
individuals to take into account the long-term interests of the Company and its
Subsidiaries. The Plan provides for the award of options to purchase shares of
the Company's Common Stock, par value $.01 per share (the "Shares").
Options granted pursuant to the Plan may be incentive stock options as
defined in Section 422 of the Code (each such option that is intended to qualify
as an incentive stock option is referred to herein as an "incentive option") or
options that are not incentive options, or both. Options granted pursuant to the
Plan shall be presumed to be non-incentive options unless expressly designated
as incentive options.
2. ELIGIBILITY FOR AWARDS.
Persons (as defined below) eligible to receive awards under the Plan
shall be all directors (including directors who are not employees) of the
Company and all executive officers of the Company and its Subsidiaries and other
employees, consultants and advisers who, in the opinion of the Board, are in a
position to make a significant contribution to the success of the Company and
its Subsidiaries. Incentive options shall be granted only to "employees" as
defined in the provisions of the Code or the regulations thereunder applicable
to incentive stock options. Persons selected for awards under the Plan are
referred to herein as "participants."
3. ADMINISTRATION.
The Plan shall be administered by the Board of Directors (the "Board")
of the Company or, if applicable, the successors and assigns of the Company. The
Board shall have authority, not inconsistent with the express provisions of the
Plan: (a) to grant awards to such participants as the Board may select; (b) to
determine the time or times when awards shall be granted and the number and type
of Option Shares (as defined below) subject to each award; (c) to determine
which awards are, and which awards are not, incentive options; (d) to determine
the terms and conditions of each award; (e) to prescribe the form or forms of
any instruments evidencing awards and any other instruments required under the
Plan and to change such forms from time to time; (f) to adopt, amend and rescind
rules and regulations for the administration of the Plan; and (g) to interpret
the Plan and any award granted hereunder and to decide any questions and settle
all controversies and disputes that may arise in connection with the Plan or any
award granted hereunder. Such determinations of the Board shall be conclusive
and shall bind all Persons. Subject to Section 8, the Board also shall
<PAGE> 2
have the authority, both generally and in particular instances, to waive
compliance by any participant with any obligation to be performed by such
participant under any award, to waive any condition or provision of any award
and to amend or cancel any award (and if any award is canceled, to grant a new
award on such terms as the Board shall specify); provided, however, that except
as expressly provided in the Plan or in any award granted hereunder, the Board
may not take any action with respect to any outstanding award that would
adversely affect the rights of the participant under such award without such
participant's written consent. Nothing in the immediately preceding sentence
shall be construed as limiting the power of the Board to make adjustments
required by Section 5(c) or 6(k).
The Board may, in its sole discretion, delegate some or all of its
powers with respect to the Plan to a committee (the "Committee"), in which event
all references in this Plan (as appropriate) to the Board shall be deemed to
refer to the Committee. The Committee, if one is appointed, shall consist of at
least two directors. A majority of the members of the Committee shall constitute
a quorum, and all determinations of the Committee shall be made by a majority of
its members. Any determination of the Committee under the Plan may be made
without notice or meeting of the Committee by a writing signed by a majority of
the Committee members.
4. EFFECTIVE DATE AND TERM OF PLAN.
The Plan shall become effective on the date on which it is approved by
the Board.
Except as otherwise determined by the Board, no awards shall be granted
under the Plan after the completion of ten years from the date on which the Plan
was adopted by the Board, but awards previously granted may extend beyond such
date.
5. SHARES SUBJECT TO THE PLAN.
(a) Number of Shares. Subject to adjustment as provided in Section
5(c), the aggregate number of Shares that may be delivered upon the exercise of
awards granted under the Plan (the "Option Shares") shall be 3,456,000, of which
2,513,455 may be designated "Regular Option Shares", and of which 942,545 may be
designated "Superincentive Option Shares". If any award granted under the Plan
terminates without having been exercised in full, or upon exercise is satisfied
other than by delivery of Shares, the number of Shares as to which such award
was not exercised shall be available for future grants within the limits set
forth in this Section 5(a).
(b) Shares to Be Delivered. Shares delivered under the Plan shall be
authorized but unissued Shares or, if the Board in its sole discretion so
decides, previously issued Shares acquired by the Company and held in its
treasury. No fractional shares of Shares shall be delivered under the Plan.
(c) Changes in Shares. In the event that the Company (i) pays a
dividend or makes a distribution on the Shares in Shares, (ii) subdivides its
outstanding Shares into a greater number of Shares, (iii) combines its
outstanding Shares into a smaller number of Shares, (iv) makes a distribution on
the Shares in shares of its capital stock other than Shares, (v) issues by
reclassification of its Shares any shares of its capital stock, (vi) changes its
capital stock, then the
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<PAGE> 3
number and kind of shares of capital stock or other securities of the Company
subject to awards then outstanding or subsequently granted under the Plan, or
(vii) effects a recapitalization, the exercise price of any such awards affected
under (i) through (vii) and the maximum number of shares of capital stock or
other securities that may be delivered under the Plan and other relevant
provisions shall be appropriately adjusted by the Board in an equitable manner
which provides similar treatment to similarly situated participants, and the
Board's determination shall be binding on all Persons.
The Board may also adjust the number of shares of capital stock or
other securities subject to outstanding awards and the exercise price and other
terms of outstanding awards, to take into consideration changes in accounting
practices or principles, extraordinary dividends, consolidations or mergers,
acquisitions, recapitalizations or dispositions of stock or property or any
other event, in each case if it is determined by the Board that such adjustment
is necessary, advisable or appropriate in an equitable manner which provides
similar treatment to similarly situated participants so that the options granted
hereunder constitute a continuing incentive; provided, however, that without the
consent of the participant, no such adjustment shall be made in the case of an
incentive option if it would constitute a modification, extension or renewal of
the option within the meaning of Section 424(h) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) Exercise Price of Options. The exercise price of each option shall
be determined by the Board, but in the case of an incentive option shall not be
less than 100% (110%, in the case of an incentive option granted to a
ten-percent stockholder) of the fair market value of the Shares at the time the
option is granted; nor shall the exercise price be less, in the case of an
original issue of authorized stock, than par value. For this purpose, "fair
market value" in the case of incentive options shall have the same meaning as it
does in the provisions of the Code and the regulations thereunder applicable to
incentive options; and "ten-percent stockholder" shall mean any participant who
at the time of grant owns directly, or by reason of the attribution rules set
forth in Section 424(d) of the Code is deemed to own, shares possessing more
than 10% of the total combined voting power of all classes of capital stock of
the Company, any of its parent corporations or any of its Subsidiaries.
(b) Duration of Options. An option shall be exercisable ("Vested")
during such period or periods as the Board may specify. The latest date on which
an option may be exercised (the "Final Exercise Date") shall be the date which
is ten years (five years, in the case of an incentive option granted to a
"ten-percent stockholder" as defined Section 6(a)) from the date the option was
granted or such earlier date as the Board may specify at the time the option is
granted.
(c) Exercise of Options.
(i) An option shall become Vested at such time or times and
upon such conditions as the Board shall specify; provided, however,
that the Board shall not change the vesting provisions set forth in any
stock option certificate or grant following its issuance in a manner
that adversely affects the holder thereof. Without limiting the
generality of the foregoing, the Board may specify a different time or
times and different conditions with respect to the exercisability of
options, which shall be set forth in the stock option certificate,
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<PAGE> 4
for Regular Option Shares and for Superincentive Option Shares granted
in the same stock option award. In the case of an option not
immediately Vested in full, the Board may at any time accelerate the
time at which all or any part of the option may become Vested.
(ii) During the participant's lifetime, an option may be
exercised only by the participant (unless the participant is declared
legally incompetent and a legal representative has been appointed for
the participant, in which event the option may be exercised on the
participant's behalf by such legal representative).
(iii) Any Person entitled to exercise any option in accordance
with the terms of the option may exercise such option by delivering to
the Company a written notice signed by such Person, which notice shall
be accompanied by (A) such documents as may be required by the Board
and (B) payment in full as specified in Section 6(d) for the number of
Shares for which such option is exercised. Such notice shall state the
number of Shares in respect of which such option is being exercised and
shall contain the acknowledgment and agreement of the participant (or
the participant's legal representative, executor, administrator or
heirs, if applicable) that such Shares are subject to the Stockholders
Agreement (as defined below). The Company shall not be obligated to
deliver any certificates representing any Shares to be issued upon the
exercise of such option until the Company receives a written
acknowledgment and agreement in form and substance reasonably
satisfactory to the Company that such Shares are subject to all the
provisions of the Stockholders Agreement and that such Person is bound
thereby as a holder of Shares.
(iv) In the case of any option that is not an incentive
option, the Board shall have the right to require the participant
exercising such option to remit to the Company an amount sufficient to
satisfy any federal, state, or local withholding tax requirements (or
make other arrangements satisfactory to the Company with regard to such
taxes) prior to the delivery of any certificates representing any
Shares to be issued upon the exercise of such option. If permitted by
the Board, either at the time of the grant of such option or the time
of exercise of such option, the participant may elect, at such time and
in such manner as the Board may prescribe, to satisfy such withholding
obligation by (A) delivering to the Company Shares owned by such
participant having a fair market value equal to such withholding
obligation or (B) requesting that the Company withhold from the Shares
to be delivered upon the exercise of such option a number of Shares
having a fair market value equal to such withholding obligation.
In the case of any incentive option, if at the time such
option is exercised the Board determines that under applicable law and
regulations the Company could be liable for the withholding of any
federal or state tax with respect to a disposition of the Shares to be
issued upon exercise of such option, the Board may require as a
condition of exercise that the participant exercising such option agree
(A) to satisfy any withholding obligations arising in connection with
the exercise of such option in accordance with the rules described in
the immediately preceding paragraph and (B) with respect to any
withholding obligations that may arise in connection with a disposition
of Shares to be issued upon exercise of such option, (1) to inform the
Company promptly of any disposition (within the meaning of Section
424(c) of the Code and the regulations thereunder) of Shares received
upon exercise
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<PAGE> 5
of such option, (2) to give such security as the Board deems adequate
to meet the potential liability of the Company for the withholding of
tax and (3) to augment such security from time to time in any amount
reasonably deemed necessary by the Board to preserve the adequacy of
such security.
(v) If any Person other than the applicable participant
attempts to exercise any option in accordance with this Section 6(c),
the Company shall be under no obligation to deliver Shares pursuant to
the exercise of such option until the Company is satisfied as to the
authority of the Person exercising such option.
(d) Payment for and Delivery of Shares. Shares purchased upon exercise
of an option under the Plan shall be paid for as follows: (i) in cash or by
certified check, bank draft or money order payable to the order of the Company;
(ii) if so permitted by the Board (which, in the case of any incentive option,
shall specify such method of payment at the time of grant), (A) through the
delivery of Shares (which, in the case of Shares acquired from the Company,
shall have been held for at least six months) having a fair market value on the
last business day preceding the date of exercise equal to the purchase price,
(B) by delivery of an unconditional and irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the exercise price or
(C) by any combination of the permissible forms of payment; or (iii) if so
permitted by the Board, by delivery of a promissory note in a form acceptable to
the Board, plus any consideration required by law to be paid in cash.
(e) Rights as Stockholder, Delivery of Shares. A participant shall not
have the rights of a stockholder with regard to awards under the Plan unless and
until a certificate or certificates representing the purchased Shares are duly
issued and delivered to the participant. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date upon
which such stock certificate is issued.
Upon exercise of any option, the Company shall not be obligated to
deliver any certificates representing the Shares to be issued delivered upon the
exercise of such option (i) until, in the opinion of the Company's counsel, the
Act and all other applicable federal, state and foreign laws and regulations
have been complied with, (ii) if the outstanding Shares are at the time listed
on any stock exchange, until the specific Shares to be issued have been listed
or authorized to be listed on such exchange upon official notice of issuance and
(iii) until all other legal matters in connection with the issuance and delivery
of such Shares have been approved by the Company's counsel. If the sale of
Shares has not been registered under the Act, the Company may require, as a
condition to exercise of such option, (A) such representations, warranties or
agreements as the Company may deem necessary or desirable in order to assure
compliance with the Act and all other applicable federal, state and foreign laws
and regulations or as may otherwise be reasonably requested by the Company and
(B) that the certificates evidencing the Shares to be issued upon the exercise
of such option bear an appropriate legend restricting transfer.
(f) Nontransferability of Awards; Transfer of Shares. Except as
otherwise set forth in a stock option award, no award may be transferred other
than by will or by the laws of descent and distribution.
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In the absence of an effective registration statement under the Act
relating to a transfer of Shares purchased upon the exercise of an award
hereunder, the Company shall not be required to register such transfer of Shares
on its books unless the Company shall have been provided with a legal opinion
satisfactory to the Company in form and substance from counsel reasonably
satisfactory to the Company prior to such transfer that registration under the
Act is not required in connection with the transaction resulting in such
transfer. Each certificate evidencing such Shares or issued upon any transfer of
such Shares shall bear an appropriate restrictive legend, except that such
certificate shall not bear such a restrictive legend if the opinion of counsel
referred to above is to the further effect that such legend is not required in
order to establish compliance with the provisions of the Act. Nothing in this
paragraph shall modify or otherwise affect the provisions applicable to the
Option Shares under, or the obligations of the participants pursuant to, the
Stockholders Agreement.
(g) Death. Except as otherwise set forth in a stock option award, if a
participant dies, each award held by such participant immediately prior to his
death may be exercised, to the extent it was Vested immediately prior to such
participant's death, by his executor or administrator, or by the Person or
Persons to whom the award is transferred by will or the applicable laws of
descent and distribution, at any time on or prior to the earlier of (i) the date
which is 180 days after such participant's death or (ii) the Final Exercise
Date. Except as otherwise set forth in a stock option award, all awards held by
a participant immediately prior to his death that are not then Vested shall
terminate on the date of such participant's death.
(h) Termination for Cause. Except as otherwise set forth in a stock
option award, if any employee's employment with the Company or any of its
Subsidiaries is terminated for Cause (as defined below), all Vested and
unexercisable awards held by such employee shall terminate immediately upon such
employee's discharge.
Except as otherwise set forth in a stock option award, the following
events or conditions, as determined by the Board in its reasonable judgment,
shall constitute "Cause" for termination: (i) participant's willful failure to
perform the duties of his employment in any material respect, which willful
failure is not remedied within thirty (30) days after receipt of written notice
from the Company, (ii) malfeasance or gross negligence in the performance of the
participant's duties of employment, which malfeasance or gross negligence is not
remedied within thirty (30) days after receipt of written notice from the
Company, (iii) the participant's conviction of a felony under the laws of the
United States or any state thereof (whether or not in connection with his
employment), or (iv) the participant's disclosure of confidential information
respecting the Company's business to any individual or entity which is not in
the performance of the duties of his employment.
(i) Other Termination. Except as otherwise set forth in a stock option
award, if any employee's employment with the Company and its Subsidiaries
terminates for any reason other than death or termination for Cause, then (A)
any award held by such employee that is not Vested prior to the date of such
termination of employment shall immediately terminate and (B) any award held by
such employee that is Vested prior to the date of such termination of employment
shall continue to be Vested at any time on or prior to the earlier of (1) the
date that is 90 days after the date of such termination of employment (or such
later date as the Board may determine or as may be set forth in such award) or
(2) the Final Exercise Date.
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After completion of the 90-day period referred to in clause (B) above
(or any applicable longer period), each such award shall terminate to the extent
not previously exercised, expired or terminated, unless otherwise specified in
the stock option award. For purposes of this Section 6(i), employment shall not
be considered terminated (1) in the case of sick leave or other bona fide leave
of absence approved for purposes of the Plan by the Board, so long as the
employee's right to reemployment is guaranteed either by statute or by contract,
or (2) in the case of a transfer of employment between the Company and any of
its Subsidiaries or between any of its Subsidiaries, or to the employment of a
corporation (or a parent or subsidiary corporation of such corporation) issuing
or assuming an award in a transaction to which Section 424(a) of the Code
applies.
(j) Termination of Service of Non-Employees. In the case of any
participant who is not an employee of the Company or any of its Subsidiaries,
provisions relating to the exercisability of awards following termination of
service shall be specified in the stock option award; provided, however, that if
such provisions are not so specified, then upon the termination of service of
such participant, all awards held by such participant shall be subject to the
provisions of Sections 6(h) and 6(i).
(k) Mergers, etc. Except as otherwise set forth in any stock option
award, in the event of a consolidation or merger in which the Company is not the
surviving corporation, or a sale of all or substantially all of the assets of
the Company, all outstanding awards shall thereupon terminate; PROVIDED,
HOWEVER, that at least 20 days prior to the effective date of any such merger or
consolidation, the Board, in its sole discretion, may either (i) make all
outstanding awards Vested immediately prior to consummation of such merger,
consolidation or sale of assets or (ii) if there is a surviving or acquiring
corporation or other related entity, arrange, subject to consummation of such
merger or consolidation, to have such corporation or related entity or an
affiliate of such corporation or related entity grant to participants
replacement awards which provide similar treatment and comparable value to
similarly situated participants and which, in the case of incentive options,
satisfy, in the determination of the Board, the requirements of Section 424(a)
of the Code.
The Board may grant awards under the Plan in substitution for awards
held by employees, consultants or advisers of another corporation who
concurrently become employees, consultants or advisers of the Company or any of
its Subsidiaries as the result of a merger or consolidation of such other
corporation with the Company or any of its Subsidiaries, or as the result of the
acquisition by the Company or any of its Subsidiaries of property or stock of
such other corporation. The Company may direct that substitute awards be granted
on such terms and conditions as the Board considers appropriate in the
circumstances.
7. CERTAIN RIGHTS.
Neither the adoption of the Plan nor the grant of awards shall confer
upon any participant any right to continue as a director of, an employee of, or
consultant or adviser to, the Company, any parent of the Company or any
Subsidiary or affect in any way the right of the Company, any of its parents or
any of its Subsidiaries to terminate such participant at any time. Except as
specifically provided by the Board in any particular case, the loss of existing
or potential profit in awards granted under this Plan shall not constitute an
element of damages in the event of any termination of the
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relationship of any participant, even if such termination is in violation of any
obligation of the Company to such participant by contract or otherwise.
8. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION.
Neither the adoption of the Plan nor the grant of awards to a
participant shall affect the Company's right to make awards to such participant
that are not subject to the Plan, to issue to such participant Shares as a bonus
or otherwise or to adopt other plans or arrangements under which Shares may be
issued.
The Board may at any time discontinue granting awards under the Plan.
With the written consent of any participant, the Board may at any time cancel in
whole or in part any existing award held by such participant and grant another
award for such number of Shares as the Board specifies. The Board may at any
time or times amend the Plan or any outstanding award for the purpose of
satisfying the requirements of Section 422 of the Code or of any changes in
applicable laws or regulations or for any other purpose that may at the time be
permitted by law, or may at any time terminate the Plan as to any further grants
of awards; provided, however, that except as expressly provided in the Plan or
in any award granted hereunder, no such amendment shall adversely affect the
rights of any participant (without the written consent of such participant)
under such award.
9. DEFINITIONS.
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"Board" has the meaning set forth in Section 3.
"Cause" has the meaning set forth in Section 6(h).
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" has the meaning set forth in Section 3.
"Company" has the meaning set forth in Section 1.
"Final Exercise Date" has the meaning set forth in Section 6(b).
"Incentive Option" has the meaning set forth in Section 1.
"Option Shares" has the meaning set forth in Section 5(a).
"Participants" has the meaning set forth in Section 2.
"Person" means any individual, partnership, joint venture, corporation,
trust, unincorporated organization or entity, or any government, or department
or agency thereof, or any other similar entity.
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"Plan" has the meaning set forth in Section 1.
"Regular Option Shares" has the meaning set forth in Section 5(a).
"Shares" has the meaning set forth in Section 1.
"Stockholders Agreement" means the 1999 Stockholders' Agreement dated
as of September 23, 1999, as amended and in effect from time to time, among the
Company and the other parties named therein.
"Subsidiary" means any Person of which the Company at the time (a)
shall own, directly or indirectly through a Subsidiary, at least a majority of
the outstanding capital stock (or other shares of beneficial interest) entitled
to vote generally or (b) shall control the board of directors of such Person.
"Superincentive Option Shares" has the meaning set forth in Section
5(a).
"Vested" has the meaning set forth in Section 6(b).
As of September 23, 1999
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Exhibit 10.2
1999 STOCKHOLDERS' AGREEMENT
----------------------------
AGREEMENT, dated as of September 23, 1999 (this "Agreement"), by and
among Simmons Holdings, Inc., a Delaware corporation ("Holdings"), Simmons
Holdings, LLC, a Delaware limited liability company ("Simmons LLC") and the
members of management of the Simmons Company, a Delaware corporation (the
"Company") who are, from time to time, a party hereto.
RECITALS
Holdings desires to grant stock options and to sell shares of Common
Stock to certain employees and such employees desire to receive such options or
purchase such shares, and in connection therewith, the parties hereto desire to
restrict the sale, assignment, transfer, encumbrance or other disposition of
certain shares of capital stock of Holdings and to set forth their agreements on
certain related matters.
Accordingly, in consideration of the premises and of the terms and
conditions herein contained, the parties hereto mutually agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
ascribed to them below:
"1999 Stock Option Plan" shall mean the plan adopted by the Board of
Directors of Holdings on September 23, 1999, as amended from time to time.
"Affiliate" of any Person shall mean any other Person directly or
indirectly controlled by, controlling or under common control with such Person.
For the purposes of this definition, "control", when used with respect to any
Person, means the power to directly or indirectly direct the management and
policies of such person, whether through the ownership of voting securities, by
contract or otherwise; the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Agreement" shall have the meaning ascribed thereto in the Preamble
hereof.
"Approved Retirement" shall mean the retirement of a holder of
Management Securities on or after his or her sixty-fifth (65th) birthday or, if
earlier, either for Good Reason or if approved by the Board of Directors of
Holdings.
"Business Day" means any day other than a Saturday, Sunday, federal
holiday or other day on which commercial banks in New York City are authorized
or required to close under the laws of the State of New York.
<PAGE> 2
"Certificate of Incorporation" means the Certificate of Incorporation
of Holdings.
"Change of Control" means (a) any change in the ownership of the
capital stock of Holdings if, immediately after giving effect thereto, (i) the
Fenway Investors will hold, directly or indirectly, less than 50% of the number
of shares of Common Stock held by the Fenway Investors and their Affiliates as
of the date hereof or (ii) any Person (or group of Persons acting in concert)
other than the Fenway Investors and their Affiliates will hold, directly or
indirectly, greater than 50% of the number of shares of Common Stock outstanding
or (b) any sale or other disposition of all or substantially all of the assets
of Holdings (including, without limitation, by way of a merger or consolidation
or through the sale of all or substantially all of the stock of its Subsidiaries
or sale of all or substantially all of the assets of Holdings and its
Subsidiaries, taken as a whole) to another Person (the "Change of Control
Transferee") if, immediately after giving effect thereto, any Person (or group
of Persons acting in concert) other than the Fenway Investors and their
Affiliates will have the power to elect a majority of the members of the board
of directors (or other similar governing body) of the Change of Control
Transferee.
"Common Stock" shall mean the shares of common stock, par value $.01
per share, of Holdings and the shares of Class B common stock, par value $.01
per share, of Holdings.
"Company" shall have the meaning ascribed thereto in the Preamble
hereof.
"Covered Sale" shall have the meaning ascribed thereto in Section
2.1(a) hereof.
"Disability" shall mean a holder of Management Shares becomes
physically or mentally incapacitated or disabled so that he or she is unable to
perform for the Company or a Subsidiary substantially the same services as he or
she performed prior to incurring such incapacity or disability or to devote his
or her full working time or use his or her best efforts to advance the business
and welfare of the Company or a Subsidiary for an aggregate period of six months
during any 12-month period.
"Drag-Along Right" shall have the meaning ascribed thereto in Section
2.1(a) hereof.
"Duly Endorsed" shall mean that a stock certificate is duly endorsed in
blank by the Person or Persons in whose name such certificate is registered or
that such certificate is accompanied by a duly executed stock or security
assignment, separate from the certificate itself, with the signature(s) thereon
guaranteed by a commercial bank or trust company or a member of a national
securities exchange or of the National Association of Securities Dealers, Inc.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute then in effect, and a reference to a
particular section thereof shall be deemed to include a reference to the
comparable section, if any, of any such similar federal statute.
"Fair Market Value" shall mean the value determined in good faith by
Holdings' Board of Directors at the applicable date. If the Board determination
is challenged by a holder of Management Shares, a mutually acceptable investment
banker or appraiser shall establish the
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Fair Market Value. If the holder of Management Shares and Holdings cannot agree
upon an investment banker or appraiser each shall choose an investment banker or
appraiser and the two investment bankers or appraisers shall choose a third
investment banker or appraiser who alone shall establish the Fair Market Value.
The Fair Market Value shall be based on an assumed sale of 100% of the
outstanding capital stock of Holdings and shall be determined using customary
criteria generally employed within the investment banking community at the time
such determination is made for valuing an entity similar to Holdings. The
investment banker's or appraiser's determination shall be conclusive and binding
on the Principal Stockholder, Holdings and the holder of Management Shares.
Holdings shall bear all costs incurred in connection with the services of such
investment banker or appraiser unless the Fair Market Value established by the
investment banker or appraiser is (i) less than or equal to 110% of the Board of
Directors' determination, in which case the holder of Management Shares shall
promptly pay or reimburse Holdings for such costs or (ii) greater than 110% but
less than 125% of the Board of Directors' determination, in which case the
holder of Management Shares shall promptly pay or reimburse Holdings for 50% of
such costs.
"Fenway Investors" shall mean each of Fenway Partners Capital Fund,
L.P., a Delaware limited partnership, Fenway Partners Capital Fund II, L.P., a
Delaware limited partnership and their respective Subsidiaries and Affiliates.
"Good Reason" shall mean (i) the assignment to a holder of Management
Securities of any duties materially inconsistent with such holder's position,
(ii) a request of a holder of Management Securities to relocate his office to a
distance of greater than seventy-five (75) miles from the present site of his
office or (iii) a material diminution in the position, authority, duties or
responsibility of a holder of Management Securities.
"Holdings" shall have the meaning ascribed thereto in the Preamble
hereof.
"Holdings Note" shall have the meaning ascribed thereto in Section
4.1(a).
"Initial Public Offering" shall mean the occurrence of each of (i) the
effectiveness of a registration statement under the Securities Act covering any
capital stock of Holdings or the Company (other than preferred stock that is not
convertible into common stock) and (ii) the completion of a sale of such capital
stock thereunder, which sale results in (A) Holdings or the Company becoming a
reporting company under Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended, and (B) such capital stock being traded on the New York Stock
Exchange or the American Stock Exchange, or being quoted on the Nasdaq Stock
Market or being traded or quoted on any other national stock exchange or
securities system.
"Lock-Up Period" shall mean in the case of an Initial Public Offering,
the 180-day period commencing on the effective date of the registration
statement covering capital stock of Holdings or the Company sold in such Initial
Public Offering, and, in the case of any subsequent registered offering, the
90-day period commencing on the effective date of the registration statement
relating to such offering, or, in either case, such lesser period as may be
agreed upon with the underwriters of such offering.
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"Management Representative" shall have the meaning ascribed thereto in
Section 5.4.
"Management Securities" shall mean (i) the Management Shares, (ii) the
stock options granted to management of the Company or Holdings under the 1999
Stock Option Plan and (iii) any shares of Common Stock issued upon exercise
under the stock options under (ii).
"Management Shares" shall mean the shares of Common Stock of Holdings
issued on or after the date hereof to management of the Company who are parties
hereto.
"Permitted Transferee" shall have the meaning ascribed thereto in
Section 3.1.
"Person" shall mean an individual, partnership, joint venture,
corporation, trust, unincorporated organization or entity, government, or any
department or agency thereof, or any other similar entity.
"Principal Stockholder" shall mean Simmons Holdings, LLC, a Delaware
limited liability company controlled by the Fenway Investors, which now or
hereafter holds shares of Common Stock of Holdings.
"Principal Stockholder Consideration" shall have the meaning ascribed
thereto in Section 2.1(a) hereof.
"Principal Stockholder Shares" shall mean the shares of Common Stock
beneficially owned by the Principal Stockholder or any of its Affiliates or any
of its transferees.
"Put Date" shall have the meaning ascribed thereto in Section 4.2(a).
"Repurchase Disability" shall have the meaning ascribed thereto in
Section 4.2(a).
"Repurchase Period" shall have the meaning ascribed thereto in Section
4.1(a).
"Repurchase Price" shall have the meaning ascribed thereto in Section
4.1(a).
"Second Repurchase Period" shall have the meaning ascribed thereto in
Section 4.1(a).
"SEC" shall mean the Securities and Exchange Commission, or any other
federal agency at the time administering the Securities Act or the Securities
and Exchange Act of 1934, as amended.
"Section 2.1 Event" shall have the meaning ascribed thereto by Section
2.1(a) hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute then in effect, and a reference to a particular
section thereof shall be deemed to include a reference to the comparable
section, if any, of any such similar federal statute.
"Simmons LLC" shall have the meaning ascribed thereto in the Preamble
hereof.
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"Stock Option" shall have the meaning ascribed thereto in Section
4.1(a).
"Subsidiary" shall mean any Person of which Holdings at the time (i)
owns, directly or indirectly through a Subsidiary, at least a majority of the
outstanding capital stock (or other shares of beneficial interest) entitled to
vote generally or (ii) controls the board of directors of such Person.
"Tag-Along Right" shall have the meaning ascribed thereto in Section
2.1(a) hereof.
"Termination Date" shall mean the date on which a holder of Management
Securities ceases to be employed by Holdings, the Company or any Subsidiary
thereof for any reason including, without limitation, by reason of death or
disability; PROVIDED, HOWEVER, that such holder shall not be considered to have
ceased to be employed by the Holdings, the Company or any Subsidiary thereof if
he or she continues to be employed by Holdings, the Company or any Subsidiary
thereof.
"Third Party" shall mean a Person or Persons which are not Affiliates
of Holdings.
ARTICLE II
TAG-ALONG AND DRAG-ALONG RIGHTS
Section 2.1 SALE OF COMMON STOCK TO A THIRD PARTY.
(a) If at any time, or from time to time, the Principal Stockholder
proposes to sell for its own account (other than in a sale pursuant to a
registration statement under the Securities Act) shares of Common Stock (a
"Section 2.1 Event") to a Third Party that is not an Affiliate of the Principal
Stockholder and, following such sale, the Principal Stockholder ceases to own,
in the aggregate, at least seventy-five percent (75%) of the shares of Common
Stock owned by the Principal Stockholder as of the date of this Agreement (each
such sale, a "Covered Sale"), each holder of Management Shares shall have the
right to participate with respect to the Management Shares that each holds, (a
"Tag-Along Right"), and the Principal Stockholder or such Third Party shall have
the right to require the holders of Management Shares to participate with
respect to such shares (a "Drag-Along Right"), in each such sale on a pro rata
basis (based on (i) the aggregate number of shares of Common Stock to be sold by
the Principal Stockholder in such Covered Sale and any related transactions (but
not in any other sales) compared to (ii) the aggregate number of Principal
Stockholder Shares then owned by the Principal Stockholder, as appropriately
adjusted for any stock dividends, stock splits, reverse stock splits,
combinations, recapitalizations and similar events occurring after the date of
this Agreement) for the same consideration per share, and otherwise on the same
terms (the "Principal Stockholder Consideration"), as the Principal Stockholder
sells its shares of Common Stock; PROVIDED, HOWEVER, that the Principal
Stockholder or Third Party shall only be entitled to exercise its Drag-Along
Right hereunder pursuant to a Covered Sale by the Principal Stockholder or its
Affiliates of at least 80% of the shares of Common Stock owned by the Principal
Stockholder as of the date of this Agreement.
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(b) Prior to or within two calendar days following the occurrence of a
Section 2.1 Event, the Principal Stockholder, in its sole discretion, may notify
the holders of Management Shares in writing of its intention to consummate or of
the occurrence of such Section 2.1 Event (which notice shall set forth the terms
upon which such Section 2.1 Event is intended to be or shall have been
consummated) in the manner and upon the terms and conditions provided in this
Section 2.1(b). If the Principal Stockholder, in its sole discretion, shall have
given prior written notice to each of the holders of Management Shares of its
intention to engage in a Section 2.1 Event, then each of the holders of
Management Shares shall have 15 calendar days from the receipt of such notice
within which to exercise its Tag-Along Right pursuant to this Section 2.1, and
the failure of a holder of Management Shares to notify the Principal Stockholder
of its intention to exercise its Tag-Along Right within such 15 calendar days
shall operate as a waiver of such Tag-Along Right; PROVIDED, HOWEVER, that the
Principal Stockholder having delivered written notice of its intention to engage
in a Section 2.1 Event shall not be construed as providing any assurance that a
Section 2.1 Event shall be consummated, and the delivery of such notice shall
not give rise to any rights on the part of the holders of Management Shares
other than those expressly set forth in this Agreement. If the Principal
Stockholder, in its sole discretion, shall not have given prior written notice
of its intention to engage in a Section 2.1 Event, then the Principal
Stockholder shall notify the holders of Management Shares in writing of the
occurrence of a Section 2.1 Event not later than two calendar days following the
consummation of such Section 2.1 Event, and the holders of Management Shares
shall have 15 calendar days from the receipt of such notice within which to
exercise their Tag-Along Rights pursuant to this Section 2.1. The failure of
each of the holders of Management Shares to notify the Principal Stockholder of
its intention to exercise its Tag-Along Right within such 15 calendar days shall
operate as a waiver of such Tag-Along Right. The delivery of any notice
regarding a Section 2.1 Event pursuant to the provisions of this Section 2.1
shall not operate as a waiver of the Principal Stockholder's or a Third Party's
Drag-Along Rights in respect of the Section 2.1 Event specified in such notice.
In the case of a Third Party's exercise of its Drag-Along Rights pursuant to the
provisions of this Section 2. 1, the Third Party shall deliver written notice to
the holders of Management Shares, not later than two calendar days following the
occurrence of a Section 2.1 Event, with respect to which such Drag-Along Rights
have been exercised, of its intention to exercise such Drag-Along Rights in
respect of such Section 2.1 Event. The consummation of any transaction pursuant
to the Third Party's exercise of its Drag-Along Rights shall occur within 15
calendar days following the delivery of the notice specified in this Section
2.1(c).
(c) The Principal Stockholder shall not enter into a transaction which
would constitute a Section 2.1 Event unless the Third Party shall have agreed in
writing, prior to the consummation of such transaction, to be bound by the
Tag-Along Right provided in this Section 2.1 applicable to that transfer;
PROVIDED, HOWEVER, that such agreement shall not be construed as providing any
assurance that a Section 2.1 Event shall be consummated and shall not give rise
to any liability on the part of Holdings to the holders of Management Shares.
The Principal Stockholder (and any subsequent transferee bound by the provisions
of this sentence) shall not transfer any shares of Common Stock (other than in a
sale pursuant to a registration statement under the Securities Act) in a
transaction that constitutes a Covered Sale or in a transaction with an
Affiliate, unless prior to such transfer, the transferee or Affiliates, as the
case may be, agrees in writing, in form and substance satisfactory to the
holders of Management Shares and
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Holdings, to be bound by the provisions of this Section 2.1 as if such
transferee were a "Principal Stockholder" solely for purposes of this Article
II. Upon consummation of a Covered Sale by the Principal Stockholder at which
Tag-Along Rights have been exercised or waived hereunder, the shares of Common
Stock sold thereunder shall be deemed free and clear of any further Tag- Along
Rights hereunder.
Section 2.2 LEGEND ON CERTIFICATES. Each certificate representing
Management Shares from time to time issued and outstanding shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
PROVISIONS OF THE 1999 STOCKHOLDERS' AGREEMENT DATED AS OF SEPTEMBER
23, 1999 AMONG SIMMONS HOLDINGS, INC., THE HOLDER OF THIS CERTIFICATE
AND THE OTHER PARTIES THERETO, AS AMENDED AND IN EFFECT FROM TIME TO
TIME (A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF SIMMONS
HOLDINGS, INC. AND WILL BE MAILED TO A STOCKHOLDER WITHOUT CHARGE
WITHIN FIVE DAYS AFTER RECEIPT BY SIMMONS HOLDINGS INC. OF A WRITTEN
REQUEST THEREFOR FROM SUCH STOCKHOLDER).
NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE
MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY APPLICABLE STATE
SECURITIES AND "BLUE SKY" LAWS OR (B) IF SIMMONS HOLDINGS, INC. HAS
BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION
AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO SIMMONS HOLDINGS, INC.,
TO THE EFFECT THAT SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF
SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER
AND SUCH STATE SECURITIES AND BLUE SKY LAWS.
Section 2.3 REMOVAL OF LEGEND. Upon termination of this Agreement or
upon consummation of an Initial Public Offering, Holdings shall, upon request by
the holders of Management Shares immediately prior to the above events, issue a
new certificate representing the Management Shares held by the holders of
Management Shares with the following legend:
NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE
MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY APPLICABLE STATE
SECURITIES AND "BLUE SKY" LAWS OR (B) IF SIMMONS HOLDINGS, INC. HAS
BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH OPINION
AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO SIMMONS HOLDINGS, INC.,
TO THE EFFECT THAT
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SUCH TRANSFER IS EXEMPT FROM THE PROVISIONS OF THEREUNDER AND SUCH
STATE SECURITIES AND BLUE SKY LAWS.
ARTICLE III
TRANSFER RIGHTS
Section 3.1 RESTRICTIONS ON TRANSFERS OF SHARES. Subject to Article IV
hereof, prior to the earlier of (i) the termination of the Lock-Up Period
following an Initial Public Offering or (ii) a Change of Control, the Management
Securities shall not be transferable or transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise) except that
each of the holders of Management Shares may transfer such Management Shares to
his or her spouse, child, estate, personal representative, heir or successor or
to a trust for the benefit of such holder or his or her spouse, child or heir (a
"Permitted Transferee"). This Agreement shall be binding on and enforceable
against any person who is a Permitted Transferee of the Management Shares. The
stock certificates issued to evidence Management Shares hereunder shall bear a
legend referring to this Agreement and the restrictions contained herein.
ARTICLE IV
REPURCHASE OF SHARES
Section 4.1 PURCHASE OF SHARES UPON TERMINATION OF MANAGEMENT.
(a) In the event that the Termination Date occurs for any reason prior
to an Initial Public Offering or a Change of Control in respect of a holder of
Management Securities, subject to Section 4.2 below, Management Shares held by
such holder shall be subject to repurchase as follows:
i. Holdings, during the sixty (60) days following the
later of (A) the Termination Date or (B) the date on
which the stock options held by such holder of
Management Securities who has been terminated become
exercisable in accordance with the term of such stock
option (the "Repurchase Period"), shall have a
one-time right to purchase all, but not less than
all, of the Management Shares then owned by such
holder.
ii. If Holdings does not elect to purchase the Management
Shares during the Repurchase Period, then the
Principal Stockholder, during the thirty (30) days
following the expiration of the Repurchase Period
(the "Second Repurchase Period"), shall have a
one-time right to purchase all, but not less than
all, of the Management Shares then owned by such
holder.
iii. The purchase price (the "Repurchase Price") for each
Management Share shall be the Fair Market Value.
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iv. If Holdings or the Principal Stockholder elects to
purchase the Management Shares, it shall notify the
holder of Management Shares at or before the end of
the Repurchase Period or, in the case of the
Principal Stockholder, the Second Repurchase Period,
and the Repurchase Price shall be paid at a time set
by Holdings or the Principal Stockholder, as the case
may be, which time shall be within thirty (30) days
after the end of the Repurchase Period or Second
Repurchase Period, as the case may be, provided that
the holder of Management Shares has presented to
Holdings or the Principal Stockholder a Duly Endorsed
certificate representing Management Shares. The
Repurchase Price shall be paid in the form of cash
or, if Holdings has elected to purchase such
Management Shares, at the option of Holdings, in a
combination of (A) an amount of cash equal to the
cost of the repurchased Management Shares and (B) the
issuance of a Holdings Note ("Holdings Note") the
principal amount of which is equal to the difference
between the Repurchase Price for the Management
Shares and the cost of the Management Shares, bearing
interest at a rate equal to the weighted average
interest rate at such time pursuant to the
then-current senior credit facilities of the Company
or Holdings, as appropriate, provided that such rate
shall in no event exceed ten percent (10%) per annum;
provided further that up to fifty percent (50%) of
any interest payment shall, at the option of
Holdings, be payable in additional Holdings Notes of
like tenor. All Holdings Notes shall mature on the
earliest to occur of (x) the third anniversary of the
date on which the Holdings Note is issued, (y) the
sale of stock of Holdings pursuant to an Initial
Public Offering, or (z) a Change of Control.
v. The Management Shares shall be transferred to
Holdings or the Principal Stockholder, as applicable,
free and clear of all liens, encumbrances, mortgages,
pledges, security interests, restrictions, prior
assignments and claims of any kind or nature
whatsoever except those created by the Certificate of
Incorporation, the stock option, if any, between a
holder of Management Securities and Holdings, or this
Agreement. Notwithstanding the failure of a holder of
Management Shares to deliver the Duly Endorsed
certificate, the Management Shares represented
thereby shall be deemed to be owned by Holdings or
the Principal Stockholder, as applicable, upon (A)
the payment by Holdings or the Principal Stockholder,
as applicable, of the Repurchase Price to the holder
of Management Shares or his or her Permitted
Transferee or (B) notice to the holder of Management
Shares or such Permitted Transferee that Holdings or
the Principal Stockholder, as applicable, is holding
the Repurchase Price in the United States for the
account of the holder of Management Shares or such
Permitted Transferee, and upon such payment or notice
(x) the holder of Management Shares and such
Permitted Transferee will have no further rights in
or to such Management Shares, (y) Holdings or the
Principal Stockholder, as applicable, shall be
entitled to specific
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performance of such holder of Management Shares or
such Permitted Transferee's obligation to deliver
such Duly Endorsed certificates, and (z) the holder
of Management Shares and his or her Permitted
Transferee shall be jointly and severally liable for
all reasonable attorneys' fees and other costs and
expenses incurred by Holdings or the Principal
Stockholder, as applicable, in enforcing its right to
repurchase the Management Shares hereunder and shall
pay to Holdings or the Principal Stockholder, as
applicable, promptly upon demand, the amount of all
such fees and expenses.
vi. The holder of Management Shares or his or her
Permitted Transferee shall not be obligated to
transfer any Management Shares to Holdings or the
Principal Stockholder, as applicable, unless,
concurrently with the repurchase of such Management
Shares hereunder, Holdings or the Principal
Stockholder, as the case may be, repurchases all of
the Management Shares owned of record by the holder
of Management Shares or his or her Permitted
Transferee.
Section 4.2 PUT RIGHT OF HOLDERS OF MANAGEMENT SHARES.
(a) If the Termination Date of a holder of Management Securities occurs
prior to an Initial Public Offering or a Change of Control due to the death,
Disability or Approved Retirement of such holder of Management Shares or in the
event of a Change of Control (substituting 75% for 50% in such definition) in
which substantially all of the proceeds of such Change of Control are not
reinvested in a similar or like business to the manufacturing of bedding
products within one (1) year of such Change of Control, such holder of
Management Shares or his or her representative shall have a one-time right to
require Holdings to purchase all, but not less than all, of the Management
Shares then owned by such holder at Fair Market Value, PROVIDED, THAT such right
must be exercised within one-hundred-eighty (180) days after the Termination
Date, or, in the case of a Change of Control, the first anniversary of such
Change of Control. The Repurchase Price shall be paid on the Put Date, which
date shall be the later of (i) the thirtieth (30th) day after Holdings has
received notice of the election of the holder of Management Shares to exercise
his or her put right, or (ii) the day that the holder of Management Shares
presents to Holdings the Duly Endorsed certificate representing the Management
Shares, and shall be paid in the form of cash or, at the option of Holdings in
the event the purchase is following the death, Disability or Approved Retirement
of the holder of Management Shares, a combination of an amount of cash equal to
the cost of the repurchased Management Shares and the issuance of a Holdings
Note the principal amount of which is equal to the difference between the
Repurchase Price for the Management Shares and the cost of the Management
Shares, bearing interest at a rate equal to the weighted average interest rate
at which interest is calculated at such time pursuant to the then-current senior
credit facilities of the Company or Holdings, as appropriate, provided that such
rate shall in no event exceed ten percent (10%) per annum; provided further that
up to fifty percent (50%) of any interest payment shall, at the option of
Holdings, be payable in additional Holdings Notes of like tenor. All Holdings
Notes shall mature on the earliest to occur of (x) the third anniversary of the
date on which the Holdings Note is issued, (y) the sale of stock of Holdings
pursuant to an Initial Public Offering, or (z) a
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Change of Control. The Management Shares shall be transferred to Holdings free
and clear of all liens, encumbrances, mortgages, pledges, security interests,
restrictions, prior assignments and claims of any kind or nature whatsoever
except those created by the Certificate of Incorporation or this Agreement.
Notwithstanding anything to the contrary in the foregoing, Holdings' obligation
to repurchase any of the Management Shares shall be suspended if (i) such
repurchase would render Holdings unable to meet its obligations in the ordinary
course of business; (ii) Holdings is prohibited from doing so by applicable law
restricting the purchase by a corporation of its own shares; or (iii) such
repurchase would constitute a breach of or default or event of default under, or
is otherwise prohibited by, the terms of any loan agreement or other agreement
or instrument to which Holdings or any of its Subsidiaries is a party, any of
such events constituting a "Repurchase Disability." In the event of a Repurchase
Disability, Holdings shall repurchase the Management Shares as soon as
reasonably practicable after all Repurchase Disabilities cease to exist (and
Holdings may also elect, but shall have no obligation, to cause its nominee to
repurchase such Management Shares while any Repurchase Disabilities continue to
exist). In the event that Holdings suspends its obligation to repurchase
Management Shares pursuant to a Repurchase Disability, then, upon repurchase of
the Management Shares, Holdings shall pay to the holder of Management Shares or
his or her representative (as applicable) an additional amount equal to interest
on the original repurchase price calculated at the Applicable Federal Rate (as
set forth in Section 1274 of the Code or the Treasury Regulations promulgated
thereunder) from the date the repurchase would have occurred but for such
Repurchase Disability to (but not including) the date such repurchase actually
occurs.
(b) For so long as a holder of Management Shares or his or her
Permitted Transferee owns the Management Shares, Holdings agrees that it shall,
upon the written request of a holder of Management Shares, provide such holder
of Management Shares with annual consolidated financial statements of Holdings
promptly upon the completion of the preparation of such statements. The annual
consolidated financial statements shall be accompanied by an audit report by
Holdings' independent accountants.
ARTICLE V
MISCELLANEOUS
Section 5.1 PRIOR STOCKHOLDERS AGREEMENTS. By execution and delivery of
this Agreement to Holdings, the undersigned holders of Management Securities
agree that notwithstanding any prior agreement to the contrary, this Agreement
shall govern the relative rights and obligations of the holders of Management
Securities with respect to the subject matter contained herein for such
Management Securities.
Section 5.2 BINDING EFFECT; NO THIRD PARTY BENEFICIARIES. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors, assigns and transferees except as set
forth in Section 2.1(c), and except to the extent that the terms of this
Agreement limit or otherwise restrict the transferability of any rights or
obligations hereunder. The provisions of this Agreement shall be binding upon
the parties hereto and their respective heirs, successors and assigns, and shall
not be for the benefit of any other Person.
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<PAGE> 12
Section 5.3 WAIVER AND AMENDMENT. Any party hereto may waive its rights
under this Agreement at any time, and Holdings may waive its rights under this
Agreement with respect to any party hereto at any time; provided that no waiver
by Holdings shall operate to waive Holdings' rights under this Agreement with
respect to any party hereto not named in such waiver. Any agreement on the part
of any such party to any such waiver shall be valid only if set forth in an
instrument in writing signed by such party. This Agreement may be amended or
waived only by a written instrument signed by (i) Holdings, (ii) stockholders
owning of record a majority of the then outstanding Principal Stockholder's
Shares and (iii) the holders of a majority of Management Shares; PROVIDED,
HOWEVER, that the consent of the holders of majority of Management Shares shall
be required for any amendment or waiver which has a material adverse effect on
the rights of the holders of Management Shares as such under this Agreement. All
parties hereto shall be bound by any amendment or waiver approved as prescribed
in the foregoing sentence from and after the date of the receipt of a written
notice from Holdings setting forth such amendment or waiver and reciting its
approval or waiver, as the case may be, whether or not Management Shares held by
any stockholder shall have been marked to indicate such consent.
Section 5.4 REPRESENTATIVE OF HOLDERS OF MANAGEMENT SHARES. Each of the
holders of Management Securities hereby appoints Zenon S. Nie (the "Management
Representative") or such other designee (as appointed in writing by the holders
of a majority in interest of Management Shares), as the agent, proxy and
attorney in fact for the holders of Management Securities for all purposes under
this Agreement (including, without limitation, full power and authority to act
on behalf of the holders of Management Securities pursuant to the direction of
the respective holders of Management Securities) (i) to give or receive any
notices or other communications required or permitted under the terms and
conditions of this Agreement (and such notice shall be deemed to have been duly
given when delivered by the Management Representative pursuant to the terms of
this Agreement) and (ii) to execute and deliver, should it elect to do so in its
sole discretion, on behalf of the holders of Management Securities, any
amendment to this Agreement so long as such amendments shall apply to all
parties to this Agreement, and (iii) to take all other actions to be taken by or
on behalf of the holders of Management Securities and exercise any and all
rights which the holders of Management Securities are permitted or required to
do or exercise under this Agreement. Each of the holders of Management
Securities hereby agrees to indemnify and hold harmless the Management
Representative from all losses, costs and expenses of any nature incurred by the
Management Representative arising out of or in connection with the
administration of his duties hereunder, unless such losses, costs or expenses
shall have been caused by the Management Representative's willful misconduct or
gross negligence.
Section 5.5 NOTICES. All notices and other communications provided for
herein shall be dated and in writing and shall be deemed to have been duly given
when delivered, if delivered personally, or when deposited in the mail, if sent
by registered or certified mail, return receipt requested, postage prepaid, or
sent by overnight delivery service, to the party to whom it is directed at the
following addresses:
12
<PAGE> 13
(a) If to Holdings, to:
Simmons Holdings, Inc.
c/o Fenway Partners, Inc.
152 West 57th Street
New York, New York 10019
Attn: Richard C. Dresdale
Telecopy: 212-757-0609
with copies to:
Ropes & Gray
One International Place
Boston, MA 02110
Attn: Lauren I. Norton, Esq.
Telecopy: 617-951-7050
13
<PAGE> 14
(b) If to the holders of Management Securities, to them at:
Simmons Company
One Concourse Parkway
Suite 600
Atlanta, GA 30328
Attn: Zenon S. Nie
Telecopy: 770-392-2565
with copies to:
Jones Day, Reavis & Pogue
3500 One Peachtree Center
303 Peachtree Street NE
Atlanta, GA 30308
Attn: Lizanne Thomas, Esq.
Telecopy: 404-581-8330
and
Altman, Kritzer & Levick, P.C.
Powers Ferry Landing, Ste. 224
6400 Powers Ferry Road, NW
Atlanta, GA 30339
Attn: Allen D. Altman
Telecopy: 770-303-1130
(c) If to the Principal Stockholder, to:
Simmons Holdings, LLC
c/o Fenway Partners, Inc.
152 West 57th Street
New York, New York 10019
Attn: Richard C. Dresdale
Telecopy: 212-757-0609
with copies to:
Ropes & Gray
One International Place
Boston, MA 02110
Attn.: Lauren I. Norton, Esq.
Telecopy: 617-951-7050
or at such other address as the parties hereto shall have specified by notice in
writing to the other parties.
14
<PAGE> 15
Notice so given pursuant to this Section 5.5 shall, in the case of
notice so given by mail, be deemed to be given and received on the fourth
calendar day after posting, in the case of notice so given by overnight delivery
service, on the date of actual delivery, and, in the case of notice given by
personal delivery, on the date of such personal delivery.
Section 5.6 APPLICABLE LAW. The laws of the State of Delaware shall
govern the interpretation, validity and performance of the terms of this
Agreement, regardless of the law that might be applied under principles of
conflicts of law.
Section 5.7 INTEGRATION. This Agreement and the documents referred to
herein or delivered pursuant hereto, which form a part hereof, contain the
entire understanding of the parties with respect to its subject matter. There
are no restrictions, agreements, promises, representations, warranties,
covenants or undertakings with respect to the subject matter hereof other than
those expressly set forth herein. This Agreement supersedes all prior agreements
and understandings between the parties with respect to its subject matter.
Section 5.8 DESCRIPTIVE HEADINGS, ETC. The headings in this Agreement
are for convenience of reference only and shall not limit or otherwise affect
the meaning of terms contained herein. Unless the context of this Agreement
otherwise requires, (a) words of any gender shall be deemed to include each
other gender; (b) words using the singular or plural number shall also include
the plural or singular number, respectively; and (c) references to "hereof"
"herein," "hereby" and similar terms shall refer to this entire Agreement.
Section 5.9 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument, and it shall not be necessary in
making proof of this Agreement to produce or account for more than one such
counterpart.
Section 5.10 SEVERABILITY. In the event that any one or more of the
provisions, paragraphs, words, clauses, phrases or sentences contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect and for any reason, the validity, legality and
enforceability of such provision, paragraph, word, clause, phrase or sentence in
every other respect, and of the other remaining provisions, paragraphs, words,
clauses, phrases or sentences hereof, shall not be in any way impaired, it being
intended that all rights, powers and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
Section 5.11 TERM. This Agreement shall terminate, with respect to each
holder of Management Shares, on the date on which such holder of Management
Shares no longer holds Management Shares.
Section 5.12 INJUNCTIVE RELIEF. It is hereby agreed and acknowledged
that it will be impossible to measure in money the damages that would be
suffered if the parties fail to comply with any of the obligations herein
imposed on them and that, in the event of any such failure, an aggrieved person
will be irreparably damaged and will not have an adequate remedy at law. Any
such person shall therefore be entitled to injunctive relief, including specific
performance, to
15
<PAGE> 16
enforce such obligations, without the posting of any bond, and, if any action
should be brought in equity to enforce any of the provisions of this Agreement,
none of the parties hereto shall raise the defense that there is an adequate
remedy at law.
16
<PAGE> 17
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement
or caused this Agreement to be executed on its behalf as of the date first above
written.
SIMMONS HOLDINGS, INC.
By:
-------------------------------
Name:
Title:
SIMMONS HOLDINGS, LLC
By:
-------------------------------
Name:
Title: An Authorized Person
17
<PAGE> 18
HOLDERS OF MANAGEMENT SECURITIES:
18
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