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As filed with the Securities and Exchange Commission on July 2, 1999
Registration No. 333-76723
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 2
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SIMMONS COMPANY
(Exact name of registrant as specified in its charter)
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Delaware 2515 06-1007444
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
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One Concourse Parkway
Atlanta, Georgia 30328
(770) 512-7700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Jonathan C. Daiker
Simmons Company
One Concourse Parkway
Atlanta, Georgia 30328
(770) 512-7700
(Address, including zip code, and telephone number, including area code, of
agent for service)
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copy to:
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Patrick O'Brien, Esq. Lizanne Thomas, Esq.
Ropes & Gray Jones, Day Reavis & Pogue
One International Place 3500 SunTrust Plaza
Boston, Massachusetts 02110 303 Peachtree Street, N.E.
(617) 951-7000 Atlanta, Georgia 30308-3242
(404) 521-3939
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+Information contained herein is subject to completion or amendment. These +
+securities may not be sold nor may offers to buy be accepted prior to the +
+time the registration statement becomes effective. This prospectus shall not +
+constitute an offer to sell or the solicitation of an offer to buy nor shall +
+there be any sale of these securities in any State in which such offer, +
+solicitation or sale would be unlawful prior to registration or qualification +
+under the securities laws of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated July 2, 1999
PROSPECTUS
[LOGO OF SIMMONS COMPANY APPEARS HERE]
Simmons Company
Offer to Exchange All Outstanding
10 1/4% Senior Subordinated Notes Due 2009
($150,000,000 Aggregate Principal Amount Outstanding)
for
10 1/4% Series B Senior Subordinated Notes Due 2009
We are offering to exchange our 10 1/4% Series B Senior Subordinated Notes due
2009, the exchange notes, for all of our outstanding 10 1/4% Senior
Subordinated Notes due 2009, the notes. We are making this exchange offer on
the terms and conditions set forth in this prospectus and the accompanying
letter of transmittal. We have registered the exchange notes under the
Securities Act of 1933 but we have not registered the notes. The form and terms
of the exchange notes and the notes are identical in all material respects,
except for transfer restrictions and registration rights relating to the notes.
We will accept for exchange all outstanding notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on , 1999, unless we
extend this exchange offer. Although our offer is subject to customary
conditions, it is not conditioned upon any minimum principal amount of notes
being tendered for exchange.
We will not receive any proceeds from the issuance of the exchange notes. We
will pay all the expenses incurred by us in connection with this exchange offer
and issuance of the exchange notes.
You should carefully review the "Risk Factors" beginning on page 16 in
connection with this exchange offer and an investment in the exchange notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of our offer of the exchange notes or
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is , 1999
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TABLE OF CONTENTS
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TRADEMARKS AND TRADENAMES................................................. v
SUMMARY................................................................... 1
Simmons Company.......................................................... 1
The Exchange Offer....................................................... 3
The Exchange Notes....................................................... 8
The Fenway Acquisition................................................... 10
The Original Offering.................................................... 11
Fenway Partners.......................................................... 11
Summary Condensed Consolidated Financial Data............................ 12
Notes to Summary Condensed Consolidated Financial Data................... 14
RISK FACTORS.............................................................. 16
Substantial Leverage--Our substantial indebtedness could adversely affect
our financial health by, among other things, increasing our
vulnerability to general adverse economic and industry conditions, and
prevent us from fulfilling our obligations under the exchange notes..... 16
Additional Borrowings Available--We and our subsidiaries may be able to
incur substantial amounts of additional debt that is senior to or equal
in rank to our obligations under the exchange notes which may increase
the likelihood that we will not have sufficient funds to service our
indebtedness under the exchange notes................................... 16
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.............................................. 16
Subordination--Your right to receive payments on the exchange notes is
junior to some of our existing indebtedness and possibly to all of our
future borrowings....................................................... 17
Control by Fenway--Fenway has effective control of Simmons. They may have
different interests from yours.......................................... 17
Financing Change of Control Offer--We may not have the ability to raise
the funds necessary to finance the change of control offer required by
the indenture........................................................... 17
Dependence on Key Customers--We rely upon a small number of customers for
a significant portion of our business. If we lose their business, our
net sales may decrease.................................................. 18
Risk of Fluctuations in the Cost of Raw Materials--If raw material costs
increase, our production costs may increase, which could reduce our
competitiveness......................................................... 18
Dependence on Key Suppliers--If we experience difficulty with a major
supplier, we may have difficulty finding alternative sources. Our
business could be adversely affected if our production is delayed while
we locate an alternative supplier or we have to alter our means of
production to adapt to alternative suppliers............................ 18
Dependence on Key Personnel--The loss of Mr. Nie's services may adversely
affect our business..................................................... 18
Competition--Our competitors may have important advantages over us that
could result in our losing market share or profitability................ 19
Environmental, Health and Safety Regulation--We are subject to
regulations that may be materially burdensome or expensive to comply
with.................................................................... 19
Acquisition Integration--Difficulties in integrating potential
acquisitions could reduce our profitability............................. 19
Labor Relations--If our labor relations become strained, our productivity
could decrease.......................................................... 20
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Year 2000 Issue--We cannot assure you that we have eliminated our exposure
to the Year 2000 issue or related adverse consequences to our business... 20
Reliance on Intellectual Property--We cannot assure you that our
protection of our intellectual property is adequate to prevent harm to
our business............................................................. 20
Legal Proceedings--An unfavorable outcome of currently pending litigation
may require us to pay money damages and alter some of our production
processes................................................................ 21
Fraudulent Conveyance Matters--Federal and state statutes allow courts,
under specific circumstances, to invalidate the exchange notes and
require noteholders to return payments received from us.................. 21
No Prior Market for Exchange Notes--We cannot assure that an active
trading market will develop for the exchange notes. Further, resales of
the exchange notes must comply with applicable state securities laws..... 22
Continuation of Restricted Transferability--If you do not exchange your
notes in the exchange offer, your ability to resell them will remain
restricted............................................................... 22
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............................ 23
THE TRANSACTIONS AND THE ORIGINAL OFFERING................................. 24
The Fenway Acquisition.................................................... 24
The Original Offering..................................................... 27
USE OF PROCEEDS............................................................ 29
CAPITALIZATION............................................................. 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA.................. 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS................................................................ 33
General................................................................... 33
Results of Operations..................................................... 33
Liquidity and Capital Resources........................................... 37
Seasonality............................................................... 38
Accounting Pronouncements................................................. 39
Significant Customer Developments......................................... 39
Year 2000 Readiness Disclosure............................................ 39
BUSINESS................................................................... 41
Simmons................................................................... 41
Industry Overview......................................................... 41
Competitive Strengths..................................................... 43
Business Strategy......................................................... 44
Products.................................................................. 45
Customers................................................................. 46
Sales, Marketing and Advertising.......................................... 47
Manufacturing Facilities.................................................. 48
Research, Engineering and Development..................................... 48
Suppliers................................................................. 49
Upgrade of Information Management System.................................. 49
Competition............................................................... 49
Warranties; Product Returns............................................... 49
Patents, Trademarks and Licenses.......................................... 50
Employees................................................................. 50
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ii
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Regulatory Matters......................................................... 50
Properties................................................................. 51
Legal Proceedings.......................................................... 51
MANAGEMENT.................................................................. 52
Director Compensation...................................................... 54
Executive Compensation..................................................... 55
Aggregated Option Exercises................................................ 56
Retirement Plans........................................................... 56
Employment Arrangements.................................................... 59
Management Stock Incentive Plan............................................ 60
PRINCIPAL STOCKHOLDERS...................................................... 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 63
Subscription Agreements.................................................... 63
Stockholders Agreement..................................................... 63
Fenway Advisory Agreement.................................................. 63
OTHER INDEBTEDNESS.......................................................... 64
New Senior Credit Agreement................................................ 64
Securities Purchase Agreement.............................................. 66
Manufacturing Facility Loans............................................... 66
DESCRIPTION OF EXCHANGE NOTES............................................... 67
Brief Description of the Exchange Notes and the Guarantees................. 67
Principal, Maturity and Interest........................................... 68
Methods of Receiving Payment on the Exchange Notes......................... 68
Paying Agent and Registrar for the Exchange Notes.......................... 68
Transfer and Exchange...................................................... 68
Subordination.............................................................. 69
Optional Redemption........................................................ 70
Mandatory Redemption....................................................... 70
Repurchase at the Option of Holders........................................ 70
Selection and Notice....................................................... 73
Certain Covenants.......................................................... 73
Events of Default and Remedies............................................. 83
No Personal Liability of Directors, Officers, Employees and Stockholders... 84
Legal Defeasance and Covenant Defeasance................................... 84
Amendment, Supplement and Waiver........................................... 86
Concerning the Trustee..................................................... 87
Additional Information..................................................... 87
Book-Entry, Delivery and Form.............................................. 87
Certain Definitions........................................................ 90
THE EXCHANGE OFFER.......................................................... 107
Purpose and Effect of the Exchange Offer................................... 107
Terms of the Exchange Offer................................................ 110
Expiration Dates; Extensions; Amendments................................... 111
Interest on the Exchange Notes............................................. 111
Procedures for Tendering................................................... 111
Guaranteed Delivery Procedures............................................. 114
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iii
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Withdrawal of Tenders...................................................... 114
Conditions of the Exchange Offer........................................... 115
Exchange Agent............................................................. 115
Fees and Expenses.......................................................... 116
Accounting Treatment....................................................... 116
Consequences of Failure to Exchange........................................ 116
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS..................... 117
Scope of Discussion........................................................ 117
United States Holders...................................................... 117
Non-United States Holders.................................................. 119
PLAN OF DISTRIBUTION........................................................ 122
LEGAL MATTERS............................................................... 123
EXPERTS..................................................................... 123
WHERE YOU CAN FIND MORE INFORMATION......................................... 123
INDEX TO FINANCIAL STATEMENTS............................................... F-1
</TABLE>
iv
<PAGE>
TRADEMARKS AND TRADENAMES
SIMMONS(R), BEAUTYREST(R), BACKCARE(R), CONNOISSEUR COLLECTION(R) and
MAXIPEDIC(R) are federally registered United States trademarks and are the
property of Simmons Company or its subsidiaries. POCKETED COIL(TM) and FIVE
ZONES FOR YOUR BONES(TM) are also trademarks owned by Simmons Company.
----------------
This exchange offer is not being made to, and we will not accept surrenders
for exchange from, holders of the outstanding notes in any jurisdiction in
which the exchange offer or its acceptance would not comply with the securities
or blue sky laws of that jurisdiction.
All resales must be made in compliance with state securities or blue sky
laws. This compliance may require that the exchange notes be registered or
qualified in a state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. We
assume no responsibility with regard to compliance with these requirements.
----------------
v
<PAGE>
SUMMARY
This summary contains basic information about Simmons and it likely does not
contain all the information regarding Simmons that is important to you. You
should read the more detailed information and financial statements, including
the accompanying notes, appearing elsewhere in this prospectus before making an
investment decision. The terms "Simmons", "we", "our" and "us" refer
collectively to Simmons Company and its wholly-owned subsidiaries, unless
otherwise indicated. The terms "fiscal year" and " year" refer to the 52 or 53
weeks ended on the last Saturday in December of the year referenced. Unless
otherwise indicated, we have based all references to industry or market data
upon information compiled and published by the International Sleep Products
Association ("ISPA") and we have based all references to market share data upon
information published in issues of Furniture/Today(R).
Simmons Company
Founded in 1871, Simmons is a leading manufacturer and distributor of
premium branded bedding products in the United States and the world leader in
Pocketed Coil(TM) innerspring technology. We manufacture and license a broad
range of mattresses and related sleep products under well-recognized brand
names including:
. Simmons(R)
. Beautyrest(R)
. BackCare(R)
. Connoisseur Collection(R)
. Maxipedic(R)
Our Beautyrest(R) line has been our flagship product since its introduction
in 1925. While we provide a full range of conventional bedding products, we
focus on higher-end market segments, emphasizing retail price points from $699
to $2,999 per queen set. In 1998, we derived approximately 54% of our net sales
from products sold at these price points which we believe offer more attractive
growth prospects and higher gross margins than lower-end products. For the year
ended December 26, 1998, we generated:
. net sales of $600.8 million, an increase of 9.2% over 1997; and
. Adjusted EBITDA of $62.3 million, an increase of 6.6% over 1997.
We believe that our net sales combined with the sales of third party
licensees make Simmons(R) the largest selling bedding products brand in the
world.
We sell to a diversified nationwide base of over 2,700 customers,
representing more than 5,500 retail outlets. We support our sales to furniture
stores, specialty sleep shops, department stores and warehouse showrooms with
significant local and national brand advertising and promotional spending as
well as extensive customer support services. We operate 18 strategically
located manufacturing facilities across the United States and in Puerto Rico.
Unlike most of our competitors, which operate as associations of independent
licensees, we are one of two national industry participants that operates each
of its manufacturing facilities, allowing us greater quality control and
standardization of best manufacturing practices.
Since 1995, we have invested approximately $28 million in re-engineering our
manufacturing operations and updating our information systems to improve our
cost structure, manufacturing productivity and operational controls. We believe
our substantial annual research and development investments enable us to be an
industry
1
<PAGE>
leader in the development of innovative and new products. In summary, we
believe we have significant advantages over smaller regional manufacturers as
well as those national competitors that operate as associations of independent
licensees because of the following:
. our national distribution;
. our extensive brand advertising;
. our customer support services; and
. our captive manufacturing.
Our company is led by an experienced and proven senior management team
averaging over 19 years of experience in the bedding industry and led by
Chairman, Chief Executive Officer and President Zenon Nie.
Our principal executive offices are located at One Concourse Parkway,
Atlanta, Georgia 30328, telephone: (770) 512-7700.
2
<PAGE>
The Exchange Offer
The exchange offer relates to the exchange of up to $150,000,000 aggregate
principal amount of our new 10 1/4% Series B Senior Subordinated Notes due 2009
for an equal aggregate principal amount of our outstanding 10 1/4% Senior
Subordinated Notes due 2009. The exchange notes will be obligations of Simmons
entitled to the benefits of the indenture governing the outstanding notes.
Registration Rights
Agreement.................. You are entitled to exchange your notes for
exchange notes with terms that are identical in
all material respects. The exchange offer is
intended to satisfy these rights. After the
exchange offer is complete, you will no longer be
entitled to the benefits of the exchange or
registration rights granted under the
registration rights agreement which we entered
into as part of the original offering.
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of exchange notes which have been
registered under the Securities Act for each
$1,000 principal amount of notes which were
issued on March 16, 1999 in a transaction exempt
from registration under the Securities Act in
accordance with Rule 144A. Each of your notes
must be properly tendered and accepted in order
to be exchanged. We will exchange all notes that
are properly tendered and not validly withdrawn.
As of this date, there are $150,000,000 in
aggregate principal amount of notes outstanding.
We will issue the exchange notes on or promptly
after the expiration of the exchange offer.
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999, unless we decide
to extend the exchange offer. In no event will
the exchange offer be extended more than 30
business days after the effective date of this
prospectus.
Conditions to the Exchange
Offer...................... The exchange offer is subject to the condition
that it does not violate applicable law or staff
interpretations of the Commission. If we
determine that applicable federal law does not
permit the exchange offer, we may terminate the
offer. The exchange offer is not conditioned upon
any minimum principal amount of notes being
tendered. The holders of notes have rights under
the registration rights agreement should we fail
to consummate the exchange offer.
Resale of the Exchange
Notes...................... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, we believe that you may offer
for resale, resell or otherwise transfer without
compliance with the registration and prospectus
delivery provisions of the Securities Act the
exchange notes in exchange for your notes,
provided that:
. you are acquiring the exchange notes in the
ordinary course of business;
. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
3
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in the distribution of the exchange notes issued
to you pursuant to the exchange offer;
. you are not a broker-dealer who purchased your
outstanding notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act; and
. you are not an "affiliate" of ours within the
meaning of Rule 405 under the Securities Act.
If our belief is inaccurate and you transfer any
exchange note issued to you pursuant to the
exchange offer in violation of the prospectus
delivery provisions of the Securities Act or
without an exemption from registration, you may
incur liability under the Securities Act. We do
not assume, or indemnify you against, any such
liability.
Each broker-dealer to which we issue exchange
notes pursuant to the exchange offer for its own
account in exchange for notes which such broker-
dealer acquired as a result of market-making or
other trading activities must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resale of such exchange notes. The
letter of transmittal states that a broker-dealer
who makes this acknowledgment and delivers such a
prospectus will not be deemed to admit that it is
an "underwriter" within the meaning of the
Securities Act. A broker-dealer may use this
prospectus for an offer to resell, resale or
other retransfer of the exchange notes issued to
it pursuant to the exchange offer. We have agreed
that, for a period of one year after the date
that we complete the exchange offer, we will make
this prospectus and any amendment or supplement
to this prospectus available to any such broker-
dealer for use in connection with any such
resales. We believe that no registered holder of
the outstanding notes is an affiliate of Simmons
within the meaning of Rule 405 under the
Securities Act.
We are not offering to, nor will we accept
surrenders for exchange from, holders of
outstanding notes in any jurisdiction in which
the exchange offer or its acceptance would not
comply with the securities or blue sky laws of
such jurisdiction. Furthermore, persons who
acquire the exchange notes are responsible for
compliance with these securities or blue sky laws
regarding resales. We assume no responsibility
for compliance with these requirements.
Accrued Interest on the
Exchange Notes and the
Outstanding Notes.......... Each exchange note will bear interest from its
issuance date. The holders of notes that we
accept for exchange will receive, in cash,
accrued interest on such notes to, but not
including, the issuance date of the exchange
notes. We will pay such interest with the first
interest payment on the exchange notes. Interest
on the notes accepted for exchange will cease to
accrue upon issuance of the
4
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exchange notes. Consequently, those holders who
exchange their outstanding notes for exchange
notes will receive the same interest payment on
September 15, 1999, the first interest payment
date with respect to the notes and the exchange
notes, that they would have received had they not
accepted the exchange offer.
Procedures for Tendering
Notes...................... If you wish to tender your notes for exchange
pursuant to the exchange offer, you must transmit
to SunTrust Bank, Atlanta, as exchange agent, on
or prior to the expiration date, either:
. a properly completed and duly executed copy of
the letter of transmittal accompanying this
prospectus, or a facsimile of such letter of
transmittal, together with your outstanding
notes and any other documentation required by
such letter of transmittal, at the address set
forth on the cover page of the letter of
transmittal; or
. if you are effecting delivery by book-entry
transfer, a computer-generated message
transmitted by means of the Automated Tender
Offer Program System of The Depository Trust
Company in which you acknowledge and agree to
be bound by the terms of the letter of
transmittal and which, when received by the
exchange agent, forms a part of a confirmation
of book-entry transfer.
In addition, you must deliver to the exchange
agent on or prior to the expiration date:
. if you are effecting delivery by book-entry
transfer, a timely confirmation of book-entry
transfer of your outstanding notes into the
account of the exchange agent at The Depository
Trust Company pursuant to the procedures for
book-entry transfers described in this
prospectus under the heading "The Exchange
Offer--Procedures for Tendering" or
. if necessary, the documents required for
compliance with the guaranteed delivery
procedures described in this prospectus under
the heading "The Exchange Offer--Guaranteed
Delivery Procedures".
By executing and delivering the accompanying
letter of transmittal or effecting delivery by
book-entry transfer, you are representing to us
that, among other things:
. the person receiving the exchange notes
pursuant to the exchange offer, whether or not
such person is the holder, is receiving them in
the ordinary course of business;
. neither the holder nor any other person has an
arrangement or understanding with any person to
participate in the distribution of such
exchange notes and that such holder is not
engaged in, and does not intend to engage in, a
distribution of the exchange notes; and
5
<PAGE>
. neither the holder nor any other person is an
"affiliate" of ours within the meaning of Rule
405 under the Securities Act.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner of notes and your
name does not appear on a security listing of The
Depository Trust Company as the holder of such
notes or if you are a beneficial owner of notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such notes in the
exchange offer, you should promptly contact the
person in whose name your notes are registered
and instruct such person to tender on your
behalf. If you, as a beneficial holder, wish to
tender on your own behalf you must, prior to
completing and executing the letter of
transmittal and delivering your outstanding
notes, either make appropriate arrangements to
register ownership of the outstanding notes in
your name or obtain a properly completed bond
power from the registered holder. The transfer of
record ownership may take considerable time.
Guaranteed Delivery
Procedures................. If you wish to tender your notes and time will
not permit the letter of transmittal or any of
the documents required by the letter of
transmittal to reach the exchange agent by the
expiration date, or the procedure for book-entry
transfer cannot be completed on time or
certificates for your notes cannot be delivered
on time, you may tender your notes pursuant to
the guaranteed delivery procedures described in
this prospectus under the heading "The Exchange
Offer--Guaranteed Delivery Procedures".
Shelf Registration
Statement.................. If any changes in law or of the applicable
interpretation of the staff of the Commission do
not permit us to effect the exchange offer, or
upon the appropriate request of any holder of the
notes, we have agreed to register the notes in a
shelf registration statement and use our best
efforts to cause such shelf registration
statement to be declared effective by the
Commission. We have agreed to maintain the
effectiveness of the shelf registration statement
for, under specific circumstances, at least two
years from the date of the original issuance of
the notes to cover resales of such notes held by
such holders.
Withdrawal Rights........... You may withdraw the tender of your outstanding
notes, at any time prior to 5:00 p.m., New York
City time, on the expiration date.
Acceptance of Notes and
Delivery of Exchange
Notes...................... Subject to specific conditions, we will accept
for exchange any and all outstanding notes which
are properly tendered and not validly withdrawn.
The exchange notes issued pursuant to the
exchange offer will be delivered promptly
following the expiration date.
Certain U.S. Federal Income
Tax Consequences........... The exchange of notes for the exchange notes
should not be a taxable exchange for United
States federal income tax purposes. See "Certain
United States Federal Tax Considerations".
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Use of Proceeds............. We will not receive any proceeds from the
issuance of the exchange notes. We will pay all
of our expenses relating to the exchange offer.
Exchange Agent.............. SunTrust Bank, Atlanta is serving as exchange
agent in connection with the exchange offer. The
exchange agent can be reached at 25 Park Place,
24th Floor, Atlanta, Georgia 30303-2900. For more
information with respect to the exchange offer,
please contact the exchange agent at (404) 588-
7067 or send your questions by facsimile to the
exchange agent at (404) 588-7335.
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The Exchange Notes
General..................... The form and terms of the exchange notes are
identical in all material respects to the form
and terms of the outstanding notes except that:
. the exchange notes will bear a Series B
designation;
. we will have registered the exchange notes
under the Securities Act and, therefore, they
will generally not bear legends restricting
their transfer; and
. the holders of exchange notes will not be
entitled to rights under the registration
rights agreement.
The exchange notes will evidence the same debt as
the outstanding notes and will be entitled to the
benefits of the indenture under which the notes
were issued.
Issuer...................... Simmons Company
Total Amount of Exchange
Notes Offered.............. $150.0 million in principal amount of 10 1/4%
Series B Senior Subordinated Notes due 2009.
Maturity.................... March 15, 2009.
Interest.................... Annual fixed rate--10 1/4%.
Payment frequency--every six months on March 15
and September 15. First interest payment--
September 15, 1999.
Ranking..................... The exchange notes are senior subordinated debts.
They rank behind all of our current and future
indebtedness, other than trade payables, except
indebtedness that expressly provides that it is
not senior to the exchange notes.
As of March 27, 1999, we estimate that the
exchange notes:
. would have been subordinated to $184.4 million
of senior debt; and
. would have ranked equally with $16.3 million of
other debt and trade payables.
Optional Redemption......... On or after March 15, 2004, we may redeem some or
all of the exchange notes at any time at the
redemption prices listed in the "Description of
Exchange Notes" section under the heading
"Optional Redemption".
Before March 15, 2002, we may redeem up to 35% of
the aggregate principal amount of the exchange
notes with the proceeds of specific public
offerings of our common equity or of our direct
parent corporation at the price listed in the
"Description of Exchange Notes" section under the
heading "Optional Redemption".
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Mandatory Offer to
Repurchase................. If we sell certain assets under certain
circumstances, or experience specific kinds of
changes of control, we must offer to repurchase
the exchange notes at the prices listed in the
"Description of Exchange Notes" section under the
heading "Repurchase at the Option of Holders".
Basic Covenants of
Indenture.................. We will issue the exchange notes under an
indenture with SunTrust Bank, Atlanta. The
indenture will, among other things, restrict our
ability and the ability of our subsidiaries to:
. borrow money;
. pay dividends on stock or repurchase stock;
. make investments;
. use assets as security in other transactions;
and
. sell assets or merge with or into other
companies.
These covenants are subject to important
exceptions and qualifications which are described
in the section entitled "Description of the
Exchange Notes" under the heading
"Certain Covenants".
9
<PAGE>
The Fenway Acquisition
Prior to the Fenway acquisition described below, our parent company Simmons
Holdings, Inc. was owned by members of our management and investors affiliated
with or arranged by INVESTCORP S.A., the Investcorp group, and we were owned by
Simmons Holdings and our employee stock ownership trust, the Simmons ESOP.
On October 29, 1998, a limited liability company formed and controlled by
funds affiliated with Fenway Partners, Inc., referred to as Fenway Investment
LLC, acquired a controlling interest in Simmons Holdings through a series of
transactions, the Fenway acquisition. Before this acquisition, Fenway had no
relationship with us or Simmons Holdings. In the Fenway acquisition, members of
our management and the Investcorp group sold a portion of their shares and
retained their remaining ownership interest. In addition, members of our
management received payments for cancellation of options exercisable for shares
of Simmons Holdings. The Simmons ESOP sold some of its shares in us and
exchanged its remaining shares for shares of Simmons Holdings. The Fenway
acquisition was accounted for as a recapitalization.
The ownership of Simmons Holdings immediately after the Fenway acquisition,
including vested and exercisable warrants and options for shares of common
stock of Simmons Holdings and the cash consideration received in exchange for
shares and cancelled options as a result of the Fenway acquisition, is
summarized in the chart below:
<TABLE>
<CAPTION>
Ownership Percentage Cash Consideration
Acquired or Retained Received
-------------------- ------------------
(in millions)
<S> <C> <C>
Fenway Investment LLC............. 71.2% $ --
Members of our management......... 11.4 14.0
The Investcorp group.............. 4.8 193.4
The Simmons ESOP.................. 12.6 15.4
----- ------
100.0% $222.8
===== ======
</TABLE>
In connection with the Fenway acquisition, we redeemed all of our
outstanding subordinated notes plus accrued interest and premium totaling
approximately $115.9 million and we repaid all borrowings under our then
existing credit facility plus accrued interest totaling approximately $71.4
million.
The Fenway acquisition, the related refinancing and expenses were financed
primarily through the following:
. a cash equity investment by Fenway Investment LLC of approximately $128.1
million;
. borrowings by us under our new senior credit agreement in the aggregate
principal amount of $200.0 million consisting of three tranches
aggregating $190.0 million of term loans and $10.0 million under our
revolving credit facility;
. borrowings by us under a bridge loan agreement of $75.0 million;
. the issuance by us under a securities purchase agreement of $30.0 million
of junior subordinated notes to Fenway Investment LLC; and
. the issuance by Simmons Holdings under the securities purchase agreement
of $10.0 million of junior subordinated notes to Fenway Investment LLC.
10
<PAGE>
The Original Offering
On March 16, 1999, in order to refinance some of the indebtedness incurred
in connection with the Fenway acquisition, we sold the notes in the original
offering, a transaction exempt from the registration requirements of the
Securities Act. We used the proceeds from the original offering as follows:
<TABLE>
<CAPTION>
Amount
-------------
(in millions)
<S> <C>
Sources:
Proceeds of the original offering.............................. $150.0
======
Uses:
Repayment of bridge loans and accrued interest................. 75.4
Repayment of our junior subordinated notes and accrued
interest...................................................... 31.1
Repayment of our revolving credit facility..................... 15.0
Prepayment of portion of our term loan facility................ 23.7
Payment of fees and expenses of the original offering.......... 4.8
------
Total........................................................ $150.0
======
</TABLE>
In connection with the original offering, we agreed to register the exchange
notes and offer them in exchange for the notes.
Fenway Partners
Founded in 1994, Fenway Partners, Inc., is a New York-based private
investment firm dedicated to building long-term value through direct investment
in leading middle market companies. The firm manages funds with over $1.4
billion of capital and focuses on acquiring companies, in partnership with
management, with established franchises, meaningful market share and strong
brands with significant opportunities for growth. Fenway Partners provides
management with strategic guidance and the necessary resources to exploit these
opportunities and to improve the operating and financial performance of their
businesses. Fenway's investment in Simmons is its largest single investment to
date.
11
<PAGE>
Summary Condensed Consolidated Financial Data
(dollars in thousands)
Set forth below are:
(1) our summary condensed consolidated financial data for 1997, 1998,
and the three months ended March 28, 1998 and March 27, 1999; and
(2) our summary condensed consolidated statement of operations data for
1998, as adjusted assuming that we had consummated the Fenway acquisition
and the original offering as of the beginning of the period presented and
eliminating certain non-recurring charges incurred in connection with the
Fenway acquisition.
We derived the summary condensed consolidated financial data for 1997, 1998,
and the three months ended March 28, 1998 and March 27, 1999 and as of March
27, 1999 from our consolidated financial statements. You should read the
information contained in this table along with "Selected Historical
Consolidated Financial and Other Data", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated
financial statements and accompanying notes and other financial information
appearing elsewhere in this prospectus.
You should note the following when reading the table below:
. EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization. We believe that EBITDA is a widely
accepted financial indicator of a company's ability to service or incur
debt and a similar measure is utilized for purposes of the covenants
contained in the indenture. EBITDA and adjusted EBITDA are not
measurements of operating performance calculated in accordance with
generally accepted accounting principles and should not be considered
substitutes for operating income, net income, cash flows from operating
activities or other statement of operations or cash flow data prepared
in accordance with generally accepted accounting principles, or as
measures of profitability or liquidity. EBITDA and adjusted EBITDA may
not be indicative of our historical operating results, nor are they
meant to be predictive of potential future results. Our measures of
EBITDA and adjusted EBITDA may not be comparable to those recorded by
other companies.
. Cash interest expense represents interest expense less amortization of
debt issuance costs and other non-cash interest expense. We believe that
the ratio of adjusted EBITDA to cash interest expense and the ratio of
adjusted EBITDA to total interest expense are widely accepted as useful
information regarding a company's ability to service and/or incur debt.
. For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before taxes and fixed charges. Fixed charges
consist of interest expense, which includes the amortization of deferred
debt issuance costs and the interest portion of our rent.
. Working capital represents total current assets, excluding cash and
equivalents, less total current liabilities, excluding current
maturities of long-term debt and capital lease obligations.
12
<PAGE>
<TABLE>
<CAPTION>
Year Ended Three Months Ended
---------------------------------------- ---------------------
As Adjusted
December 27, December 26, December 26, March 28, March 27,
1997 1998 1998 1998 1999
------------ ------------ ------------ --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales.................... $ 550,085 $ 600,773 $ 600,773 $139,392 $ 146,348
Cost of products sold........ 319,074 348,842 348,842 83,435 85,586
---------- ---------- ---------- -------- ---------
Gross Profit................. 231,011 251,931 251,931 55,957 60,762
Selling, general and
administrative expenses..... 183,556 202,213 202,213 51,068 55,192
ESOP expense................. 6,230 6,453 6,453 1,475 1,792
Amortization of intangibles.. 7,679 7,629 7,629 1,908 1,906
Interest expense, net (1).... 19,088 22,454 30,953 (2) 4,643 7,941
Other expense, net........... 1,571 3,321 2,684 (3) 408 521
Management compensation--
transaction related......... -- 14,223 -- (4) -- --
---------- ---------- ---------- -------- ---------
Income (loss) from continuing
operations before taxes..... $ 12,887 $ (4,362) $ 1,999 $ (3,545) $ (6,590)
========== ========== ========== ======== =========
Net income (loss)............ $ 6,362 $ (19,019) $ (1,826) $ (6,653)
========== ========== ======== =========
Other Data:
Adjusted EBITDA (5).......... $ 58,420 $ 62,264 $ 62,264 $ 7,906 $ 8,215
Adjusted EBITDA margin....... 10.6 % 10.4 % 10.4 % 5.7 % 5.6 %
Gross margin................. 42.0 % 41.9 % 41.9 % 40.1 % 41.5 %
Cash provided by (used in)
operating activities ....... $ 32,301 $ (14,008) -- $ (1,755) $ (11,736)
Cash used in investing
activities.................. (15,355) (15,553) -- (3,755) (1,374)
Cash provided by (used in)
financing activities........ (12,377) 26,488 -- 5,195 15,792
Adjusted capital expenditures
(6)......................... 7,616 8,989 8,989 1,560 1,665
Depreciation and
amortization................ 13,549 16,593 16,593 4,103 4,396
Cash interest expense........ 18,731 21,566 29,563 4,500 7,423
Total interest expense....... 19,344 22,638 31,137 4,688 7,989
Ratio of adjusted EBITDA to
cash interest expense....... 2.1 x
Ratio of adjusted EBITDA to
total interest expense...... 2.0 x
Ratio of earnings to fixed
charges (7)................. 1.6 x -- 1.1 x -- --
</TABLE>
<TABLE>
<CAPTION>
As of
March 27,
1999
-----------
(Unaudited)
<S> <C>
Balance Sheet Data:
Working capital ................................................... $ 62,447
Total assets....................................................... 409,044
Total debt, including current maturities........................... 334,440
Total common stockholders' deficit................................. (18,447)
</TABLE>
13
<PAGE>
Notes to Summary Condensed Consolidated Financial Data
(except as otherwise indicated, dollars in thousands)
(1) Interest expense, net includes the amortization of deferred debt issuance
costs of $613, $777, $777, $188 and $135 for 1997, 1998, 1998 as adjusted,
and the three months ended March 28, 1998 and March 27, 1999, respectively,
and is net of interest income of $256, $184, $184, $45 and $48 for the same
periods, respectively.
(2) Reflects the following net increase in interest expense resulting from the
increased borrowings to finance the Fenway acquisition and related
refinancing and the original offering:
<TABLE>
<S> <C>
Elimination of historical interest expense for refinanced debt.. $(21,258)
Interest resulting from the term loan facility under our new
senior credit agreement:
Tranche A--$30,976 at 7.75%................................. 2,401
Tranche B--$70,000 at 8.25%................................. 5,775
Tranche C--$50,000 at 8.50%................................. 4,250
Interest resulting from the issuance of the notes at 10.25%..... 15,375
Commitment fee resulting from the portion of our revolving
credit facility assumed to be unused........................... 382
Amortization of the $12,018 deferred financing costs related to
the above...................................................... 1,574
--------
Net Increase.................................................. $ 8,499
========
</TABLE>
The 1998 as adjusted net increase in interest expense is based on the
amount of debt outstanding as of December 26, 1998 adjusted for the
application of proceeds of the original offering. As of December 26, 1998,
we had $190.0 million of term loans outstanding and no amounts outstanding
under our revolving credit facility.
As of March 21, 1999, immediately prior to the closing of the original
offering, we had borrowings under our revolving credit facility of
approximately $15.0 million and borrowings under our term loan facility of
approximately $189.7 million. We used a portion of the proceeds of the
original offering to repay all amounts outstanding under our revolving
credit facility and to prepay approximately $23.7 million of principal
amounts under our term loan facility as well as approximately $0.1 million
of accrued interest. We applied $21.4 million, $1.1 million and
$1.1 million of prepayments to the Tranche A, Tranche B and Tranche C term
loans, respectively, which resulted in a total outstanding amount under
our term loan facility of approximately $166.0 million.
Interest rates assumed for our new senior credit agreement borrowings are
based upon a LIBOR borrowing rate of 5.0% plus the applicable margin. If
the interest rates assumed above increased by 0.25%, our total interest
expense would increase by $377 for 1998.
<TABLE>
<S> <C>
(3)Reflects the following net decrease:
Elimination of other non-recurring expenses related to the Fenway ac-
quisition........................................................... $(1,012)
Increase in the annual management fee................................ 375
-------
$ (637)
=======
</TABLE>
(4) Reflects the elimination of non-recurring management compensation solely
related to the Fenway acquisition.
14
<PAGE>
(5) Items added back to EBITDA to arrive at adjusted EBITDA are as follows:
<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
-------------------------------------- -------------------
As Adjusted
December 27, December 26, December 26, March 28, March 27,
1997 1998 1998 1998 1999
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
EBITDA.................. $45,524 $34,685 $49,545 $5,201 $5,747
ESOP expense............ 6,230 6,453 6,453 1,475 1,792
Other expense, net...... 1,571 3,321 2,684 408 521
Management
compensation--
transaction related.... -- 14,223 -- -- --
Interest income......... 256 184 184 45 48
Non-Recurring Expenses:
SWIFT/UNITE........... 2,347 2,208 2,208 641 --
Strategic management
initiatives.......... 1,693 418 418 -- 107
Discontinued product
line................. 799 772 772 136 --
------- ------- ------- ------ ------
Adjusted EBITDA..... $58,420 $62,264 $62,264 $7,906 $8,215
======= ======= ======= ====== ======
</TABLE>
(6) Adjusted capital expenditures are exclusive of expenditures related to:
(a) our substantially completed SWIFT and UNITE programs of $3,786,
$2,808, $2,808, $1,204 and $0 for 1997, 1998, the year 1998 as
adjusted, the three months ended March 28, 1998 and March 27, 1999,
respectively; and
(b) new plant facilities of $4,299, $3,756, $3,756, $991 and $0 for the
same periods, respectively.
(7) Earnings were insufficient to cover fixed charges by $4,362, $3,545 and
$6,590 for 1998, and the three months ended March 28, 1998 and March 27,
1999, respectively.
15
<PAGE>
RISK FACTORS
You should carefully consider the following factors in addition to the other
information set forth in this prospectus before investing in the exchange
notes.
Substantial Leverage--Our substantial indebtedness could adversely affect our
financial health by, among other things, increasing our vulnerability to
general adverse economic and industry conditions, and prevent us from
fulfilling our obligations under the exchange notes.
As a result of the Fenway acquisition and the original offering, we have a
significant amount of indebtedness. As of March 27, 1999, our total
indebtedness was approximately $334.5 million and our ratio of earnings to
fixed charges was 1.1 to 1.
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for us to satisfy our obligations under the exchange
notes;
. increase our vulnerability to general adverse economic and industry
conditions;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, which would reduce the amount
of cash flow available to fund working capital, capital expenditures,
research and development efforts and other general corporate requirements;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. limit our ability to borrow additional funds. In addition, it will subject
us to financial and other restrictive covenants, and failure to comply
with those covenants could result in an event of default which, if not
cured or waived, could have a material adverse effect on us.
Additional Borrowings Available--We and our subsidiaries may be able to incur
substantial amounts of additional debt that is senior to or equal in rank to
our obligations under the exchange notes, which may increase the likelihood
that we will not have sufficient funds to service our indebtedness under the
exchange notes.
The terms of the indenture do not fully prohibit us or our subsidiaries from
incurring additional debt that is senior to or equal in rank to the exchange
notes. Our new senior credit agreement permits additional borrowings under our
revolving credit facility of up to approximately $79.4 million as of March 27,
1999 and all of those borrowings would be senior to the exchange notes. If new
debt that is senior or equal in rank to the exchange notes is added to our
current debt levels, the related risks that you and we face could intensify.
Ability to Service Debt--To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including
the exchange notes, and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
In 1998, we incurred a net loss of $19.0 million. This loss included costs
attributable to the Fenway acquisition of $10.2 million, net of tax, and an
extraordinary debt extinguishment loss of approximately $15.0 million, net of
tax. We had to increase our borrowings to finance the cash portion of these
Fenway acquisition costs. We cannot assure you that we will not incur similar
charges in connection with acquisitions, debt refinancings or other
transactions affecting our capital structure in the future. Our ability to
generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
16
<PAGE>
We cannot assure you that our business will generate sufficient cash flow
from operations, that we will realize currently anticipated cost savings and
operating improvements on schedule or at all or that future borrowings will be
available to us under our new senior credit agreement in amounts sufficient to
enable us to pay our indebtedness, including the exchange notes, or to fund
our other liquidity needs. We may need to refinance all or a portion of our
indebtedness, including the exchange notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness,
including our new senior credit agreement and the exchange notes, on
commercially reasonable terms or at all.
Subordination--Your right to receive payments on the exchange notes is junior
to some of our existing indebtedness and possibly to all of our future
borrowings.
As of March 27, 1999, the original notes were subordinated to approximately
$184.4 million of senior debt and we had approximately $79.4 million available
for borrowing as additional senior debt under our revolving credit facility.
The exchange notes will be similarly subordinated to our senior debt. In
addition, so long as we maintain a fixed charge coverage ratio of at least 2.0
to 1 the indenture will permit us to incur unlimited additional indebtedness,
all of which could be senior or equal in rank to the exchange notes.
The exchange notes rank behind all of our existing and future indebtedness
other than trade payables and except for any future indebtedness that
expressly provides that it ranks equal with, or is subordinated in right of
payment to, the exchange notes. As a result, upon any distribution to our
creditors in a bankruptcy, liquidation or reorganization or similar proceeding
relating to us or our property, the holders of our senior debt will be
entitled to be paid in full in cash before any payment may be made with
respect to the exchange notes.
In addition, all payments on the exchange notes will be blocked in the
event of a payment default on our senior debt and may be blocked for up to 179
of 360 consecutive days in the event of specific non-payment defaults on
senior debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to our company, holders of the exchange notes will
participate with trade creditors and all other holders of our subordinated
indebtedness in the assets remaining after we have paid all of the senior
debt. However, because the indenture requires that amounts otherwise payable
to holders of the exchange notes in a bankruptcy or similar proceeding be paid
to holders of senior debt instead, holders of the exchange notes may receive
less, ratably, than holders of trade payables in any such proceeding. In any
of these cases, we may not have sufficient funds to pay all of our creditors,
and holders of exchange notes may receive less, ratably, than the holders of
senior debt.
Control by Fenway--Fenway has effective control of Simmons. They may have
different interests from yours.
Fenway Investment LLC owns approximately 75.1% of the outstanding voting
stock of Simmons Holdings and holds the junior subordinated notes issued by
Simmons Holdings. Therefore, Fenway Investment LLC has the power to:
. elect a majority of the directors of our parent company;
. control all matters submitted to stockholders of our parent company; and
. exercise control over the business, policies and affairs of our parent
company.
Fenway Investment LLC, as our parent company's majority equity holder and
as holder of the junior subordinated notes issued by Simmons Holdings, may
have interests different from yours.
Financing Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change of control offer required by the
indenture.
Upon the occurrences of specific kinds of change of control events, we will
be required to offer to repurchase all outstanding notes. However, we may not
have sufficient funds at the time of the change of
17
<PAGE>
control to make the required repurchase of exchange notes or restrictions in
our new senior credit agreement or other senior debt may not allow such
repurchases. In addition, some important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would not
constitute a "Change of Control" under the indenture.
Dependence on Key Customers--We rely upon a small number of customers for a
significant portion of our business. If we lose their business, our net sales
may decrease.
If we lose all or a significant portion of our business with any of our
significant customers, our financial condition or results of operations may
suffer materially. We currently derive a significant portion of our sales from
a small number of customers and expect similar customer concentration to
continue in the future. In 1998, our ten largest customers accounted for
approximately 38% of our net sales. Heilig-Meyers Company and its
subsidiaries, including Rhodes, Inc., accounted for approximately 11.8% of our
1998 net sales.
We cannot eliminate the risk that important customers may experience
financial difficulties or become bankrupt. In 1997, two of our ten largest
customers, Montgomery Ward & Co. and Levitz Furniture, Inc., filed for
protection under Chapter 11 of the United States Bankruptcy Code.
Risk of Fluctuations in the Cost of Raw Materials--If raw material costs
increase, our production costs may increase, which could reduce our
competitiveness.
If prices of the raw materials that we purchase increase and we are unable
to pass on the increase in our costs to our customers, then our financial
condition or results of operations may be materially and adversely affected.
The major raw materials that we purchase are wire, spring components, lumber,
cotton, insulator pads, innersprings, fabrics and roll goods consisting of
foam, fiber, ticking and non-wovens. The price and availability of these raw
materials may change depending upon market conditions.
Dependence on Key Suppliers--If we experience difficulty with a major
supplier, we may have difficulty finding alternative sources. Our business
could be adversely affected if our production is delayed while we locate an
alternative supplier or we have to alter our means of production to adapt to
alternative suppliers.
We obtain a large percentage of our raw materials from a small number of
suppliers. We have long-term supply agreements with Leggett & Platt,
Incorporated, Foamex International Inc. and Amoco Fabrics and Fiber Company.
With the exception of Leggett & Platt, we believe that we can readily replace
our other suppliers, if necessary, because we have already identified and used
alternative sources. Because we may not be able to find sources on terms as
favorable to us for some of these components, our business, financial
condition and results of operations could be materially and adversely affected
if we lose Leggett & Platt as a supplier.
Leggett & Platt supplies the majority of several bedding components to the
bedding industry, including spring components, insulator pads, wire, fiber,
quilt backing and flange material. In 1998, we bought approximately one-third
of our raw materials from Leggett & Platt. We expect that in 1999 we will buy
a comparable portion of our raw materials from Leggett & Platt. Under our
agreements with Leggett & Platt, we are required to buy a majority of our
requirements of several components from them, such as grid tops, innersprings
and wire. Those agreements generally expire in 2010.
We purchase substantially all of our conventional bedding raw materials
centrally to obtain volume discounts and achieve economies of scale. In 1998,
we bought approximately 86% of our raw materials from ten suppliers. Supplier
concentration is common in the bedding industry.
Dependence on Key Personnel--The loss of Mr. Nie's services may adversely
affect our business.
Our success will continue to depend upon our management team, and in
particular upon Zenon Nie, the Chairman of our Board of Directors, our Chief
Executive Officer and President. The loss of Mr. Nie's services could
materially and adversely affect our business and future operations. In October
1998, we and Mr. Nie
18
<PAGE>
entered into a three-year employment agreement that renews automatically on a
daily basis, subject to three years' notice of termination. We also maintain a
$10.0 million key man life insurance policy covering Mr. Nie, of which we are
the beneficiary.
Competition--Our competitors may have important advantages over us that could
result in our losing market share or profitability.
The bedding industry is intensely competitive. There are approximately 800
bedding manufacturers in the United States. We, along with Sealy Corporation
and Serta, Inc., currently have a significant portion of the industry's
wholesale revenues. We could experience increased future competition resulting
in price reductions, reduced margins or loss of market share. Any of these
could have an adverse effect on our operating results or financial condition.
In addition, some of our principal competitors may be less highly-leveraged,
have greater access to financial or other resources, have lower cost
operations, have greater vertical integration, and be better able to withstand
market conditions.
Environmental, Health and Safety Regulation--We are subject to regulations
that may be materially burdensome or expensive to comply with.
We are subject to various federal, state and local laws and regulations
relating to occupational health and safety, pollution and environmental
protection. It is possible that, despite our efforts, we may fail to be in
complete compliance with all of the applicable regulations.
We are currently evaluating our potential liability for the clean-up of
environmental contamination in and around our leased manufacturing facilities
in San Leandro, California.
Our efforts to comply with environmental regulations do not remove the risk
that we may be held liable, and that the amount of liability may be material,
for releases of hazardous substances occurring on or coming from our
properties or any associated offsite disposal location, or for contamination
discovered at any of our properties from activities conducted by previous
occupants. This risk is common for manufacturers in general.
We have recorded a reserve to reflect our potential liability for
environmental matters. The costs of environmental remediation are uncertain,
and we may incur costs in excess of our recorded reserves.
Acquisition Integration--Difficulties in integrating potential acquisitions
could reduce our profitability.
We regularly evaluate potential acquisition opportunities to support and
strengthen our business. We cannot assure you that we will be able to locate
suitable acquisition candidates, acquire candidates on acceptable terms or
integrate acquired businesses successfully.
Future acquisitions may require us to incur additional debt and contingent
liabilities, which may materially and adversely affect our business, operating
results and financial condition. In addition, the process of effectively
integrating acquired businesses involves the following risks:
. assimilating operations and products may be unexpectedly difficult;
. management's attention may be diverted from other business concerns;
. we may enter markets in which we have limited or no direct experience;
and
. we may lose key employees of the acquired business.
We do not currently have any agreements relating to acquisitions or joint
ventures.
Labor Relations--If our labor relations become strained, our productivity
could decrease.
We may experience labor-related work stoppages in the future, particularly
in connection with negotiations over our labor contracts, most of which expire
in 2001. Labor-related work stoppages could lead to increased production
costs.
19
<PAGE>
At nine of our 18 manufacturing facilities, at least one of the following
unions represents our employees:
. the Upholstery Division of the United Steelworkers;
. the Teamsters;
. the United Furniture Workers;
. the Longshoremen; and
. the International Association of Machinists and Aerospace Workers.
Labor unions may attempt to organize employees at our non-union faciliites.
Year 2000 Issue--We cannot assure you that we have eliminated our exposure to
the Year 2000 issue or related adverse consequences to our business.
We continue to evaluate the possibility of disruption to our computer and
other systems upon the turn of the century as a result of the widely-known
dating flaw inherent in many systems known as the year 2000 issue. We are in
the process of upgrading and modifying our existing systems to address the
year 2000 issue. A failure to complete the upgrades or modifications in a
timely manner may disrupt our operations.
We have relationships with suppliers, customers, banks, insurers and other
significant entities, such as public utilities, that may not have adequately
addressed the year 2000 issue with respect to their equipment or information
systems. Although we are attempting to assess the extent of their compliance
efforts, we have not received any written assurances and, accordingly, cannot
determine the risk to our business.
In the event that we are unable to complete planned upgrades or implement
replacement systems prior to December 31, 1999, or that the parties with whom
we have relationships have not adequately addressed the year 2000 issue, we
may experience significant disruptions or delays in our operations. This could
result in our business, financial condition or results of operations suffering
a material adverse effect.
Reliance on Intellectual Property--We cannot assure you that our protection
of our intellectual property is adequate to prevent harm to our business.
To compete effectively with other companies, we must maintain the
proprietary nature of our owned and licensed intellectual property. Despite
our efforts, we cannot eliminate the following risks:
. others may circumvent our trademarks;
. our trademarks may, now or in the future, violate the proprietary rights
of others;
. we may be prevented from using our own trademarks if challenged;
. we may be unable to afford to enforce or defend our trademarks;
. our patents may not sufficiently protect us;
. our pending patent applications may not result in patents being issued;
and
. we may be unable to protect our technological advantages when our patents
expire.
We hold over 200 trademarks registered in the United States. We believe
these trademarks have significant value and are important in marketing our
products to retailers and end-consumers. Our principal trademarks are
registered or pending registration in over 90 foreign countries. We own
numerous United States and foreign patents and have patent applications
pending domestically and abroad. We also own United States and foreign
registered trade names and service marks and have pending applications for the
registration of trade names and service marks domestically and abroad. In
addition, we own a variety of unpatented proprietary technology and know-how
which is important to the design and manufacture of our products.
20
<PAGE>
Although we do not believe that our overall success is dependent upon any
particular intellectual property rights, an inability to maintain the
proprietary nature of our intellectual property may materially and adversely
affect our financial condition or results of operations. For example, any
challenge to the use of our trademarks could have a material adverse effect on
our financial condition or results of operations, either through a negative
ruling with respect to our use, the validity or enforceability of our
trademarks or through the time consumed and legal costs involved in defending
against a challenge.
Legal Proceedings--An unfavorable outcome of currently pending litigation may
require us to pay money damages and alter some of our production processes.
One of our competitors, Serta, Inc., has filed a patent infringement
litigation action against us. We believe that Serta's allegations are without
merit, and we intend to defend the action vigorously. However, an unfavorable
resolution of this action could have an adverse effect on our results of
operations.
Fraudulent Conveyance Matters--Federal and state statutes allow courts, under
specific circumstances, to invalidate the exchange notes and require
noteholders to return payments received from us.
Federal bankruptcy law and comparable provisions of state fraudulent
transfer laws allow courts to invalidate the exchange notes, or to subordinate
claims in respect of the exchange notes to all of our other debts if, among
other things, at the time we incurred the indebtedness evidenced by the
exchange notes, we:
. received less than reasonably equivalent value or fair consideration for
the incurrence of that indebtedness and were insolvent or rendered
insolvent by reasons of that incurrence; or
. were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital; or
. intended to incur, or believed that we would incur, debts that we could
not pay as they matured.
In addition, courts could invalidate any payments we make pursuant to the
exchange notes and require such payments to be returned to us, or to a fund for
the benefit of our creditors.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, courts would consider
us insolvent if:
. the sum of our debts, including contingent liabilities, was greater than
the fair saleable value of all of our assets; or
. the present fair saleable value of our assets was less than the amount that
would be required to pay our probable liability on existing debts,
including contingent liabilities, as they became absolute and mature; or
. we could not pay our debts as they became due.
On the basis of historical financial information, recent operating history
and other factors, we believe that, after giving effect to the indebtedness
incurred in connection with the original offering and the Fenway acquisition,
we:
. will not be insolvent;
. will not have unreasonably small capital for our business; and
. will not have incurred debts that we cannot pay as they mature.
We cannot assure you, however, as to what standard a court would apply in
making such determinations or that a court would agree with our conclusions in
this regard.
21
<PAGE>
No Prior Market for Exchange Notes--We cannot assure you that an active
trading market will develop for the exchange notes. Further, resales of the
exchange notes must comply with applicable state securities laws.
The exchange notes are new securities for which there currently is no
market and we cannot assure you that an active trading market will develop or
sustain itself for the exchange notes. Although Goldman, Sachs & Co., Warburg
Dillon Read LLC, Fleet Securities, Inc. and U.S. Bancorp Libra, the initial
purchasers of the outstanding notes, have informed us that they intend to make
a market in the exchange notes, they are not obligated to do so and they may
discontinue any such market making at any time without notice. We expect the
exchange notes to be eligible for trading by qualified buyers in the PORTAL
market. We do not intend to apply for listing of the exchange notes on any
securities exchange or for quotation through The Nasdaq National Market.
In addition, changes in the overall market for high yield securities and
changes in our financial performance or prospects or in the prospects for
companies in our industry generally may adversely affect the liquidity of the
trading market in the exchange notes, and the market price quoted for the
exchange notes.
All resales must be made in compliance with state securities or blue sky
laws. Such compliance may require that the exchange notes be registered or
qualified in a state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. We
assume no responsibility with regard to compliance with these requirements.
If you do not exchange your notes in the exchange offer, your ability to
resell them will remain restricted.
Untendered outstanding notes that you do not exchange for the registered
exchange notes pursuant to the exchange offer will remain restricted
securities, subject to the following restrictions on transfer:
. you may resell only if registered pursuant to the Securities Act or if an
exemption from registration is available;
. the notes will bear a legend restricting transfer in the absence of
registration or an exemption; and
. a holder of the notes who wants to sell or otherwise dispose of all or any
part of its notes under an exemption from registration under the
Securities Act, if requested by us, must deliver to us an opinion of
independent counsel experienced in Securities Act matters, reasonably
satisfactory in form and substance to us, that such exemption is
available.
Except under limited circumstances, we have no obligation to register any
notes not tendered in the exchange offer.
22
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other
things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we can give no
assurance that we will achieve or realize these plans, intentions or
expectations. Forward-looking statements are inherently subject to risks,
uncertainties and assumptions. Important factors that could cause actual
results to differ materially from the forward-looking statements we make in
this prospectus are set forth below under the caption "Risk Factors" and
elsewhere in this prospectus. We expressly qualify all forward-looking
statements attributable to us or persons acting on our behalf in their entirety
by these cautionary statements. We will not update these forward-looking
statements even though our situation will change in the future.
23
<PAGE>
THE TRANSACTIONS AND THE ORIGINAL OFFERING
The Fenway Acquisition
Prior to the Fenway acquisition, our parent company Simmons Holdings was
owned by members of our management and the Investcorp group and we were owned
by Simmons Holdings and the Simmons ESOP. In the Investcorp acquisition, the
Investcorp group acquired a controlling interest in Simmons Holdings in March
1996.
On October 29, 1998, Fenway Investment LLC acquired a controlling interest
of Simmons Holdings through the Fenway acquisition. Members of management and
the Investcorp group sold a portion of their shares and retained an ownership
interest in Simmons Holdings. In addition, members of our management received
payments for cancellation of options exercisable for shares of Simmons
Holdings. The Simmons ESOP sold some of its shares in us and exchanged its
remaining shares for shares of Simmons Holdings. The Fenway acquisition was
accounted for as a recapitalization.
The percentage ownership of Simmons Holdings immediately before and after
the Fenway acquisition and the cash consideration received by existing
shareholders as a result of the Fenway acquisition are summarized in the chart
below. When reading this chart you should note that all ownership percentages
include any options or warrants currently exercisable for, or securities
convertible into, shares of common stock of Simmons Holdings.
<TABLE>
<CAPTION>
Ownership Percentage
prior to the Ownership Percentage Cash Consideration
Fenway Acquisition Acquired or Retained Received
-------------------- -------------------- ------------------
(in millions)
<S> <C> <C> <C>
Fenway Investment LLC... -- 71.2% $ --
Members of our
management............. 13.9% 11.4 14.0
The Investcorp group.... 72.6 4.8 193.4
The Simmons ESOP........ 13.5 12.6 15.4
----- ----- -------
100.0% 100.0% $ 222.8
===== ===== =======
</TABLE>
As a result of the Fenway acquisition, members of management received cash
consideration of approximately $7.8 million for shares of stock of Simmons
Holdings and approximately $6.2 million for canceled options to purchase stock
of Simmons Holdings. The members of our management who received cash
consideration as a result of the Fenway acquisition and who remain as
shareholders of Simmons Holdings include our named executive officers. The
total cash consideration that our management received in exchange for shares
and canceled options in connection with the Fenway acquisition was as follows:
<TABLE>
<CAPTION>
Amount
-------------
(in millions)
<S> <C>
Zenon Nie...................................................... $ 7.4
Martin Passaglia............................................... 0.9
Jonathan Daiker................................................ 0.3
Robert Barton.................................................. 0.6
Joseph Ulicny.................................................. 0.4
Approximately 40 other members of management................... 4.4
-----
$14.0
=====
</TABLE>
24
<PAGE>
The following table summarizes the sources and uses of funds in connection
with the Fenway acquisition:
<TABLE>
<CAPTION>
Amount
-------------
(in millions)
<S> <C>
Sources:
Borrowings under our new senior credit agreement
Term loans............................................... $190.0
Revolving credit facility................................ 10.0
Senior bridge loans........................................ 75.0
Junior subordinated notes issued by us..................... 30.0
Junior subordinated notes issued by Simmons Holdings....... 10.0
Cash equity investment by Fenway Investment LLC............ 128.1
------
Total sources.......................................... $443.1
======
Uses:
Cash consideration paid to members of management, the
Investcorp group and the Simmons ESOP..................... $222.8
Redemption of previously outstanding senior subordinated
notes plus accrued interest and premium................... 115.9
Repayment of borrowings under our existing credit facility
plus accrued interest..................................... 71.4
Transaction fees and expenses of Fenway acquisition........ 31.4
Working capital increase................................... 1.6
------
Total uses............................................. $443.1
======
</TABLE>
New Senior Credit Agreement. In connection with the Fenway acquisition, we
entered into a new senior credit agreement with institutional lenders and
affiliates of the initial purchasers of the notes providing for loans of up to
$270.0 million, consisting of three tranches of a term loan facility totaling
$190.0 million and an $80.0 million revolving credit facility.
Immediately prior to the original offering, the amount of term loans
outstanding under our new senior credit agreement was $189.7 million. After
December 26, 1998 and prior to the original offering, we borrowed $15.0
million under our revolving credit facility. With proceeds from the original
offering, we reduced the outstanding amount of the term loans to $166.0
million and repaid the $15.0 million then outstanding under our revolving
credit facility.
For more information on the terms of our new senior credit agreement, see
"Other Indebtedness--New Senior Credit Agreement".
Senior Bridge Loan Agreement. In connection with the Fenway acquisition, we
entered into a bridge loan agreement with West Street Fund I, L.L.C. and UBS
A.G., Stamford Branch, each an affiliate of an initial purchaser of the notes.
This bridge loan agreement provided for $75.0 million in aggregate principal
amount of senior subordinated increasing rate bridge loans. On March 16, 1999,
with proceeds from the original offering, we repaid the $75.0 million of these
senior bridge loans as well as approximately $0.4 million of accrued interest.
Securities Purchase Agreement. In connection with the Fenway acquisition,
we and Simmons Holdings entered into a securities purchase agreement with
Fenway Investment LLC. Pursuant to this securities purchase agreement, we
issued junior subordinated notes in the aggregate principal amount of $30.0
million and Simmons Holdings issued junior subordinated notes in the aggregate
principal amount of $10.0 million.
With proceeds from the original offering, we redeemed the entire $30.0
million of our junior subordinated notes.
25
<PAGE>
For more information on the terms of the junior subordinated notes that
remain outstanding under the securities purchase agreement, see "Other
Indebtedness--Securities Purchase Agreement".
Under the securities purchase agreement, Simmons Holdings also issued to
Fenway Investment LLC a warrant to purchase 601,346.63 shares of common stock
of Simmons Holdings. This warrant is immediately exercisable with an initial
exercise price of $6.7315 per share. In general, the initial exercise price
will be adjusted proportionately to account for subsequent stock splits, stock
dividends or other actions taken by Simmons Holdings having a dilutive effect
on the shares underlying the warrant.
Simmons Holdings also issued warrants to purchase an aggregate of
2,104,713.22 shares of common stock of Simmons Holdings to be held in escrow.
If Fenway Investment LLC sells any of the Simmons Holdings junior subordinated
notes, it may also assign up to 50% of these escrowed warrants to the assignee
of the notes. The number of any warrants assigned will be that which Fenway
Investment LLC determines is necessary or desirable to make the terms of the
sale of the junior subordinated notes acceptable to Fenway Investment LLC. Any
escrowed warrants so assigned will be immediately exercisable upon assignment
with an initial exercise price of $0.01 per share.
On the first anniversary of the securities purchase agreement, October 29,
1999, if Fenway Investment LLC:
. still holds any of the Simmons Holdings junior subordinated notes, it
will be entitled to receive all warrants not assigned as described above
up to a maximum of 50% of the warrants originally placed in escrow; or
. does not hold any of the Simmons Holdings junior subordinated notes, it
will be entitled to receive 50% of all warrants not assigned as
described above.
Any escrowed warrants that Fenway Investment LLC receives will be
immediately exercisable at an initial exercise price of $6.7315 per share. In
general, the initial exercise price will be adjusted proportionately to
account for subsequent stock splits, stock dividends or other actions taken by
Simmons Holdings having a dilutive effect on the warrant.
Any warrants not assigned to a third party or issued to Fenway Investment
LLC will be returned to Simmons Holdings for cancellation.
Redemption of Old Senior Subordinated Notes. The Fenway acquisition
constituted a "change of control" under the terms of our indenture for our
$100.0 million of 10.75% senior subordinated notes due 2006, or old notes. As
a result, we had the right to redeem the old notes at a redemption price equal
to 100% of the principal amount plus accrued and unpaid interest to the date
of redemption plus an applicable premium. With a portion of the proceeds from
the Fenway acquisition and the related refinancing, we completed the
redemption of these old notes and repayment of interest in November 1998.
Refinancing of Previous Senior Credit Agreement. We terminated our
previously existing senior credit facility in connection with the Fenway
acquisition. This previous senior credit facility provided for a $40.0 million
revolving credit facility and a term loan facility of $75.0 million. When we
terminated this previous senior credit facility, we repaid approximately $69.9
million of borrowings plus accrued interest.
26
<PAGE>
The Original Offering
On March 16, 1999, we sold the notes in the original offering. We used the
proceeds from the original offering as follows:
<TABLE>
<CAPTION>
Amount
-------------
(in millions)
<S> <C>
Sources:
Proceeds of the original offering........................ $ 150.0
=======
Uses:
Repayment of bridge loans and accrued interest........... 75.4
Repayment of our junior subordinated notes and accrued
interest................................................ 31.1
Repayment of our revolving credit facility............... 15.0
Prepayment of portion of our term loan facility.......... 23.7
Payment of fees and expenses of the original offering.... 4.8
-------
Total.................................................. $ 150.0
=======
</TABLE>
The initial maturity date of the senior bridge loans was October 29, 1999.
The senior bridge loans initially bore interest at 9.6%, based on LIBOR plus an
applicable margin. This interest rate increased to 10.6% on January 27, 1999
and would have increased by 0.5% for every three-month period thereafter up to
a maximum rate of 15.0%. The proceeds from these senior bridge loans were used
to complete the Fenway acquisition.
The maturity date of our junior subordinated notes was October 29, 2010. Our
junior subordinated notes initially bore interest at 13.0% through December 30,
1998. This rate increased to 13.5% on December 31, 1998 and would have
increased by 0.5% for every three-month period thereafter up to a maximum rate
of 16.0%. The proceeds from these junior subordinated notes were used to
complete the Fenway acquisition.
Our revolving credit facility is available until the earliest to occur of:
(1) October 29, 2004;
(2) the date the revolving loan commitments of the lenders under our new
senior credit agreement are permanently reduced to zero under specific
circumstances; and
(3) the date the revolving loan commitments are terminated due to an
event of default under our new senior credit agreement.
The Tranche A term loan matures in quarterly installments from December 1999
until final payment in October 2004. The Tranche B term loan began maturing in
quarterly installments in December 1998 and will continue to mature until final
payment in October 2005. The Tranche C term loan began maturing in quarterly
installments in December 1998 and will continue to mature until final payment
in October 2006.
Our borrowings under our revolving credit facility and our term loans bear
interest at either the base rate or the adjusted Eurodollar rate plus the
applicable margin, each of which is a floating rate.
The base rate is the applicable margin plus the higher of:
(1) the applicable prime lending rate of UBS; and
(2) the Federal Reserve reported average overnight Federal funds rate
plus 0.5%.
The adjusted Eurodollar rate is described in our new senior credit
agreement.
27
<PAGE>
The applicable margins for borrowings under our new senior credit agreement
are as follows:
<TABLE>
<CAPTION>
Base Rate Adjusted Eurodollar Rate
--------- ------------------------
<S> <C> <C>
Tranche A term loan....................... 1.75% 2.75%
Tranche B term loan....................... 2.25% 3.25%
Tranche C term loan....................... 2.50% 3.25%
Revolving credit facility loans........... 1.75% 2.75%
</TABLE>
The applicable margins for our Tranche A term loan and our revolving credit
facility could be reduced to 1.00% for base rate loans and 2.00% for adjusted
Eurodollar rate loans as a result of changes in our leverage ratio.
28
<PAGE>
USE OF PROCEEDS
There will be no proceeds from the issuance of the exchange notes.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our actual
capitalization as of March 27, 1999. You should read this table along with the
"Selected Historical Consolidated Financial and Other Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of March 27, 1999
--------------------
(in thousands)
<S> <C>
Cash and cash equivalents................................ $ 8,706
========
Long-term debt obligations, including current portion:
New senior credit agreement
Revolving credit facility............................ $ --
Term loan facility................................... 166,028
Industrial revenue bonds............................... 14,700
Other, including capital leases........................ 3,712
Notes.................................................. 150,000
--------
Total long-term debt............................... 334,440
Redemption obligation--Simmons ESOP, net of related
unearned compensation of $10,095........................ 13,389
Common stockholders' deficit............................. (18,447)
--------
Total capitalization............................... $329,382
========
</TABLE>
29
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(dollars in thousands)
Set forth below are our selected historical consolidated financial data. We
derived our historical Statements of Operations and Balance Sheet Data for
1994, 1995, the period from December 31, 1995 through March 21, 1996, the
period from March 22, 1996 through December 28, 1996, 1997, 1998 and the three
months ended March 28, 1998 and March 27, 1999 from our consolidated financial
statements. You should read the information presented below along with
"Capitalization", "Management's Discussion and Analysis of Financial Condition
and Results of Operations", our consolidated financial statements and
accompanying notes and other financial information appearing elsewhere in this
prospectus.
As a result of the Investcorp acquisition, our assets and liabilities were
adjusted to reflect their estimated fair values as of March 22, 1996. In
addition, we entered into new financing arrangements and changed our capital
structure. Accordingly, the results for the periods subsequent to the
Investcorp acquisition are not comparable to the prior historical periods
presented.
You should note the following when reading the table below:
. EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization. We believe that EBITDA is a widely
accepted financial indicator of a company's ability to service or incur
debt and a similar measure is utilized for purposes of the covenants
contained in the indenture. EBITDA and adjusted EBITDA are not
measurements of operating performance calculated in accordance with
generally accepted accounting principles and should not be considered
substitutes for operating income, net income, cash flows from operating
activities or other statements of operations or cash flow data prepared
in accordance with generally accepted accounting principles, or as
measures of profitably or liquidity. EBITDA and adjusted EBITDA may not
be indicative of our historical operating results, nor are they meant to
be predictive of potential future results. Our measures of EBITDA and
adjusted EBITDA may not be comparable to those recorded by other
companies.
. Cash interest expense represents interest expense less amortization of
debt issuance costs and other non-cash interest expense. We believe that
the ratio of adjusted EBITDA to cash interest expense and the ratio of
adjusted EBITDA to total interest expense are widely accepted as useful
information regarding a company's ability to service and/or incur debt.
. For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before taxes and fixed charges. Fixed charges
consist of interest expense, which includes the amortization of deferred
debt issuance costs and the interest portion of our rent.
. Working capital represents total currents assets, excluding cash and
equivalent, less total current liabilities, excluding current maturities
of long-term debt and capital lease obligations.
30
<PAGE>
<TABLE>
<CAPTION>
Predecessor Successor
--------------------------------- --------------------------------------------------------
Period from Period from
Dec. 31, March 22,
Year Ended 1995 1996 Year Ended Three Months Ended
------------------- through through ------------------- ---------------------
Dec. 31, Dec. 30, March 21, Dec. 28, Dec. 27, Dec. 26, March 28, March 27,
1994 1995 1996 1996 1997 1998 1998 1999
-------- -------- ----------- ----------- -------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $439,689 $489,815 $106,431 $423,870 $550,085 $600,773 $139,392 $146,348
Cost of products sold... 269,741 292,825 66,630 254,127 319,074 348,842 83,435 85,586
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 169,948 196,990 39,801 169,743 231,011 251,931 55,957 60,762
Selling, general and
administrative
expenses............... 137,791 161,202 35,846 135,762 183,556 202,213 51,068 55,192
ESOP expense............ 4,463 4,533 1,203 3,797 6,230 6,453 1,475 1,792
Amortization of
intangibles............ 5,753 5,753 1,324 5,650 7,679 7,629 1,908 1,906
Interest expense,
net(1)................. 8,197 8,185 1,489 15,277 19,088 22,454 4,643 7,941
Other expense (income),
net.................... 2,517 400 96 (2,528) 1,571 3,321 408 521
Management
compensation--
transaction related.... -- -- -- 4,085 -- 14,223 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes from continuing
operations............. $ 11,227 $ 16,917 $ (157) $ 7,700 $ 12,887 $ (4,362) $ (3,545) $ (6,590)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)....... $ 7,994 $ 9,411 $ (439) $ 1,312 $ 6,362 $(19,019) $ (1,826) $ (6,653)
======== ======== ======== ======== ======== ======== ======== ========
Other Data:
Adjusted EBITDA(2)...... $ 36,498 $ 42,153 $ 5,739 $ 42,737 $ 58,420 $ 62,264 $ 7,906 $ 8,215
Adjusted EBITDA margin.. 8.3 % 8.6 % 5.4 % 10.1 % 10.6 % 10.4 % 5.7 % 5.6 %
Gross margin............ 38.7 % 40.2 % 37.4 % 40.0 % 42.0 % 41.9 % 40.1 % 41.5 %
Cash provided by (used
in) operating
activities............. $ 34,380 $ 28,513 $ (6,446) $ 2,339 $ 32,301 $(14,008) $ (1,755) $(11,736)
Cash used in investing
activities............. (4,195) (5,824) (183,461) (1,567) (15,355) (15,553) (3,755) (1,374)
Cash provided by (used
in) financing
activities............. (32,864) (22,030) 185,349 (816) (12,377) 26,488 5,195 15,792
Adjusted capital
expenditures(3)........ 4,496 3,021 523 4,203 7,616 8,989 1,560 1,665
Depreciation and
amortization........... 9,249 9,780 2,198 9,118 13,549 16,593 4,103 4,396
Cash interest expense... 7,095 6,488 1,119 14,875 18,731 21,566 4,500 7,423
Total interest expense.. 9,042 8,347 1,525 15,396 19,344 22,638 4,688 7,989
Ratio of earnings to
fixed charges(4)....... 1.9x 2.4x -- 1.4x 1.6x -- -- --
Balance Sheet Data (end
of period):
Working capital......... $ 23,077 $ 20,171 $ -- $ 42,414 $ 37,133 $ 46,567 -- $ 62,447
Total assets............ 249,891 254,492 -- 367,849 375,125 400,061 -- 409,044
Total debt, including
current maturities..... 109,435 93,768 -- 196,815 184,443 313,469 -- 334,440
Total common
stockholders' equity
(deficit).............. 41,936 44,372 -- 86,291 92,614 (12,301) -- (18,447)
</TABLE>
- --------
(1) Interest expense, net includes the amortization of deferred debt issuance
costs of $835, $679, $84, $521, $613, $777, $188 and $135 for 1994, 1995,
the period from December 31, 1995 through March 21, 1996, the period from
March 22, 1996 through December 28, 1996, 1997, 1998, and the three months
ended March 28, 1998 and March 27, 1999, respectively, and is net of
interest income of $845, $162, $36, $119, $256, $184, $45 and $48 for the
same periods, respectively.
31
<PAGE>
(2) Items added back to EBITDA to arrive at adjusted EBITDA are as follows:
<TABLE>
<CAPTION>
Predecessor Successor
----------------------------- --------------------------------------------------
Period from Period from
Dec. 31, March 22,
Year Ended 1995 1996 Year Year Three Months Ended
----------------- through through Ended Ended -------------------
Dec. 31, Dec. 30, March 21, Dec. 28, Dec. 27, Dec. 26, March 28, March 27,
1994 1995 1996 1996 1997 1998 1998 1999
-------- -------- ----------- ----------- -------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $ 28,673 $ 34,882 $ 3,530 $ 32,095 $ 45,524 $ 34,685 $ 5,201 $ 5,747
ESOP expense............ 4,463 4,533 1,203 3,797 6,230 6,453 1,475 1,792
Other expense (income),
net.................... 2,517 400 96 (2,528) 1,571 3,321 408 521
Management
compensation--
transaction related.... -- -- -- 4,085 -- 14,223 -- --
Interest income......... 845 162 36 119 256 184 45 48
Non-Recurring Expenses:
SWIFT/UNITE expense..... -- 1,815 640 3,467 2,347 2,208 641 --
Strategic management
initiatives............ -- -- -- -- 1,693 418 -- 107
Inventory written-up to
fair market value(a)... -- -- -- 1,000 -- -- -- --
Discontinued product
line................... -- 361 234 702 799 772 136 --
-------- -------- --------- ---------- -------- -------- -------- --------
Adjusted EBITDA........ $ 36,498 $ 42,153 $ 5,739 $ 42,737 $ 58,420 $ 62,264 $ 7,906 $ 8,215
======== ======== ========= ========== ======== ======== ======== ========
</TABLE>
(a) Reflects non-recurring write up to fair market value in connection with
the Investcorp acquisition.
(3) Adjusted capital expenditures are exclusive of expenditures related to
(a) our SWIFT and UNITE programs of $2,813, $1,044, $6,531, $3,786, $2,808,
$1,204 and $0 for 1995, the period from December 31, 1995 through March
21, 1996, the period from March 22, 1996 through December 28, 1996,
1997, 1998, and the three months ended March 28, 1998 and March 27,
1999, respectively; and
(b) new plant facilities of $0, $0, $2,612, $4,299, $3,756, $991 and $0 for
the same periods, respectively.
(4) Earnings were insufficient to cover fixed charges for the period from
December 31, 1995 through March 21, 1996, the year ended December 26, 1998
and the three months ended March 28, 1998 and March 27, 1999 by $157,
$4,362, $3,545 and $6,590, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion along with the "Selected Historical
Consolidated Financial and Other Data" and our consolidated financial
statements and the accompanying notes included elsewhere in this prospectus.
General
Simmons is a leading manufacturer and distributor of premium branded bedding
products in the United States and is the world leader in Pocketed Coil(TM)
innerspring technology. We design, manufacture, distribute and license a broad
range of mattresses, box springs, bedding frames and sleep accessories under
well recognized brand names including Simmons(R), Beautyrest(R), BackCare(R),
Connoisseur Collection(R), and Maxipedic(R). While we provide a full range of
conventional bedding products, our focus is on the higher-end market segments,
emphasizing retail price points from $699 to $2,999 per queen set. We believe
that these products offer more attractive growth prospects and higher gross
margins than lower-end products.
Results of Operations
For purposes of the discussion and the table below, the results of
operations for the year ended December 28, 1996 represent the mathematical
addition of the historical amounts for the predecessor period, December 31,
1995 through March 21, 1996 and the successor period, March 22, 1996 through
December 28, 1996. For comparability with subsequent periods, net sales, cost
of products sold, selling, general, and administrative expenses, ESOP expense,
amortization of intangibles, interest expense, net, other expense (income),
net, management compensation-transaction related, provision for income taxes
and net income for the predecessor and successor periods in 1996 have been
discussed on a combined basis. We believe that a combined discussion of
predecessor and successor periods is reasonable and appropriate because there
were no material adjustments to these items resulting from the accounting
treatment of the Investcorp acquisition.
The following table sets forth some components of our consolidated statement
of operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
--------------------- -----------------------
Combined March 28, March 27,
1996 1997 1998 1998 1999
-------- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold.......... 60.5 58.0 58.1 59.9 58.5
----- ----- ----- ----- -----
Gross margin................... 39.5 42.0 41.9 40.1 41.5
Selling, general and
administrative expenses....... 32.4 33.4 33.7 36.6 37.7
----- ----- ----- ----- -----
Operating income before ESOP
expense and amortization of
intangibles................... 7.1% 8.6% 8.2% 3.5% 3.8%
===== ===== ===== ===== =====
Adjusted EBITDA margin......... 9.1% 10.6% 10.4% 5.7% 5.6%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 27, 1999 as Compared to Three Months Ended March 28,
1998
Net Sales. Net sales for the three months ended March 27, 1999 increased
5.0%, or $7.0 million, from $139.4 million in the same period in 1998 to $146.4
million in 1999. The increase was due primarily to a 3.1% or $4.4 million
increase in bedding unit sales volume and a 1.9% or $2.6 million increase in
bedding average unit selling price. The growth in bedding unit sales volume
resulted primarily from increased BackCare(R) and Beautyrest(R) product
shipments. The increase in bedding average unit selling price is attributable
to sales of higher priced products, particularly in the BackCare(R) line.
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Cost of Products Sold. As a percentage of net sales, cost of products sold
for the three months ended March 27, 1999 decreased to 58.5% from 59.9% for the
same period in 1998. Our improvement in gross margin for 1999 reflects raw
material cost efficiencies resulting from higher levels of procurement and
increased productivity in certain of our manufacturing facilities. Gross
margins during this period also benefited from the increase in bedding average
unit selling price described above.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses for the three months ended March
27, 1999 increased to 37.7% from 36.6% for the same period in 1998. We
attribute this increase to an increase in marketing expenditures and consulting
expenditures. Marketing expenditures increased due to higher advertising and
promotion costs. Consulting fees increased due to various initiatives
undertaken.
ESOP Expense. ESOP expense increased to $1.8 million for the three months
ended March 27, 1999 from $1.5 million for the same period in 1998. 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 $3.3 million to $7.9
million for the three months ended March 27, 1999 from $4.6 million for the
same period in 1998 due primarily to increased indebtedness resulting from the
Fenway acquisition.
Other Expense, Net. Other expense, net increased slightly to $0.5 million
for the three months ended March 27, 1999 from $0.4 million for the same period
in 1998. We attribute this slight increase to an increase in management
advisory service fees.
Provision for Income Taxes. Our effective tax rates for the three months
ended March 27, 1999 and March 28, 1998 differ from the federal statutory rate
primarily because of non tax-deductible amortization of goodwill.
Extraordinary Item. In the three months ended March 27, 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 original offering.
Net Loss. For the reasons set forth above, we incurred a net loss of $6.7
million for the three months ended March 27, 1999 compared to a $1.8 million
loss for the same period in 1998.
Fiscal 1998 as Compared to Fiscal 1997
Net Sales. Net sales increased 9.2%, or $50.7 million, from $550.1 million
in 1997 to $600.8 million in 1998. We attribute $29.2 million of this increase
to a 5.3% increase in our bedding unit sales volume and $21.5 million of it to
a 3.9% increase in our bedding average unit selling price. The growth in
bedding unit sales volume resulted primarily from increased BackCare(R) product
shipments and an increase in open coil contract bedding sales in the last three
quarters of 1998. Bedding average unit selling price increased due to a shift
in our product mix to higher priced products, particularly in the Beautyrest(R)
and BackCare(R) lines.
Cost of Products Sold. As a percentage of net sales, cost of products sold
for 1998 remained stable at approximately 58.1% as compared to the same time
period a year ago. Our gross margins for 1998 reflect an increase in unit sales
of some premium products with gross margins lower than our average, offset by
raw material cost efficiencies together with higher levels of procurement.
Gross margins during 1998 also benefited from the increase in bedding average
unit selling price described above.
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Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses increased from 33.4% in 1997 to
33.7% in 1998. We attribute this increase to an increase in marketing
expenditures and to higher depreciation expense, offset, in part, by increased
royalty income, a lower bad debt provision and reduced discretionary
expenditures. Marketing expenditures increased due to higher cooperative
advertising and promotion costs. Depreciation increased due to the amortization
of the systems upgrade project.
ESOP Expense. ESOP expense increased slightly from $6.2 million in 1997 to
$6.5 million in 1998. We attribute this slight increase to an increase in the
appraised value of the shares subject to the Simmons ESOP in 1998.
Amortization of Intangibles. Amortization of intangibles for 1998 remained
relatively stable at approximately $7.6 million.
Interest Expense, Net. Interest expense, net increased $3.4 million from
$19.1 million in 1997 to $22.5 million in 1998 due primarily to increased
indebtedness and higher interest rates primarily in the fourth quarter of 1998.
Other Expense (Income), Net. Other expense, net increased $1.7 million from
$1.6 million in 1997 to $3.3 million in 1998. We attribute the increase to
various non-recurring expenses incurred in connection with the Fenway
acquisition.
Management Compensation--Transaction Related. In connection with the Fenway
acquisition, we incurred non-recurring costs in 1998 of $14.2 million
consisting of:
(1) $6.3 million related to the election by management to cancel a portion
of their compensatory incentive stock options which were immediately vested;
and
(2) $7.9 million of management bonuses.
Provision for Income Taxes. Our effective tax rates for 1997 and 1998 differ
from the federal statutory rate primarily because of non tax-deductible
amortization of goodwill.
Extraordinary Item. In 1998, we recorded a $15.0 million extraordinary
charge representing the remaining unamortized debt issuance costs related to
the repayment of some long-term obligations repaid and the redemption of the
old senior subordinated notes in connection with the Fenway acquisition.
Net Income. For the reasons set forth above, we incurred a net loss of $19.0
million as compared to net income of $6.4 million for 1997.
Fiscal 1997 as Compared to Fiscal 1996
Net Sales. Net sales increased 3.7%, or $19.8 million, from $530.3 million
in 1996 to $550.1 million in 1997. $22.8 million of this increase was due
primarily to a 4.4% increase in our bedding average unit selling price and the
balance of the increase was due to a relatively slight increase in our unit
sales volume. We attribute the strong improvement in bedding average unit
selling price to an increase in Beautyrest(R) sales as a percentage of total
sales and to sales of higher-priced BackCare(R) products. Unit sales volume
increased only slightly in 1997 due to the following:
(1) a substantial sales decline resulting from our spring, 1997 decision
to discontinue our supply relationship with Mattress Discounters, Inc., our
largest customer in 1996, when the terms of the relationship did not meet
our account profitability expectations;
(2) the repositioning of the BackCare(R) product line to be consistent
with our overall marketing strategy; and
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<PAGE>
(3) lost sales volume during the bankruptcy proceedings of Montgomery
Ward & Co. and Levitz Furniture, Inc. However, due to the breadth of
penetration and continued consumer acceptance of our Beautyrest(R) and
BackCare(R) product lines, we were able to replace revenues lost as a
result of our decision to discontinue our relationship with Mattress
Discounters, Inc.
The bankruptcy filings and the Mattress Discounters, Inc. decision have not
had, and we do not expect them to have, any material adverse effect on our
financial condition.
Cost of Products Sold. As a percentage of net sales, cost of products sold
decreased 2.5 percentage points from 60.5% in 1996 to 58.0% in 1997. We
attribute this improvement to the following:
(1) an increase in sales of Beautyrest(R) products as a percentage of
total sales;
(2) relatively stable raw material costs;
(3) improved operating efficiencies due to the effect of the completed
implementation of our UNITE reengineering program; and
(4) writing up, as required by the principles of purchase accounting,
the cost of products sold in 1996 reflecting the sale of finished goods
inventory to net realizable value as of the date of the Investcorp
Acquisition.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses increased 1.0% from 32.4% in 1996
to 33.4% in 1997. We attribute this to the following:
(1) higher consulting fees and other expenditures associated with
strategic initiatives we undertook;
(2) additional expenses, as well as a partial year of amortization
expense related to the rollout of SWIFT, our systems upgrade project;
(3) an increase in selling expenses related to competitive sales
promotion programs and additional sales personnel;
(4) an increase in distribution costs due to contractual increases and
expansion into outlying territories; and
(5) a higher provision for uncollectible accounts.
ESOP Expense. ESOP expense increased by $1.2 million from approximately
$5.0 million in 1996 to $6.2 million in 1997 due primarily to an increase in
the number of eligible participants.
Amortization of Intangibles. Amortization of intangible assets increased
$0.7 million from $7.0 million in 1996 to $7.7 million in 1997 due primarily
to a full year of amortization relating to the increase in goodwill resulting
from purchase accounting adjustments made in connection with the Investcorp
acquisition.
Interest Expense, Net. Interest expense, net increased $2.3 million from
$16.8 million in 1996 to $19.1 million in 1997 due primarily to a full year of
interest expense which resulted from financing in connection with the
Investcorp acquisition. See Note 8 to our consolidated financial statements.
Other Expense (Income), Net. Other expense (income), net in 1997 was
expense of $1.6 million representing a management advisory fee of $1.0 million
and miscellaneous expense of $0.6 million. Other expense (income), net in 1996
was income of approximately $2.5 million, primarily consisting of a gain of
$4.0 million on the sale of a minority interest in some foreign affiliates,
partially offset by a management advisory fee of $0.8 million and non-
recurring expenses related to the Investcorp acquisition of $0.3 million.
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Management Compensation--Transaction Related. In connection with the
Investcorp acquisition, we incurred non-recurring costs in 1996 of $4.1 million
consisting of:
. $3.7 million related to the election by management to cancel a portion of
their compensatory incentive stock options which were immediately vested;
and
.$0.4 million of management bonuses.
Provision for Income Taxes. Our effective tax rates for 1996 and 1997 differ
from the federal statutory rate primarily because of non tax-deductible
amortization of goodwill.
Net Income. For the reasons set forth above, we earned net income of $6.4
million in 1997 as compared to net income of $0.9 million in 1996.
Liquidity and Capital Resources
Our principal source of cash to fund liquidity needs is net cash provided by
operating activities and availability under our new senior credit agreement.
Our primary use of funds consists of payments of principal and interest, and
capital expenditures.
Our operating activities used cash of $11.8 million in the first quarter of
1999 compared to $1.8 million used in the first quarter of 1999. The difference
is due primarily to a higher net loss during the quarter, the timing of
payments of accounts payable and the timing of accounts receivable collections.
Our capital expenditures totaled $1.7 million for the first quarter of 1999.
These capital expenditures consisted primarily of normal recurring capital
expenditures. We expect to spend approximately $9.0 million for capital
expenditures in 1999, which will be funded by cash from operating activities
or, to the extent necessary, by borrowings under our revolving credit facility.
We will allocate approximately $3.0 million of these expenditures to increased
manufacturing capacity and $6.0 million to normal recurring capital
expenditures. We believe that annual capital expenditure limitations in our new
senior credit agreement and the indenture will not significantly inhibit us
from meeting our ongoing capital needs.
Our operating activities used cash of $14.0 million in 1998 compared to cash
generated of $32.3 million in 1997. The difference is due primarily to the cash
expenses incurred in 1998 in connection with the Fenway acquisition, as well as
the timing of accounts receivable collections and the timing of payments of
accounts payable and accrued liabilities.
Our capital expenditures totaled $15.6 million for 1998. These capital
expenditures consisted primarily of normal recurring capital expenditures in
the amount of $9.0 million, capital expenditures relating to the construction
of new manufacturing facilities in the amount of $3.8 million and capital
expenditures related to our systems upgrade project in the amount of $2.8
million.
In connection with the Investcorp acquisition in 1996, we entered into our
previous senior credit facility, which provided for a $40.0 million revolving
credit facility and a $75.0 million term loan facility. In addition, we issued
$100.0 million of senior subordinated notes.
As of March 27, 1999, we had no borrowings and $79.4 million available under
our revolving credit facility. As of March 27, 1999, we were in compliance with
the financial covenants contained in our new senior credit agreement.
To finance, in part, the Fenway acquisition, we incurred substantial
additional indebtedness. Specifically, we used borrowings under our new senior
credit agreement and our senior bridge loan agreement to repay borrowings under
our previous senior credit facility and our old senior subordinated notes
issued in 1996.
We used the net proceeds from the original offering to:
(1) repay the indebtedness under our senior bridge loan agreement and the
junior subordinated notes issued by us and accrued interest;
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(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.
After the consummation of the exchange offer, one of our primary uses of
cash will be to make interest payments on the exchange notes and interest and
principal payments under our new senior credit agreement.
Our new senior credit agreement provides for loans of up to $270.0 million,
consisting of our term loan facility of $190.0 million and our revolving loan
facility of $80.0 million. We distributed a portion of the proceeds of our term
loan facility and our initial borrowings under our revolving credit facility to
Simmons Holdings to provide a portion of the funds necessary to consummate the
Fenway acquisition. Following the prepayments made from the proceeds of the
original offering, our term loan facility was reduced to approximately $166.1
million and will require no principal amortization payments in 1999 and will
require aggregate annual principal amortization payments of $0.5 million in
2000 and $3.5 million in 2001. Interest rates are variable and, based on
current interest rates, we estimate annual interest expense under our new
senior credit agreement to be $13.6 million.
For more information about the terms of our new senior credit agreement
including covenants, guarantees and collateralization, see "Other
Indebtedness--New Senior Credit Agreement". For more information about
covenants and restrictions on actions by us and our subsidiaries under the
indenture, see "Description of the Exchange Notes".
We regularly evaluate potential acquisition opportunities to support and
strengthen our business, although there are no binding agreements with respect
to any particular acquisition or joint venture at this time. We cannot assure
you that in the future we will be able to acquire suitable acquisition
candidates on acceptable terms or that future acquisitions, if completed, will
be successful. Moreover, we cannot assure you that we will be able to find
adequate sources of capital to finance these acquisitions. We may need to incur
additional debt and contingent liabilities, which could have a material adverse
effect on our business, operating results and financial condition in order to
effect future acquisitions. The success of any completed acquisition will
depend on our ability to integrate effectively the acquired business. The
process of integrating acquired businesses involves numerous risks, including
difficulties in the assimilation of operations and products, the diversion of
management's attention from other business concerns, risks of entering markets
in which we have limited or no direct prior experience and the potential loss
of key employees of the acquired businesses. See "Risk Factors--Acquisition
Integration".
Our ability to pay principal, interest or liquidated damages, if any, on our
indebtedness, including the exchange notes, will depend on our future
performance. Our ability to refinance indebtedness or to fund planned capital
expenditures and research and development will also depend on our future
performance. Our future performance is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based upon our current level of operations, we believe that cash flow
from operations and available cash, together with available borrowings under
our new senior credit agreement, will be adequate to meet our future liquidity
needs for at least the next several years. However, we cannot assure you that
our business will generate sufficient cash flow from operations, that
anticipated revenue growth and operating improvements will be realized or that
future borrowings will be available under our new senior credit agreement in an
amount sufficient to enable us to service our indebtedness, including the
exchange notes, or to fund our other liquidity needs. If our business does not
generate sufficient cash flow, we may not be able to effect any refinancing of
our existing indebtedness on commercially reasonable terms or at all.
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
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seasonal fluctuation in profitability, with our gross profit percentage during
the first quarter of each year slightly lower than the margin percentages
obtained in the remaining part of the year. We believe that seasonality of
profitability is a factor that affects the conventional bedding industry
generally and that it is primarily due to retailers' emphasis in the first
quarter on price reductions and promotional bedding and manufacturers' emphasis
on close-outs of the prior year's product lines. These two factors together
result in lower profit margins.
Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Financial statements for prior periods need not
be restated. We are currently reviewing the provisions of SFAS No. 133 and do
not believe that our financial statements will be materially impacted by the
adoption of this provision.
Significant Customer Developments
During the year ended December 27, 1997, Montgomery Ward & Co. and Levitz
Furniture Inc., two of our ten largest customers, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. As of December 27, 1997 and the date of
each of the bankruptcy filings, we had the reserves necessary to cover our
estimated exposure. For a period prior to the filings under the bankruptcy
code, we halted shipments to Montgomery Ward & Co. and Levitz Furniture Inc. to
minimize our exposure. Subsequent to the filing, after taking further steps to
minimize exposure we recommenced shipments to the retailers. These situations
have not had a material adverse effect on our financial position or results of
operation.
Year 2000 Readiness Disclosure
Issues relating to the year 2000 are the result of computer programs and
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, 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 substantially complete today, our information systems are
largely year 2000 compliant. However, certain of our office computer systems
are not year 2000 compliant. We will complete a year 2000 upgrade of these
remaining systems that are not year 2000 compliant by the third quarter of
1999. We currently expect costs to complete the year 2000 upgrade will include
internal data processing resources, as well as some external consultant fees to
assist in the effort. The fiscal year 1999 cost of this initiative through
March 26, 1999 was approximately $0.3 million, all of which was expensed in the
first quarter of 1999. We anticipate that additional costs to bring all of our
systems into year 2000 compliance, consisting of costs related to personal
computer replacements and upgrades, will be approximately $2.1 million, of
which we estimate $1.6 million will be expensed in 1999. Our internal resources
to address the year 2000 issue consist of approximately five 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
39
<PAGE>
equipment. We have completed the assessment and remediation of equipment with
embedded chips or software. We have completed approximately 75% of the testing
of remediation of our equipment. Once testing is complete, our equipment should
be compliant. We expect to complete testing and implementation of updated
equipment by the end of July 1999.
Our facilities staff is also currently investigating 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 substantially complete. In total, Leggett & Platt
management estimates that the year 2000 systems conversion effort is 85%
complete as of March 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 all 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.
The costs of our year 2000 initiatives and their completion dates are based
upon best estimates and derived using various assumptions of future events
including the continued availability of resources, third party statements of
compliance and other factors. To date, we have not encountered any problems
implementing year 2000 remediation. However, we cannot guarantee that these
estimates will be achieved and actual results could differ materially from
these plans. See "Risk Factors--Year 2000 Issue".
Based upon the 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 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 adversely
affected.
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BUSINESS
Simmons
Founded in 1871, Simmons is a leading manufacturer and distributor of
premium branded bedding products in the United States and the world leader in
Pocketed Coil(TM) innerspring technology. We manufacture and license a broad
range of mattresses and related sleep products under well-recognized brand
names including:
. Simmons(R)
. Beautyrest(R)
. BackCare(R)
. Connoisseur Collection(R)
. Maxipedic(R)
Our Beautyrest(R) line has been our flagship product since its introduction
in 1925. While we provide a full range of conventional bedding products, we
focus on higher-end market segments, emphasizing retail price points from $699
to $2,999 per queen set. In 1998, we derived approximately 54% of our net sales
from products sold at these price points which we believe offer more attractive
growth prospects and higher gross margins than lower-end products. For the year
ended December 26, 1998, we generated:
.net sales of $600.8 million, an increase of 9.2% over 1997; and
.Adjusted EBITDA of $62.3 million, an increase of 6.6% over 1997.
We believe that our net sales combined with the sales of third party
licensees make Simmons(R) the largest selling bedding products brand in the
world.
We sell to a diversified nationwide base of over 2,700 customers,
representing more than 5,500 retail outlets. We support our sales to furniture
stores, specialty sleep shops, department stores and warehouse showrooms with
significant local and national brand advertising and promotional spending as
well as extensive customer support services. We operate 18 strategically
located manufacturing facilities across the United States and in Puerto Rico.
Unlike most of our competitors, which operate as associations of independent
licensees, we are one of two national industry participants that operates each
of its manufacturing facilities, allowing us greater quality control and
standardization of best manufacturing practices.
Since 1995, we have invested approximately $28 million in re-engineering our
manufacturing operations and updating our information systems to improve our
cost structure, manufacturing productivity and operational controls. We believe
our substantial annual research and development investments enable us to be an
industry leader in the development of innovative and new products. In summary,
we believe that our national distribution, extensive brand advertising,
customer support services and captive manufacturing create significant
advantages over smaller regional manufacturers as well as those national
competitors that operate as associations of independent licensees. Our business
plan will be executed by an experienced and proven senior management team
averaging over 19 years of experience in the bedding industry and led by
Chairman, Chief Executive Officer and President Zenon Nie.
Industry Overview
The domestic wholesale bedding industry generated sales of over $3.8 billion
in 1998. Although fragmented with approximately 800 manufacturers, the industry
is mature and stable, and has enjoyed the attributes described below.
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Consistent Growth. From 1978 to 1998, the domestic wholesale bedding
industry experienced a compound annual growth rate of 6.6%, with sales volumes
increasing in all but one of those 20 years. Similarly, average unit selling
prices increased every year over the same period and grew at an annual rate
of 3.6%. In addition, we believe the bedding industry offers attractive growth
prospects to larger, well-positioned competitors like us that have the ability
to offer differentiated, branded products, effective national and regional
promotion, just-in-time product delivery and significant levels of customer
support services.
[Bar Graph Appears Here]
Domestic Wholesale Bedding Sales
(dollars in billions)
<TABLE>
<CAPTION>
78 79 80 81 82 83 84 85 86 87
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1.1 $1.2 $1.3 $1.4 $1.4 $1.6 $1.7 $1.8 $1.9 $2.1
<CAPTION>
88 89 90 91 92 93 94 95 96 97
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2.3 $2.3 $2.3 $2.4 $2.6 $2.8 $3.0 $3.2 $3.3 $3.6
<CAPTION>
98
- ------
$3.8
</TABLE>
Stability and Profitability. In each year since 1986, the bedding industry
has demonstrated highly consistent gross margins ranging between 29% and 32%.
We attribute this consistent profitability to the high variable cost structure
of the manufacturing process and the high retail margins associated with
bedding products relative to other products. Bedding manufacturing is largely
an assembly operation with raw materials and labor accounting for approximately
80% of total cost of goods sold. In addition, bedding products are generally
manufactured to order. Bedding also offers an estimated 45% gross margin to
retailers as well as some of the highest sales per square foot and return on
inventory of all retail furniture products. Consequently, even in circumstances
of fluctuating demand retailers continue to strongly promote sales of bedding
products. Finally, the stability of the bedding market is further supported by
the fact that over 70% of bedding sales result from replacement purchases.
[Bar Graph Appears Here]
Industry Gross Profit Margin
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$32% 31% 30% 30% 29% 30% 30% 30% 31% 32% 32%
</TABLE>
42
<PAGE>
Favorable Demographics. In recent years, favorable demographic trends have
supported industry growth across all bedding price points. In particular, we
believe that Simmons will benefit from the increased demand for larger sized
and higher priced, premium bedding. In 1997, king and queen sized bedding
accounted for 39% of wholesale bedding sales, compared to 30% in 1990. We
believe that key demographic trends are driving growth in the demand for larger
sized, premium bedding products including:
. the rapidly growing 45-64 year old population category, a group with
higher levels of disposable income and which historically has been more
likely to purchase premium bedding;
. the increasing consumer awareness of the health related benefits of
proper rest; and
. the increasing number and size of bedrooms in homes.
[GRAPH APPEARS HERE]
[Graph depicting historical and projected domestic
population by age category, 1990-2010]
Competitive Strengths
Consumers generally have limited knowledge of specific bedding products and,
on average, shop for bedding only once every seven to eight years. As a result,
consumers rely heavily on brand awareness and the retail salesperson in making
their purchase decision. We believe that the most successful bedding
manufacturers are those that are best able to meet retailers' needs by offering
broad, differentiated product lines with recognizable brand names and
substantial sales force product education programs, as well as strong marketing
and customer support services. We believe that the following competitive
strengths are the principal success factors underlying our position as a leader
in the bedding products industry:
Superior Brand Recognition. We enjoy strong brand recognition through our
well-established brand names, including: Simmons(R), Beautyrest(R),
BackCare(R), Connoisseur Collection(R) and Maxipedic(R). We believe the
strength of our brands is an important factor in maintaining existing and
establishing new retail and end-user customers. We also continue to seek to
strengthen our brand recognition through national advertising, such as our
award-winning "Do Not Disturb" campaign. We believe that the consolidation of
the bedding industry will continue to favor strong branded companies such as
ours, as many retailers are focusing on promoting leading brands while reducing
their number of suppliers.
Strong Competitive Positioning. We believe we are well-positioned for
continued profitability and growth due to our premium product focus,
recognizable brand names and reputation for innovation and quality, all of
which have contributed to our strong market share. Our emphasis on premium,
name brand products, such as Beautyrest(R), BackCare(R) and Connoisseur
Collection(R), enables us to take advantage of the current demographic trends
driving demand for larger sized, higher priced premium bedding products which
typically carry a higher margin. Our product positioning emphasizes retail
price points from $699 to $2,999 per queen
43
<PAGE>
set. While approximately one-half of our net sales is derived from beds priced
in this range, industry-wide sales in this same price range amount to
approximately one-third of total sales. As a result of our focus on premium
bedding, our gross margin in 1998 was approximately 42% compared to an industry
average of 32% in recent years.
High Quality and Diverse Customer Base. Our reputation for high quality
products, innovation and customer service, together with the highly attractive
retail margins associated with bedding products, has enabled us to establish a
strong nationwide customer base. Our current customer base represents over
5,500 retail outlets, and we have had on average a 27 year relationship with
our top 10 customers. Our 2,700 customers reflect our significant presence in
all major bedding distribution channels, including furniture stores, specialty
sleep shops, department stores and warehouse showrooms. We believe our
extensive customer support programs, which include cooperative local
advertising, merchandising and marketing assistance and customer sales staff
training and incentive programs, are the key to maintaining our strong customer
relationships.
Focused Research and Development. In order to maintain and improve our
strong industry position, we invest substantially in developing new products,
enhancing existing products and improving our operating processes. For example,
we developed our BackCare(R) product line to address consumer demand for
products in the health conscious segment of the bedding market. BackCare(R) is
quickly gaining market acceptance. We believe that our strong research and
development capabilities will enable us to continually introduce new and
innovative products and product improvements and further enhance our retail
customer relationships. We also seek to reduce costs and improve productivity
by continually developing more efficient manufacturing and distribution
processes.
Experienced Management Team with Exceptional Track Record. Since 1993,
industry veteran and Simmons Chairman, Chief Executive Officer and President,
Zenon Nie, has led a highly experienced management team with exceptional sales,
marketing and manufacturing expertise. Our top 13 executive officers have over
245 years of combined experience in the bedding industry and over 160 years of
combined experience with Simmons and are highly focused on increasing sales as
well as profitability. From 1994 to 1998, our management team:
.achieved sales growth of 8.1% versus an industry average growth rate of
6.1%;
.improved our gross margin from 38.7% to 41.9%; and
.increased our Adjusted EBITDA margin from 8.3% to 10.4%.
Business Strategy
Continue to Build Brand Equity. We plan to continue to support and leverage
our significant brand equity. Brand recognition is critical in the bedding
industry, in which strong brand names influence both customer preferences and
retailer floor space allocation. Our regional promotional and national
advertising programs are targeted to increase sales of our core Beautyrest(R)
and BackCare(R) product lines. In particular, we have recently followed our
award-winning "Do Not Disturb" advertising campaign with a sequel commercial
entitled "Leap of Faith" to support the Beautyrest(R) line and we recently
launched our "Five Zones For Your Bones" campaign to provide first time
national marketing support for our BackCare(R) line. We believe that such
consistent investments in our brands will result in continued growth.
Enhance Customer Base. We have a targeted sales and marketing campaign
directed at increasing the profitability and size of our customer base. We
continuously analyze and rationalize our account base to ensure that both
existing and new customer opportunities meet our profitability guidelines. For
example, in the spring of 1997, we decided to end our supply relationship with
Mattress Discounters, Inc. because it no longer met our minimum profit
requirements. We believe that our ability to attract new customers is primarily
attributable
44
<PAGE>
to our highly effective advertising campaigns, superior levels of customer
service and extensive customer support programs. Through our 200 direct sales
representatives, we have targeted a significant number of potential new
accounts with the objective of profitably increasing our revenues and market
share. In particular, we intend to target certain national specialty sleep
shops, the fastest growing retail bedding distribution channel.
Strengthen Current Customer Relationships. We are focused on increasing
sales to existing accounts by introducing new and innovative products,
emphasizing more profitable product lines and continually enhancing customer
support services. We believe that our product lines are among our retail
customers' most profitable products and that our customers typically allocate a
significant share of floor space to Simmons(R) products. To continue to
strengthen our customer relationships, we will continue to invest in and
improve our extensive customer support programs, which include cooperative
local advertising, merchandising assistance and customer sales staff training
and incentive programs.
Improve Operating Productivity and Efficiency. We intend to continue to
invest in focused programs to reduce costs and improve productivity and
operating efficiencies. We have largely completed initiatives that we began in
1995 to re-engineer our manufacturing processes and to upgrade our information
systems. These initiatives have contributed to the increase in our adjusted
EBITDA margin from 8.6% in 1995 to 10.4% in 1998. Our productivity enhancement
initiatives were implemented in eleven of our 18 manufacturing facilities as of
the end of 1998. Our average manufacturing productivity, measured by pieces per
person-hour, increased approximately 8.0% between 1995 and 1998. We expect to
realize additional operating efficiencies and cost savings in the near term as
these programs are completed.
Pursue Selected Complementary Acquisitions. We regularly evaluate potential
acquisition opportunities to support and strengthen our business. In general,
we intend to explore acquisitions in order to broaden our product lines and
geographic distribution and achieve additional operating efficiencies. We have
no agreements with respect to any particular acquisition or joint venture at
this time.
Products
We provide our customers with a full range of mattress products that cover
the breadth of the market price points. Our strategic focus is on premium
bedding products sold at retail price points between $699 and $2,999. We derive
approximately 54% of our net sales from products sold at these price points.
We believe that the higher end market segment is attractive to bedding
retailers who are increasingly focused on branded products to enhance and
differentiate their business as well as to increase profitability. We further
believe that the following should support an increasing consumer shift towards
larger, higher priced and technologically advanced mattresses:
. the rapidly growing 45-64 year old population category, a group with
increased levels of disposable income;
. an increasing consumer awareness of the health-related benefits of proper
rest; and
. an increasing number and size of bedrooms in homes.
We employ two different base manufacturing technologies in our mattresses,
the pocketed coil and the open coil, and market our products under a variety of
well known brands. Most of our products are based on our patented Pocketed
Coil(TM) technology, which we believe offers a substantially better sleep
experience than our competitors' products. Pocketed Coil(TM) products such as
the Beautyrest(R) line account for the majority of our sales, as well as our
retail floor presence and brand image.
Our Beautyrest(R) and Connoisseur Collection(R) lines employ Pocketed
Coil(TM) manufacturing technology. Pocketed Coil(TM) mattresses are designed to
be the most comfortable and durable mattresses in the market.
45
<PAGE>
Unlike open coil mattresses in which each innerspring coil is joined to
adjacent coils at the top and the bottom, Pocketed Coil(TM) innersprings are
constructed so that each row of innerspring coils is joined to adjacent rows of
coils in the center third of the fabric pocket enclosing each coil. This
permits the top and bottom of each coil to respond independently to pressure
applied to the surface of the mattress. Pocketed Coil(TM) design is unique to
us. It enables the mattress to contour to the user's body, reduces lateral
transmission of movement in the mattress and provides exceptional comfort.
Beautyrest(R). Beautyrest(R), our flagship premium product, has been our
primary focus for 74 years and we expect it to continue to generate the
majority of sales. Beautyrest(R) has employed Pocketed Coil(TM) technology
since its introduction in 1925. The Beautyrest(R) line is available to end-
users through a broad range of distribution channels including furniture
stores, major department stores, specialty sleep shops and warehouse showrooms.
Connoisseur Collection(R). We introduced the Connoisseur Collection(R) line
to capitalize on the accelerating growth in the premium bedding segment. The
Connoisseur Collection(R) line combines the benefits of Pocketed Coil(TM)
technology with variable pressure foam for maximum comfort and support. The
Connoisseur Collection(R) product line is primarily available through selected
major department stores and specialty sleep shops.
BackCare(R). We introduced BackCare(R), a second flagship brand, in 1995.
The BackCare(R) line was created to meet the needs of health conscious
consumers, as well as chronic back pain sufferers. We are positioning
BackCare(R) as another of our premium bedding products. BackCare(R) has
received an endorsement from the National Foundation for Spinal Health.
BackCare(R) employs five zone construction designed through each element of the
sleep set. Anatomic foam provides support under the lower back and thighs while
offering comfort under the calves, upper shoulders and buttocks. Anatomic foam
also allows the back to better assume a natural position ensuring proper spinal
alignment and comfort.
We expect increasing consumer concerns for comfort and health to help
support increased retail penetration of the BackCare(R) product line. To ensure
continued retail penetration, we have developed a BackCare(R) national
television advertising campaign entitled "Five Zones for Your Bones". We have
also hired BackCare(R) sales managers who will focus exclusively on the
BackCare(R) product line.
Maxipedic(R). Maxipedic(R) provides our customers with a superior open coil
product. The Maxipedic(R) mattress features non-skid quilting and a variety of
high quality foam components. The matching foundation features a steel grid
that anchors the coils, reducing lateral motion and providing uniform firmness.
This product is intended to provide customers with a high quality, moderately
priced, open coil product.
Customers
Our strong brand name and reputation for high quality products, innovation
and service to our customers, together with the highly attractive retail
margins associated with bedding products, have enabled us to establish a strong
customer base throughout the United States and across all major distribution
channels, including furniture stores, specialty sleep shops, department stores
and warehouse showrooms. We manufacture and supply conventional bedding to over
5,500 retail outlets, representing more than 2,700 customers. Furthermore, our
sales to specialty sleep shops, the fastest growing channel of retail bedding
distribution, has been increasing.
We also distribute branded products on a contract sale basis directly to
commercial users of bedding products such as hotels, motels, and commercial
centers. Major commercial accounts include Westin Hotel Limited Partnership,
Hyatt Corporation, Marriott International, Inc. and The Walt Disney Company.
We have enjoyed on average, a 27 year relationship with our top ten
customers. Our 10 largest customers accounted for approximately 38% of 1998 net
sales, while sales to Heilig-Meyers Company and its subsidiaries, including
Rhodes, Inc., represented approximately 11.8% of 1998 net sales.
46
<PAGE>
As a result of our strong brand names, national manufacturing, distribution
capabilities and broad product line, we have been able to successfully
capitalize on the trend of retailers moving toward sole-source vendors. For
example, the Heilig-Meyers Company, after a test market program, decided to
carry only Simmons bedding products at its Heilig-Meyers furniture stores.
Sales, Marketing and Advertising
Our products are sold by approximately 200 local field sales
representatives, backed by sales management centralized at each of our 18
manufacturing facilities, as well as national account representatives. This
selling infrastructure provides retailers with coordinated national marketing
campaigns as well as local support that is tailored to the competitive
environment of the local market.
Our marketing strategy focuses on two areas:
(1) cooperative promotional advertising and other retailer support
programs designed to complement individual retailers' marketing programs;
and
(2) national advertising designed to establish and build brand awareness
with consumers.
We spend approximately 88% of our promotional budget on regional and local
retailer programs. We develop advertising and retail sales incentive packages
specifically for each individual retailer. Point-of-sale materials including
mattresses and box springs that we design and supply highlight the
differentiating features of our products. In addition, we offer training for
retail sales people through our Mattress Business Academy programs. We believe
that our sales training and consumer education programs are the most extensive
in the bedding industry. We have designed these programs, delivered on-site at
our retailers' facilities or at our research and education center, to teach
retail floor salespeople how to match customers with their mattress comfort
preference by improving the retail floor salespersons' product knowledge and
sales skills. We seek to improve our retailers' unit sales as well as increase
sales of bedding in the higher price segment. We also establish individual
incentive programs for our customers and their sales personnel. Our sales force
is trained extensively in advertising, merchandising and salesmanship which
increases the value of the marketing support they provide to retailers. We
believe that our focus on the training of sales representatives and our
customers' retail floor salespeople differentiates us from most of our largest
competitors.
Regionally, we conduct advertising on a cooperative basis and reimburse up
to 50% of some advertising costs of our retailers subject to minimum sales
volume requirements. We believe cooperative advertising fosters strong
relationships with retailers, who exert significant influence on the consumer's
purchasing decision.
We spend approximately 12% of our promotional budget on activities to build
national brand awareness, primarily in the form of national advertising. We
seek to build long-term brand awareness through regular national advertising
and to achieve short-term sales objectives through local and regional
television and radio programming and print advertising. We have developed a
strong reputation for innovative advertising campaigns. We launched the "Do Not
Disturb" campaign, one of our most successful, in the spring of 1995. The "Do
Not Disturb" campaign was created to build awareness of how our Beautyrest(R)
mattress facilitates independent motion. As testimony to the effectiveness of
the "Do Not Disturb" campaign, retailers indicated that their customers ask for
the Beautyrest(R) "bowling ball mattress". We have created a sequel commercial
in the "Do Not Disturb" campaign entitled "Leap of Faith", which has recently
been introduced to the market. In addition, we recently developed a national
campaign for our BackCare(R) product line entitled "Five Zones for Your Bones".
Launched in April 1998, the campaign identifies how the BackCare(R) product
provides proper spinal support. Additionally, we regularly retain market
research firms and sponsor market research in order to measure the
effectiveness of our advertising. Research indicates that since 1995, the year
the "Do Not Disturb" campaign first aired, the percentage of consumers aware of
our Beautyrest(R) products and the percentage of consumers indicating that they
intended to purchase a Simmons(R) product have doubled.
We also utilize a proprietary system for analyzing marketing data in order
to assist both ourselves and our customers to market products more effectively.
The Simmons Market Analysis of Retail Trends system
47
<PAGE>
combines geographically-organized sales and demographic data with bedding
consumer demographic and lifestyle data to provide valuable bedding sales at
the retail level. This computerized system improves retail sales by analyzing
sales, demographic and lifestyle data to identify target customers' geographic
areas with strong sales potential. We use this data to help determine plant
location and analyze sales territories and retailers use the data to help
optimize store location and advertising planning.
Manufacturing Facilities
We operate 18 manufacturing facilities in 16 states and Puerto Rico. These
manufacturing facilities have a combined capacity of over 25,000 units per day,
assuming two eight-hour shifts daily. In 1998, we produced a daily average of
17,150 bedding units per day. We believe that, on average, our facilities are
presently operating at approximately 70% of capacity. Currently, 14 of our 18
facilities operate two shifts a day and four facilities operate a single shift.
We have recently completed a 77,500 square-foot facility in Salt Lake City,
Utah, to manufacture and distribute products for customers in Utah and
surrounding states.
The manufacturing facilities are strategically located to service major
metropolitan areas and consist of an average of approximately 120,000 square
feet of manufacturing space, most of which is devoted to production. We receive
most raw materials inventory through "just-in-time" delivery from our major
suppliers. We minimize finished goods inventory through made-to-order
production, with most orders being scheduled, produced and shipped within 24 to
72 hours of receipt.
In 1995, with the assistance of a nationally recognized management
consulting firm, we undertook a project to improve manufacturing productivity
by 20%. The project is internally referred to as UNITE ("Utilizing New Ideas to
Excel"). We are re-engineering both the lay-out of the factory floor and the
basis on which manufacturing employees are paid. Our manufacturing processes
are being reorganized into cell configurations to take advantage of new
conveyor systems and a just-in-time raw materials replenishment system. In
addition, we are implementing a compensation system under which manufacturing
employees are paid on a team incentive basis rather than on individual
piecework. The programs are expected to be implemented in each of our
manufacturing facilities. Through 1998, we have reconfigured 11 plants. We have
also implemented the new compensation system in 11 of our plants. We expect to
complete implementation of the UNITE programs in 1999. We expect to realize
increased operating efficiencies and cost savings in the near term as we
complete the UNITE implementation and optimize our re-engineered processes.
Research, Engineering and Development
We invest substantially in new product development, enhancement of existing
products and improved operating processes. We believe new product development
and product enhancements are crucial to maintaining our strong industry
position. We maintain close contact with bedding industry developments through
sleep research conducted by industry groups and by our engineering department,
as well as through participation in the Better Sleep Council, an industry
association that promotes awareness of sleep issues, and ISPA. Our marketing
and manufacturing departments work closely with the engineering staff to
develop and test new products for marketability and durability.
We also seek to reduce costs and improve productivity by continually
developing more efficient manufacturing and distribution processes. In 1995, we
completed the construction of the Simmons Institute of Technology and Education
("SITE"), a state-of-the-art 38,000 square foot research and education center
in Atlanta, Georgia. Approximately 36 engineers and technicians are employed
full-time at SITE. These employees ensure that we maintain high quality
products by conducting product and materials testing, designing manufacturing
facilities and equipment and improving process engineering and development. We
believe that our engineering staff gives us a competitive advantage over some
of our competitors who do not have significant in-house engineering
departments.
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<PAGE>
Suppliers
We purchase substantially all of our conventional bedding raw materials
centrally in order to maximize economies of scale and volume discounts. The
major raw materials that we purchase are wire, spring components, lumber,
cotton, insulator pads, innersprings, fabrics and roll goods consisting of
foam, fiber, ticking and non-wovens. We obtain a large percentage of our
required raw materials from a small number of suppliers. In 1998, we bought
approximately 86% of our raw material needs from 10 suppliers. Supplier
concentration is common in the bedding industry.
We have long-term supply agreements with Leggett & Platt, Incorporated,
Foamex International Inc. and Amoco Fabrics and Fiber Company. With the
exception of Leggett & Platt, we believe that we can readily replace our other
suppliers because we have already identified and used alternative sources.
Leggett & Platt supplies the majority of several components, including spring
components, insulator pads, wire, fiber, quilt backing and flange material, to
the bedding industry. In 1998, we bought approximately one-third of our raw
materials from Leggett & Platt. We expect that in 1999 we will buy a comparable
portion of our raw materials from Leggett & Platt. To ensure a long-term
adequate supply of various components, we have entered into agreements with
Leggett & Platt, generally expiring in the year 2010, for the supply of grid
tops, innersprings and wire. Among other things, these agreements generally
require us to purchase a majority of our requirements of several components
from Leggett & Platt. See "Risk Factors--Dependence on Key Suppliers".
Upgrade of Information Management System
In 1995, we undertook the implementation of a new enterprise wide
information management system, known internally as SWIFT ("Simmons Working
Intelligently for Tomorrow"). Implemented in all of our facilities other than
in Puerto Rico, the SWIFT system improved the information management systems of
nearly all of our operational areas. The SWIFT system provides a uniform
hardware and software system throughout Simmons and has largely improved data
reliability. The system provides new and more detailed operating and financial
information and greatly improves our ability to analyze product line and
customer profitability, administer customer support and advertising programs
and allocate manufacturing resources.
Competition
There are approximately 800 bedding manufacturers in the United States, with
three companies, Simmons, Sealy Corporation, and Serta, Inc. accounting for a
significant portion of the industry's wholesale revenues. We believe we
principally compete against these two primary competitors on the basis of brand
recognition, product quality and the quality of customer support programs,
which include cooperative advertising, sales force training and marketing
assistance. We believe we compare favorably to our primary competitors in each
of these areas. In addition, only Simmons and Sealy Corporation have national,
company operated manufacturing and distribution capabilities.
The rest of the United States conventional bedding market consists of
approximately seven smaller national manufacturers and nearly 800 independent
local and regional manufacturers. These local and regional manufacturers
generally focus on the sale of lower price point products. While we primarily
manufacture high margin, differentiated bedding products, we also offer a full
line of bedding products to our retailer base in order for these retailers to
maintain their competitive positioning. See "Risk Factors--Competition".
Warranties; Product Returns
Our conventional bedding products generally offer 10 year limited warranties
against manufacturing defects, while some promotional products carry one year
warranties. We believe that our warranty terms are generally consistent with
those of our primary national competitors. The historical costs to us of
honoring warranty claims have been immaterial. We have also experienced non-
warranty returns for reasons generally related to order entry errors and
shipping damage. We resell our non-warranty returned products primarily through
as-is furniture vendors or outlets.
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Patents, Trademarks and Licenses
We own many trademarks, including Simmons(R), Beautyrest(R), BackCare(R),
Connoisseur Collection(R), Maxipedic(R) and Pocketed Coil(TM), most of which
are registered in the United States and in many foreign countries. We protect
our manufacturing equipment and processes as trade secrets and through patents.
We possess several patents on the equipment used to manufacture our Pocketed
Coil(TM) innersprings. While we do not consider our overall success to be
dependent upon any particular intellectual property rights, we cannot assure
you that the degree of protection offered by the various patents will be
sufficient, that patents will be issued in respect of pending patent
applications, or that we will be able to protect our technological advantage
upon the expiration of our patents. If we were unable to maintain the
proprietary nature of our intellectual property, our financial condition or
results of operations could be materially adversely affected.
Through the early 1990s, we disposed of most of our foreign operations and
secondary domestic lines of business. As a result, we now license the
Simmons(R) name and many of our trademarks, processes and patents on an
exclusive basis to third-party manufacturers abroad to produce and distribute
conventional bedding products within their designated territories and to third-
party manufacturers in the U.S. to manufacture and distribute juvenile bedding
and non-bedding upholstered furniture, primarily on perpetual or automatically
renewable terms. In addition, we have licensed the Simmons(R) name and other
trademarks, generally for limited terms, for domestic use to third-party
manufacturers of adjustable beds, down comforters, pillows, bed pads, blankets,
futons, airbeds and waterbeds.
Employees
As of March 27, 1999, we had approximately 2,800 employees. Approximately
1,200 of these were represented by labor unions. Employees at nine of our 18
manufacturing facilities are represented by at least one of the following
unions: the Upholstery Division of the United Steelworkers, the Teamsters, the
United Furniture Workers, the Longshoremen and the International Association of
Machinists and Aerospace Workers. Union contracts typically are negotiated for
four-year terms. A majority of our current contracts expire in 2001. Labor
relations historically have been good. We have had no labor-related work
stoppages in over 20 years. Since 1980, we have opened nine new plants, none of
which are unionized. Approximately 1,700 of our current and former employees
are participants in the Simmons ESOP.
Regulatory Matters
As a manufacturer of bedding and related products, we use and dispose of a
number of substances, such as glue, lubricating oil, solvents, and other
petroleum products, that may subject us to regulation under numerous federal
and state statutes governing the environment. Among other statutes, we are
subject to the Federal Water Pollution Control Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Resource
Conservation and Recovery Act, the Clean Air Act and related state statutes and
regulations. We have made and will continue to make capital and other
expenditures to comply with environmental requirements. As is the case with
manufacturers in general, if a release of hazardous substances occurs on or
from our properties or any associated offsite disposal location, or if
contamination from prior activities is discovered at any of our properties, we
may be held liable and the amount of such liability could be material. We are
currently evaluating our potential liability with respect to the cleanup of
environmental contamination at and in the vicinity of our leased manufacturing
facilities in San Leandro, California.
We have recorded a reserve to reflect our potential liability for
environmental matters. Because of the uncertainties associated with
environmental remediation, we cannot assure you that the costs incurred with
respect to the potential liabilities will not exceed the recorded reserves.
Our conventional bedding and other product lines are subject to various
federal and state laws and regulations relating to flammability, sanitation and
other standards. We believe that we are in material compliance with all such
laws and regulations.
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Properties
Our corporate offices are located at One Concourse Parkway, Atlanta, Georgia
30328. The following table sets forth selected information regarding
manufacturing and other facilities we operated as of May 31, 1999:
<TABLE>
<CAPTION>
Year of
Date Lease Square Union
Location Occupied Expiration Footage Affiliation
-------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Manufacturing
Facilities:
Atlanta, Georgia...... 1992 2007 148,300 United Steelworkers of America
Charlotte, North
Carolina............. 1993 2003 144,180 None
Columbus, Ohio........ 1988 2004 190,000 United Steelworkers of America,
International Association of
Machinists and Aerospace Workers
Dallas, Texas......... 1998 2008 140,981 United Steelworkers of America
Denver, Colorado...... 1998 2008 129,000 None
Fredericksburg,
Virginia............. 1995 2010 128,500 None
Honolulu, Hawaii...... 1993 2003 58,530 International Longshoremen's
and Warehousemen's Union
Jacksonville,
Florida.............. 1973 2003 205,729 United Steelworkers of America
Janesville,
Wisconsin............ 1982 Owned 288,700 None
Shawnee, Kansas....... 1997 Owned 130,000 United Steelworkers of America
Los Angeles,
California........... 1982 2005 223,382 International Brotherhood of Teamsters,
United Steelworkers of America
Phoenix, Arizona...... 1997 2007 103,408 None
Piscataway, New
Jersey............... 1988 2003 264,908 International Association of Machinists
and Aerospace Workers,
United Steelworkers of America
Salt Lake City, Utah.. 1998 2008 77,500 None
San Leandro,
California........... 1964 2007 260,500 United Furniture Workers of America
Seattle, Washington... 1992 2002 133,610 None
Springfield,
Massachusetts........ 1988 2006 129,000 None
Trujillo Alto, Puerto
Rico................. 1998 Owned 50,000 None
---------
Subtotal............ 2,806,228
Other Facilities in Atlanta,
Georgia:
Corporate
Headquarters......... 1992 2003 37,500 None
SITE Research and
Development Center... 1994 2005 38,000 None
Consumer Service
Center............... 1977 2003 30,960 None
---------
Total Square
Footage............ 2,912,688
=========
</TABLE>
Legal Proceedings
On April 3, 1998, Serta, Inc. filed a complaint against Simmons in the
United States District Court for the Northern District of Illinois, Eastern
Division, alleging that some Simmons products--including those sold in
connection with the trademarks Connoisseur(R) collection, Crescendo(TM), and
some World Class Beautyrest(R) and Back Care(R) Ultimate models--infringe one
of their U.S. patents and that our use of the term "Crescendo" infringes their
alleged common-law trademark, "Crescendo". Serta seeks compensatory damages in
an unspecified amount, interest, an accounting and disgorgement of profits
derived from allegedly infringing acts, treble damages, an order enjoining
further alleged infringement and requiring destruction of allegedly infringing
items, costs, expenses and attorney's fees. We have denied the material
allegations of the complaint. We also have asserted affirmative defenses and/or
counterclaims against Serta alleging non-infringement, invalidity and
unenforceability of the patent-in-suit, and alleging infringement by Serta of
our rights in the term "Crescendo" in various geographic areas to the extent
usage of the term by both Serta and us would be confusingly similar. Serta
requested the Patent and Trademark Office, the PTO, to reexamine the patent-in-
suit. Pending the outcome of the reexamination, and by agreement of the
parties, the pending lawsuit was stayed. In April 1999, the PTO reinstated
Serta's patent and the stay in the action was lifted. 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.
From time to time, we have been involved in various legal proceedings. We
believe that all other litigation is routine in nature and incidental to the
conduct of our business, and that none of this other litigation, if determined
adversely to us, would have a material adverse effect on our financial
condition or results of our operations.
51
<PAGE>
MANAGEMENT
The following table sets forth the name, age as of May 31, 1999 and position
of each of our directors, executive officers and other key employees. Each of
our directors will hold office until the next annual meeting of our
shareholders or until his successor has been elected and qualified. Our
officers are elected by our Board of Directors and serve at the discretion of
the Board of Directors.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<C> <C> <S>
Zenon S. Nie..................... 48 Chairman of the Board of Directors,
Chief Executive Officer and President
Jonathan C. Daiker............... 51 Executive Vice President--Finance and
Administration, Chief Financial
Officer and Director
Martin R. Passaglia.............. 50 Senior Executive Vice President,
Secretary and Director
Peter Lamm....................... 47 Director
Richard C. Dresdale.............. 43 Director
Andrea Geisser................... 56 Director
Gregory P. Meredith.............. 41 Director
Mark R. Genender................. 34 Director
William L. Ayers, IV............. 53 Executive Vice President--Sales
Michael P. Rakauskas............. 49 Executive Vice President--Strategic
Ventures
Joseph Ulicny.................... 55 Executive Vice President--Market
Development
Robert K. Barton................. 58 Senior Vice President--Human Resources
Leo T. Brennan................... 63 Vice President--Materials Management
Roger W. Franklin................ 43 Vice President--Finance and Treasurer
James P. Maher................... 63 Divisional President
Cleve B. Murphy.................. 48 Divisional President
Gary G. Pleasant................. 56 Divisional President
Gary L. Senese................... 52 Vice President--Chief Information
Officer
</TABLE>
Zenon S. Nie joined Simmons in 1993 as Chief Executive Officer, has served
as a Director since 1993 and was appointed Chairman of the Board of Directors
in 1994. Prior to joining Simmons, Mr. Nie served as President of the Consumer
Home Fashions Division of The Bibb Company from 1991 to 1993. From 1981 through
1991, Mr. Nie held several senior management positions at Serta, Inc. including
President, Executive Vice President, Chief Operating Officer, Senior Vice
President--Manufacturing, Finance and Administration and Vice President--
Strategic Planning. Mr. Nie's previous experience includes several marketing
positions at Sealy Corporation. Mr. Nie is a director of LADD Furniture, Inc.
Jonathan C. Daiker joined Simmons in 1995 as Executive Vice President--
Finance and Administration, Chief Financial Officer and a Director. Prior to
joining Simmons, Mr. Daiker held a number of directorships in the corporate
offices of Philips Electronics North America Corporation, as well as operating
positions within its divisional structure from 1981 to 1995, including Senior
Vice President and Chief Financial Officer for Philips Lighting Company. Prior
to 1981, he was a senior manager with Price Waterhouse, a predecessor to
PricewaterhouseCoopers LLP. Mr. Daiker is a Certified Public Accountant.
Martin R. Passaglia joined Simmons in 1973 and has served as Senior
Executive Vice President and a Director since 1994. Prior to 1994, Mr.
Passaglia held various positions including Regional Sales Manager, Vice
President and General Manager--Hawaii, Executive Vice President--Account
Development, and Executive Vice President--Marketing and Sales.
52
<PAGE>
Peter Lamm became a director of Simmons in 1998 in connection with the
Fenway acquisition. Mr. Lamm is Chairman and Chief Executive Officer and a
founding partner of Fenway, a New York-based direct investment firm for
institutional investors with a primary objective of acquiring leading middle-
market companies. From February 1982 to April 1994, Mr. Lamm was a member of
Butler Capital Corporation, a private investment firm, most recently as Senior
Direct Investment Officer and Managing Director. Mr. Lamm currently serves as a
director of Aurora Foods, Inc., Central Tractor Farm & Country, Inc., Iron Age
Corporation, Delimex Holdings, Inc., New Creative Enterprises, Inc. and Blue
Capital Management.
Richard C. Dresdale became a director of Simmons in 1998 in connection with
the Fenway acquisition. Mr. Dresdale is President and a founding partner of
Fenway. From June 1985 until March 1994, Mr. Dresdale was a member of Clayton,
Dubilier & Rice, Inc. a private investment firm, most recently as a Principal.
Mr. Dresdale currently serves as a director of Aurora Foods, Inc., Central
Tractor Farm & Country, Inc., Delimex Holdings, Inc., MW Windows Inc., and Blue
Capital Management.
Andrea Geisser became a director of Simmons in 1998 in connection with the
Fenway acquisition. Mr. Geisser is a Managing Director and a founding partner
of Fenway. From February 1989 to June 1994, Mr. Geisser was a Managing Director
of Butler Capital Corporation. From 1986 to 1989, Mr. Geisser served as a
Managing Direct of Onex Investment Corporation, the largest Canadian buyout
company. Mr. Geisser currently serves as a director of Aurora Foods, Inc., Iron
Age Corporation, New Creative Enterprises, Inc. and Decorative Concepts, Inc.
Gregory P. Meredith became a director of Simmons in 1998 in connection with
the Fenway acquisition. Mr. Meredith has been a Managing Director of Fenway
since 1997. From 1993 to 1996, Mr. Meredith was employed by NationsBanc Capital
Markets, Inc., most recently as Managing Director and Head of Leveraged
Finance. Prior to 1993, Mr. Meredith was employed by Salomon Brothers Inc, most
recently as a Senior Trader in the High Yield Group in charge of trading
distressed securities and special situations. Mr. Meredith currently serves as
a director of MW Windows Inc., Decorative Concepts, Inc. and FNX Limited.
Mark R. Genender became a director of Simmons in 1999. Mr. Genender has been
a Vice President of Fenway since 1996. From 1994 to 1996, Mr. Genender was a
Director of Sales and Marketing for Nabisco International. From 1991 to 1994,
Mr. Genender held various senior management positions at Hostess Frito-Lay, the
Canadian snack food division of PepsiCo, Inc. Prior to 1991, Mr. Genender was
employed by Goldman, Sachs & Co. in the Merger and Acquisitions department. Mr.
Genender currently serves as director of Delimex Holdings, Inc.
William L. Ayers, IV joined Simmons in 1973 and has served as Executive Vice
President--Sales and Marketing since 1994. Prior to 1994, Mr. Ayers held
several sales management positions including Vice President and General
Manager--Los Angeles and Divisional Executive Vice President.
Michael P. Rakauskas joined Simmons in 1998 as Executive Vice President-
Strategic Ventures. Prior to joining Simmons, Mr. Rakauskas served as Executive
Vice President-Chief Financial Officer and as Senior Vice President-
Administration and Chief Financial Officer since 1995 of The Spring Air
Company. Prior to 1995, he held various positions including Vice President-
Planning and Development, Vice-President-Administration, Operations Manager,
Corporate Controller and several financial positions with Sealy Corporation
since 1973. Mr. Rakauskas is a Certified Public Accountant.
Joseph Ulicny joined Simmons in 1992 and assumed his current position as
Executive Vice President--Market Development in 1995. From 1992 until 1995, Mr.
Ulicny served as Executive Vice President--Finance and Chief Financial Officer.
Prior to joining Simmons, Mr. Ulicny worked at The Dannon Company, Inc., a
yogurt wholesaler, from 1985 to 1992.
Robert K. Barton joined Simmons in 1982 and has served as Senior Vice
President--Human Resources since 1990. Prior to assuming his current position,
Mr. Barton served as Vice President--Human Resources, Vice President--
Administration, Vice President--Dealer Financial Services and Director of
Dealer Financial Services.
53
<PAGE>
Leo T. Brennan joined Simmons in 1978 and has served as Vice President--
Materials Management since 1985. Prior to assuming his current position, Mr.
Brennan served as Director of Purchasing.
Roger W. Franklin joined Simmons in 1986 and has served as Vice President--
Finance and Treasurer since 1990. Mr. Franklin served as Vice President--
Controller and Director of Taxes prior to assuming his current position. Prior
to joining Simmons, Mr. Franklin was a manager with Price Waterhouse, a
predecessor to PricewaterhouseCoopers LLP, in both the audit and tax areas from
1978 to 1986. Mr. Franklin is a Certified Public Accountant.
James P. Maher joined Simmons in 1989 and has served as Divisional President
since January 1997. Prior to assuming his current position, Mr. Maher served as
Divisional Executive Vice President, Vice President and General Manager--
Jacksonville, and Vice President and General Manager--San Leandro. Before
joining Simmons, Mr. Maher held senior management positions with Nachman
Corporation, a wire and bedding components manufacturer, Leggett & Platt,
Incorporated, a manufacturer of bedding components, and May & Company, a
bedding manufacturer.
Cleve B. Murphy joined Simmons in 1995 and has served as Divisional
President since January 1997. Prior to assuming his current position, Mr.
Murphy served as Divisional Executive Vice President. Mr. Murphy's background
includes twelve years at Sealy Corporation where he started as Sales Manager
and became one of four Regional Vice Presidents, from 1983 to 1995. Prior to
his employment with Sealy Corporation, Mr. Murphy served eight years as General
Manager for Englander, a bedding manufacturer, from 1975 to 1983 and held
various positions with Serta, Inc. from 1973 to 1975.
Gary G. Pleasant rejoined Simmons in 1991 and has served as Divisional
President since January 1997. Prior to assuming his current position, Mr.
Pleasant served as Divisional Executive Vice President and Vice President and
General Manager--Seattle. Mr. Pleasant was previously employed by Simmons from
1966 to 1985 in various sales management positions. From 1985 to 1991, Mr.
Pleasant worked for Sealy Corporation, first as Vice President--Sales--Ohio--
Sealy and then as National Vice President--Marketing and Sales.
Gary L. Senese joined Simmons in 1998 as Vice President--Chief Information
Officer. Prior to joining Simmons, Mr. Senese served as Vice President--Chief
Information Officer of VWR Scientific Products Corporation, a laboratory
supplies distributor, from 1995 until 1998 and as Vice President--Chief
Information Officer of Rubbermaid Commercial Products Inc. from 1989 to 1995.
Director Compensation
We pay no additional remuneration to our employees or to executives of
Fenway for serving as directors. See "--Executive Compensation". There are no
family relationships among any of the directors or executive officers.
54
<PAGE>
Executive Compensation
The following table sets forth all cash compensation earned in the previous
three years by our Chief Executive Officer and each of our other four most
highly compensated executive officers. The compensation arrangements for each
of these officers that are currently in effect are described under the caption
"-- Employment Arrangements" below. The bonuses set forth below include amounts
paid in connection with the Fenway and Investcorp acquisitions and amounts
earned in the year shown but paid in the subsequent year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------ Number of Securities All Other
Name and Principal Salary Underlying Long-Term Compensation
Position Year ($) Bonus ($) Compensation Options (#)(1) ($)(2)
------------------ ---- -------- ---------- --------------------------- ------------
<S> <C> <C> <C> <C> <C>
Zenon S. Nie............ 1998 $579,792 $5,116,125 -- $ 15,276
Chairman, Chief 1997 517,500 586,366 -- 32,853
Executive 1996 501,458 876,823 1,800,000 31,551
Officer and President
Martin R. Passaglia..... 1998 267,500 295,573 -- 11,074
Senior Executive Vice 1997 267,500 211,325 -- 29,133
President 1996 267,500 234,063 64,237 161,721
Jonathan C. Daiker...... 1998 226,917 496,053 -- 10,175
Executive Vice 1997 213,000 169,060 -- 27,008
President-- 1996 205,750 230,031 156,338 30,741
Finance &
Administration, Chief
Financial Officer
Robert K. Barton........ 1998 202,417 276,102 -- 11,722
Senior Vice President-- 1997 180,000 143,517 -- 29,329
Human 1996 171,750 150,281 63,667 147,447
Resources
Joseph Ulicny........... 1998 190,417 161,389 -- 11,988
Executive Vice 1997 180,000 142,793 -- 28,600
President--Market 1996 172,483 150,923 30,000 27,028
Development
</TABLE>
- --------
(1) These amounts show the number of shares underlying options granted in 1996.
In 1996, in connection with the Investcorp acquisition, all options then
outstanding were purchased. Messrs. Nie, Passaglia, Daiker, Barton and
Ulicny received $1,812,800, $364,496, $117,435, $363,867 and $308,856,
respectively, for their options.
(2) These amounts consist of:
(a) our contributions to our ESOP in 1997 and 1996, respectively, in the
amounts of $18,571 and $17,192 for Mr. Nie, $18,614 and $17,192 for
Mr. Passaglia, $18,571 and $17,192 for Mr. Daiker, $18,614 and $17,192
for Mr. Barton, and $18,571 and $17,192 for Mr. Ulicny, respectively;
the amount of our contribution to our ESOP for 1998 has not been
determined;
(b) premiums for term life insurance and long-term disability insurance in
1998, 1997 and 1996, respectively, in the amounts of $13,276, $14,282
and $14,359 for Mr. Nie, $9,074, $10,519 and $11,185 for Mr.
Passaglia, $8,175, $8,437 and $8,321 for Mr. Daiker, $9,722, $10,715
and $11,908 for Mr. Barton, $9,988, $10,029 and $9,836 for Mr. Ulicny,
respectively;
(c) payments of benefits under non-qualified ESOP in 1996, in the amount
of $133,344 and $118,347 for Mr. Passaglia and Mr. Barton,
respectively;
(d) relocation assistance in 1996 in the amount of $5,228 for Mr. Daiker;
and
(e) $2,000 per named executive officer in 1998 for financial planning
services.
55
<PAGE>
Aggregated Option Exercises
The table below sets forth information concerning the exercise of stock
options during 1998 and the value of unexercised stock options at the end of
1998 for our Chief Executive Officer and each of our other four most highly
compensated executive officers. There was no public trading market for our
common stock as of October 29, 1998 and December 27, 1998. Therefore, the
values in the table below have been calculated on the basis of the per share
consideration paid in connection with the Fenway acquisition less the
applicable exercise price. The number of options shown as exercised reflects
options to purchase common stock of Simmons Holdings that were redeemed for
cash in connection with the Fenway acquisition. The number of options shown as
unexercised reflects options to purchase common stock of Simmons Holdings
retained in connection with the Fenway acquisition.
Aggregated Option Exercises in
Fiscal 1998 and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-
Options at Money Options
Fiscal Year End (#) at Fiscal Year End ($)
---------------------- -----------------------
Number of
Shares
Exercised
Underlying Value
Name Options (#) Realized ($) Exercisable Exercisable
- ---- ------------ ------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Zenon S. Nie............ 1,128,911 $4,552,716 752,608 $ 3,035,146
Martin R. Passaglia..... 34,429 132,251 51,642 198,371
Jonathan C. Daiker...... 40,479 163,572 121,439 490,724
Robert K. Barton........ 29,086 112,251 54,017 208,467
Joseph Ulicny........... 17,649 66,727 26,473 100,088
</TABLE>
Retirement Plans
We maintain several single employer retirement plans including a single
employer defined benefit plan and two single employer defined contribution
plans, the Simmons ESOP and a 401(k) Plan, which are intended to be qualified
under Section 401(a) of the Internal Revenue Code of 1986. We also participate
in a number of multi-employer pension plans, from which we have no present
intention to withdraw. In the aggregate, these plans cover substantially all
permanent employees.
Simmons 401(k) Plan. The Simmons 401(k) Plan, formed in 1987, contains a
cash or deferred arrangement under Section 401(k) of the Internal Revenue Code.
Employees with 12 weeks of employment who have reached age 21 are permitted to
participate in the plan. Generally employees covered by collective bargaining
agreements are not permitted to participate in the plan, unless the collective
bargaining agreement expressly provides for participation.
Presently, approximately 500 employees participate in this plan.
Participants direct the investment of their account balances. Eligible
employees may defer the receipt of up to 6% of compensation on a pre-tax basis,
subject to various limitations. Participants are fully vested in their
contributions at all times. Other than the pre-tax deferrals mentioned above,
we did not make any contributions to the 401(k) plan during the 1998 plan year.
Simmons ESOP. The Simmons ESOP, formed in 1989, is a defined contribution
pension benefit plan that is designed to qualify as a leveraged employee stock
ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue
Code. Assets of the Simmons ESOP are held in a trust for which State Street
Bank & Trust Company serves as trustee. The Simmons ESOP covers otherwise
eligible employees of Simmons who are 21 or older and who have completed at
least one year of service for Simmons. Generally, employees covered by
collective bargaining agreements are not permitted to participate, unless the
collective bargaining
56
<PAGE>
agreement expressly provides for participation. As of March 27, 1999,
approximately 1,700 of our current and former employees were participants in
the Simmons ESOP.
The Simmons ESOP provides benefits to each participating employee based on
the value of the stock allocated to such participant's account over the period
of such participant's participation in the plan. In general, benefits become
payable to participants only following retirement or other separation from
employment.
The Simmons ESOP is a leveraged ESOP. Leveraged ESOPs differ from other
defined contribution employee pension benefit plans in that they can borrow
funds from the employer sponsoring the plan or from other parties in order to
acquire company stock for allocation to participants' accounts as such
indebtedness is repaid. Pending such allocation, as described below, Simmons'
stock acquired by the Simmons ESOP is held by the ESOP trustee in a suspense
account. In connection with the establishment of the Simmons ESOP in 1989, the
Simmons ESOP borrowed funds from us for the purpose of acquiring Simmons'
stock. As of December 26, 1998, the borrowed amount outstanding was
approximately $39.4 million. As of December 27, 1997, the Simmons ESOP was
indebted to us in the approximate principal amount of $51.2 million. Prior to
March 22, 1996, the date of the Investcorp acquisition, the Simmons ESOP held
11,671,663 shares of our common stock. On the closing of the Investcorp
acquisition, the Simmons ESOP sold 6,001,257 shares, representing all shares
previously allocated to participants' ESOP accounts, to Simmons Holdings for
approximately $31.2 million in the aggregate, the net proceeds of which were
reinvested in diversified investments in the respective accounts of such
participants in the Simmons ESOP. Pursuant to the Investcorp acquisition, the
remaining 5,670,406 shares, representing all unallocated shares held in the
suspense account, were converted into our Series A preferred stock. Prior to
the Fenway acquisition, if converted into common stock of Simmons or capital
stock of Simmons Holdings, this Series A preferred stock would have represented
direct or indirect ownership of 15.1% of our common stock, after giving effect
to such conversion, exclusive of outstanding stock options.
On July 22, 1998, we entered into the ESOP Stock Sale and Exchange Agreement
with Simmons Holdings, the ESOP trustee and REM Acquisition, Inc., a transitory
merger corporation set up for the Fenway acquisition. Pursuant to this
agreement, immediately prior to the Fenway acquisition, REM purchased all of
our Series A preferred shares held by the Simmons ESOP that had been allocated
to plan participants as of such date for an aggregate purchase price of
approximately $15.4 million. These shares were cancelled in connection with the
Fenway acquisition. In addition, immediately prior to the Fenway acquisition,
the Simmons ESOP exchanged its remaining outstanding shares of our Series A
preferred stock for 3,482,036 shares of common stock of Simmons Holdings. The
Simmons ESOP received a fairness opinion from its financial advisor to the
effect that the $15.4 million consideration received for our shares under the
ESOP agreement was fair to the Simmons ESOP from a financial point of view.
We will make annual cash contributions to the Simmons ESOP in an amount up
to 25% of eligible participant compensation, subject to limitations and
conditions. The Simmons ESOP will then use this cash to repay the internal loan
to us. As a result, there is no cash cost to us associated with the
contributions to the Simmons ESOP. As the internal loan is repaid, a portion
of, the shares of Simmons Holdings held by the Simmons ESOP will be allocated
to participant accounts and non-cash compensation expense equal to the fair
value of the allocated shares will be charged to non-cash ESOP expense. When
the internal loan is repaid in full in approximately three years, all shares of
Simmons Holdings held by the Simmons ESOP immediately after the Fenway
acquisition will have been allocated to plan participants.
With limited exceptions, such as an exception required by law permitting
retirement age individuals with at least 10 years of plan participation to
liquidate over a six-year period those shares allocated to their accounts,
shares allocated to a participant's account under the Simmons ESOP cannot be
sold or otherwise transferred by the participant. The Simmons ESOP provides for
distributions to be made to participants following termination of employment.
With respect to participants whose termination of employment occurs after
becoming eligible for retirement at age 65, early retirement at age 55 with at
least 10 years of service, or on account of permanent disability or death,
distribution generally is made during the plan year following the plan year in
which such
57
<PAGE>
termination occurs. In all other cases, distribution generally is made or
commences to be made after the expiration of a five plan year period following
the plan year in which termination occurs. Distributions are made in cash,
based on the fair market value, as determined pursuant to an annual appraisal,
of the shares allocated to the participant's account. A participant entitled to
a distribution is entitled under law to have our shares allocated to his or her
account distributed in kind. A participant electing to have a distribution of
shares has a limited right to require us to purchase such shares at fair market
value over an approximately two year period.
Defined Benefit Plan. We also sponsor a single employer defined benefit
pension plan for eligible employees called the Retirement Plan for Simmons
U.S.A. Employees. This plan currently benefits only employees covered by
specific collective bargaining agreements, and has approximately 120
participants. The monthly benefit for these participants upon normal retirement
is generally determined as the sum of:
(1) 0.75% of monthly earnings as of January 1, 1963 multiplied by
specified credited service as of May 1, 1963;
(2) 1.0% of the first $400 of monthly earnings plus 1.75% of monthly
earnings in excess of $400 for the time period from May 1, 1963 through
April 30, 1967; and
(3) 1.25% of the first $550 of monthly earnings plus 1.75% of monthly
earnings in excess of $550 for each year and completed month of credited
service, beginning May 1, 1967.
There is a reduction for benefits accrued under the Retirement Plan for
Simmons Employees, a predecessor plan that was terminated in 1987. A somewhat
different formula applies to employees who are represented by IAM Local 315 in
New Jersey and UFWA Local 262 in California. This plan is fully funded and will
incur no additional liability. None of the named executive officers benefits
under the plan.
Nonqualified Employee Stock Ownership Plan. In 1989, we instituted a
nonqualified plan to provide benefits to eligible employees similar to those
benefits provided under the Simmons ESOP, described above. This plan covers
employees who are not eligible to participate in the Simmons ESOP because of
restrictions imposed by the Simmons ESOP on employees who elected favorable
income tax treatment under Code Section 1042 with respect to the sale of
employer securities to the Simmons ESOP. Benefits are to be paid in cash and
are computed based on the value of shares the participants would have received
had they participated in the Simmons ESOP. Participants are entitled to receive
accrued benefits upon termination of employment with us, retirement, death or
permanent disability. The nonqualified plan provides for bookkeeping entries to
be provided on account of each designated employee, to be credited with the
shares of stock which would have been allocated to the designated employee's
accounts under the Simmons ESOP but for the fact that the Simmons ESOP terms
restricted such an allocation. The same vesting schedule and distribution
provisions apply as are described in the Simmons ESOP. We charged approximately
$184,000 in 1998 and $64,000 in 1997. The accrued benefits under the
nonqualified plan were $373,000 at December 26, 1998 and $189,000 December 27,
1997 and are included in other long term liabilities in the accompanying
balance sheets. We have continued the nonqualified plan after the consummation
of the Fenway acquisition.
Retiree Health Coverage. We provide health care and life insurance benefits
to eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or non-union employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20,000 lifetime maximum benefit for
participants age 65 and over. We also provide life insurance to all retirees
who retired before 1979. These plans are unfunded.
58
<PAGE>
Employment Arrangements
Zenon Nie, Chairman of the Board of Directors and Chief Executive Officer,
and we have entered into a three-year employment agreement that renews
automatically on a daily basis, subject to termination upon three years'
notice. Pursuant to his employment agreement, Mr. Nie is entitled to receive:
(1) a base salary, currently $600,000 per year, subject to further
increases approved by our Board of Directors;
(2) an annual cash bonus based upon our achievement of our annual
financial plan approved by the Board of Directors and to participate in all
of our other compensation and employee benefit programs; and
(3) specified fringe benefits, including reimbursement of country club
dues and provision of an automobile.
If we terminate Mr. Nie's employment other than for death, disability or
cause, Mr. Nie will be entitled to:
(1) payment of his base salary then in effect for three years following
the date of termination;
(2) payment of an annualized bonus equal to a percentage of his base
salary then in effect based upon our performance for a period of one year
following the date of termination; and
(3) participate in health and welfare benefit programs for three years
following the date of termination.
Mr. Nie is entitled to receive an additional bonus from us based upon our
future performance. If any payments by us to Mr. Nie constitute "excess
parachute payments" within the meaning of Section 280G of the Internal Revenue
Code, we must reimburse Mr. Nie for any resulting excise tax liability plus
any income tax liability related to such reimbursement.
The following named executive officers entered into employment agreements
with us, which commenced on June 29, 1998:
. Jonathan Daiker, Executive Vice President--Finance and Administration and
Chief Financial Officer;
. Martin Passaglia, Senior Executive Vice President;
. Joseph Ulicny, Executive Vice President--Market Development; and
. Robert Barton, Senior Vice President--Human Resources.
The employment agreements for Messrs. Daiker, Passaglia and Barton
initially run for two years and automatically extend one year on a daily basis
beginning on the first anniversary of the commencement of the employment term,
subject to termination upon one year's notice. Mr. Ulicny's agreement
initially runs for one year, automatically extending for one year on a daily
basis, subject to termination upon one year's notice. These agreements
currently provide the following base annual salaries, subject to further
increases approved by our Board of Directors:
<TABLE>
<CAPTION>
Executive Annual Base Salaries
--------- --------------------
<S> <C>
Mr. Daiker........................................... $236,000
Mr. Passaglia........................................ $267,500
Mr. Ulicny........................................... $197,000
Mr. Barton........................................... $209,000
</TABLE>
Each of these executives is eligible to receive an annual cash bonus based
upon achievement of our annual financial plan approved by the Board of
Directors and to participate in all of our other compensation and fringe
benefit programs. If we terminate any of these executives without cause, such
executive shall be entitled to
59
<PAGE>
payment of his base salary, an annualized bonus equal to 42.5% of his base
salary then in effect and participation in health and welfare benefit programs
for:
(1) in the cases of Messrs. Daiker, Passaglia and Barton, the longer of
(a) the remainder of the initial two year employment term; or
(b) one year; and
(2) in the case of Mr. Ulicny, one year.
Portions of bonuses paid in connection with the Fenway acquisition are
subject to repayment if the executive officer terminates his employment in the
two year period ending October 28, 2000.
Management Stock Incentive Plan
Simmons Holdings has also adopted a management stock incentive plan to
provide incentives to our employees and directors and to the employees and
directors of Simmons Holdings by granting them awards tied to the common stock
of Simmons Holdings. This incentive plan is administered by the compensation
committee of the Board of Directors of Simmons Holdings, which has broad
authority in administering and interpreting the incentive plan. Awards to
employees are not restricted to any specified form or structure and may
include, without limitation, restricted stock, stock options, deferred stock or
stock appreciation rights. Options granted under the incentive plan may be
options intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code or options not intended to so qualify. An award granted
under the incentive plan to an employee may include a provision terminating the
award upon termination of employment under some circumstances or accelerating
the receipt of benefits upon the occurrence of specified events, including, at
the discretion of the compensation committee of the Board of Directors of
Simmons Holdings, any change of control of Simmons.
Upon the closing of the Fenway acquisition, there were outstanding under the
incentive plan options to purchase an aggregate of 1,639,077 shares of Simmons
Holdings common stock issued to 47 individuals with a weighted average exercise
price of $2.825 per share. All such options are exercisable in full
immediately.
In connection with the Fenway acquisition, management received cash for
shares of stock owned by them and also received with respect to outstanding
options, an amount equal to the difference between the per share merger
consideration and the exercise price per share.
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PRINCIPAL STOCKHOLDERS
After the consummation of the Fenway acquisition on October 29, 1998, we had
one class of issued and outstanding common stock and Simmons Holdings owned all
of it.
After the consummation of the Fenway acquisition, Simmons Holdings had
25,343,075.80 shares of issued and outstanding common stock, excluding its
Class B common stock. The following table describes the beneficial ownership of
each class of issued and outstanding equity securities of Simmons Holdings by
each of our directors and executive officers, our directors and executive
officers as a group and each person who beneficially owns more than 5% of the
outstanding shares of any class of equity securities of Simmons Holdings as of
May 31, 1999. As used in this table, beneficial ownership has the meaning set
forth in Rule 13d-3(d)(1) of the Exchange Act.
Fenway Partners Capital Fund, L.P. and Fenway Partners Capital Fund II, L.P.
together hold substantially all of the voting interests of Fenway Investment
LLC, and may therefore be deemed to have the power to vote or dispose of the
shares of common stock held directly by Fenway Investment LLC. Additionally,
the general partners of Fenway Partners Capital Fund and Fenway Partners
Capital Fund II, Fenway Partners, L.P. and Fenway Partners II, LLC,
respectively, may also be deemed to own beneficially these Fenway funds'
holdings. Fenway Partners Management, Inc. is the general partner of Fenway
Partners, L.P. and may also be deemed to own beneficially the holdings of
Fenway Partners Capital Fund. Fenway Partners, Inc. provides investment
advisory services to the Fenway funds and may be deemed to beneficially own the
shares held by the Fenway funds. Messrs. Lamm, Dresdale, Geisser and Meredith
are managing directors, and Mr. Genender is a vice president, of Fenway
Partners, Inc., and they are each a limited partner of Fenway Partners, L.P.,
and a member of Fenway Partners II, LLC. Accordingly, each may be deemed to own
beneficially our shares of common stock held by Fenway Investments LLC. All of
such persons and entities disclaim beneficial ownership of any shares in which
they do not have pecuniary interests. The table below does not include
2,104,713.22 shares of common stock that may be acquired upon the exercise of
the warrants placed in escrow pursuant to the securities purchase agreement.
These warrants were issued in connection with the issuance of the junior
subordinated notes of Simmons and Simmons Holdings, and are held of record by
an escrow agent under an escrow agreement. Under the terms of the escrow
agreement, Fenway Investment LLC may receive up to 1,052,356.61 warrants on
October 29, 1999 if, among other things, Fenway Investment LLC still holds
junior subordinated notes of Simmons or Simmons Holdings on that date. Based
upon the ownership of Simmons Holdings as of May 31, 1999, if Fenway Investment
LLC were to receive this number of escrowed warrants, its total ownership
percentage would be increased to 76.62%. For a further description of the
escrowed warrants, see "The Transactions and the Original Offering".
The discussion above and the table below do not include 379,119.07 shares of
Class B common stock, representing all of the issued and outstanding shares of
Class B common stock, issued by Simmons Holdings and held by Fenway Partners,
Inc., of which Messrs. Lamm, Dresdale, Geisser and Meredith may be deemed to
have beneficial ownership. Messrs. Lamm, Dresdale, Geisser and Meredith
disclaim beneficial ownership of any such shares of common stock or Class B
common stock, in which they do not have pecuniary interests. Class B common
stock has the same rights and privileges as Simmons Holdings' other common
stock except that currently, each share of Class B common stock:
. has 16% of the amount of voting power of a share of common stock; and
. entitles its holder to 16% of the amount of any distributions by Simmons
Holdings to which a holder of a share of Simmons Holdings' common stock
is entitled.
The voting power and rights to distributions of the Class B common stock
shall be increased to equal that of Simmons Holdings' common stock upon a
determination of the board of directors that the value of a share of common
stock, taking into account prior distributions, is equal to $6.7315 plus an
amount sufficient to generate an internal rate of return of 7.5% per year,
compounded annually.
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<PAGE>
<TABLE>
<CAPTION>
Number
Number of Shares of Shares Underlying Total
(excluding Options/ Exercisable Options/ Total Ownership
Name Warrants) Warrants Shares Percentage
---- ------------------ -------------------- ------------- ----------
<S> <C> <C> <C> <C>
Fenway Investment LLC... 19,030,131.18 601,346.63 19,631,477.81 75.67%
c/o Fenway Partners,
Inc
152 West 57th Street
New York, NY 10019
Simmons ESOP shares not
allocated to any
participant account.... 3,482,036.00 -- 3,482,036.00 13.74%
c/o State Street Bank &
Trust Company
225 Franklin Street
Boston, MA 02110
SH Investment Limited, a
Cayman Islands
corporation............ 1,336,997.62 -- 1,336,997.62 5.28%
P.O. Box 1111, West
Wind Building, George
Town,
Grand Cayman, Cayman
Islands(a)
Zenon S. Nie............ 280,000.00 752,608.00 1,032,608.00 3.96%
Martin R. Passaglia..... 171,458.00 51,642.00 223,100.00 *
Jonathan C. Daiker...... 40,622.00 121,439.00 162,061.00 *
Robert K. Barton........ 140,181.00 54,017.00 194,198.00 *
Joseph Ulicny........... 75,688.00 26,473.00 102,161.00 *
Peter Lamm.............. 19,030,131.18 601,346.63 19,631,477.81 75.67%
Richard C. Dresdale..... 19,030,131.18 601,346.63 19,631,477.81 75.67%
Andrea Geisser.......... 19,030,131.18 601,346.63 19,631,477.81 75.67%
Gregory P. Meredith..... 19,030,131.18 601,346.63 19,631,477.81 75.67%
Mark R. Genender........ 19,030,131.18 601,346.63 19,631,477.81 75.67%
All directors and
executive officers as a
group (9 persons)...... 19,738,080.18 1,607,525.63 21,345,605.81 79.20%
</TABLE>
- --------
* Less than 1%.
(a) SH Investment Limited is an indirect wholly owned subsidiary of Investcorp
S.A., a global investment firm whose address is 37 rue Notre-Dame,
Luxumbourg. SIPCO Limited may be deemed to control Investcorp S.A. through
its ownership of a majority of a company's stock that indirectly owns a
majority of Investcorp S.A.'s shares. SIPCO Limited's address is P.O. Box
1111, West Wind Building, George Town, Grand Cayman, Cayman Islands.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subscription Agreements
Pursuant to the subscription agreements entered into in connection with the
Fenway acquisition, Fenway Investment LLC purchased 19,030,131.18 shares of
common stock of Simmons Holdings for $128.1 million. Under the subscription
agreement with Fenway Investment LLC, Simmons Holdings agreed to indemnify and
pay various expenses of Fenway Investment LLC and its affiliates and their
advisors and consultants.
For more information about the Fenway acquisition, see "The Transactions
and the Original Offering".
Stockholders Agreement
In connection with the Fenway acquisition, we entered into a stockholders
agreement with Simmons Holdings, Fenway Investment LLC, the Simmons ESOP, and
the Investcorp group. In addition, we entered into a stockholders agreement
with Fenway Investment LLC, Simmons Holdings and members of management. The
stockholders agreements provide, among other things, that in the event that
Fenway Investment LLC transfers to a non-affiliate sufficient common stock of
Simmons Holdings that reduces its ownership percentage below 75% of the shares
it acquired in the Fenway acquisition, the Simmons ESOP, the Investcorp group
and the members of management may participate in the transfer in proportion to
their holdings, referred to as tag-along rights. If Fenway Investment LLC
sells at least 80% of the shares it acquired in the Fenway acquisition, it may
require the Simmons ESOP, the Investcorp group and the members of management
to participate in the transfer in proportion to their holdings, referred to as
a drag-along right. In addition, the stockholders agreement with management
provides, among other things, that:
. except under specific conditions, members of management may not transfer
their shares of common stock of Simmons Holdings; and
. upon termination of employment of a member of management, Simmons
Holdings and Fenway Investment LLC may purchase the shares of common
stock owned by such employee and such employee may require Simmons
Holdings to purchase such shares.
Fenway Advisory Agreement
We, Simmons Holdings and Fenway Partners entered into an advisory agreement
effective upon consummation of the Fenway acquisition pursuant to which Fenway
Partners agreed to provide strategic advisory services to Simmons Holdings and
us. In exchange for such services, Simmons Holdings and we agreed to pay
Fenway Partners the following:
. annual management fees of 0.25% of net sales for the prior fiscal year;
. fees in connection with the consummation of any acquisition transactions
for Fenway Partners' assistance in negotiating such transactions; and
. fees and expenses, including legal and accounting fees and any out-of-
pocket expenses incurred by Fenway Partners in connection with providing
services to Simmons Holdings and us.
The annual management fees are subject to increase in the event of
acquisitions. Simmons Holdings and we also agreed to indemnify Fenway Partners
under specific circumstances. In addition, pursuant to the advisory agreement,
upon the consummation of the merger, Fenway Partners received $5.1 million and
approximately 379,000 shares of Simmons Holdings' Class B common stock. For a
description of the Class B common stock, see "Principal Stockholders".
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<PAGE>
OTHER INDEBTEDNESS
As part of the merger, we entered into a new senior credit agreement and a
securities purchase agreement to provide financing for the Fenway acquisition
and working capital.
New Senior Credit Agreement
On October 29, 1998, we entered into a new senior credit agreement
comprising a term loan facility and a revolving credit facility with
institutional lenders and affiliates of the initial purchasers of the notes,
including:
. Goldman Sachs Credit Partners L.P., an affiliate of Goldman Sachs, as
joint lead arranger, syndication agent and lender;
. Warburg Dillon Read, as joint lead arranger;
. UBS A.G., an affiliate of Warburg Dillon Read, as administrative agent and
lender;
. Fleet National Bank, an affiliate of Fleet Securities, as co-agent and
lender; and
. U.S. Bank N.A., an affiliate of U.S. Bancorp Libra, as co-agent and lender.
Our new senior credit agreement provides for borrowings of up to $270.0
million, consisting of:
. the Tranche A term loan of up to $70.0 million;
. the Tranche B term loan of up to $70.0 million;
. the Tranche C term loan of up to $50.0 million; and
. a revolving credit facility of up to $80.0 million in revolving credit
loans, letters of credit and swing line loans.
Our new senior credit agreement is:
. guaranteed by Simmons Holdings, one of our present domestic subsidiaries,
all of our future material domestic subsidiaries except in specific
circumstances and all of our future foreign subsidiaries, to the extent
that no material adverse tax consequence would result from such
guarantee; and
. secured by substantially all of our assets as well as the assets of
Simmons Holdings and our subsidiary guarantor.
The Tranche A term loan matures in quarterly installments from December 1999
until final payment in October 2004. The Tranche B term loan began maturing in
quarterly installments in December 1998 and will continue until final payment
in October 2005. The Tranche C term loan began maturing in quarterly
installments in December 1998 and will continue until final payment in October
2006.
Our revolving credit facility is available until the earliest to occur of:
(1) October 29, 2004;
(2) the date the revolving loan commitments of the lenders under our new
senior credit agreement are permanently reduced to zero under specific
circumstances; and
(3) the date the revolving loan commitments are terminated due to an
event of default under our new senior credit agreement.
Borrowings under our revolving credit facility and our term loans bear
interest at one of two floating rates: the base rate or the adjusted Eurodollar
rate plus the applicable margin.
The base rate is the applicable margin plus the higher of :
(1) the applicable prime lending rate of UBS; and
(2) the Federal Reserve reported average overnight federal funds rate
plus 0.5%.
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<PAGE>
The adjusted Eurodollar rate is described in our new senior credit
agreement.
The applicable margins for borrowings under our new senior credit agreement
are as follows:
<TABLE>
<CAPTION>
Base Rate Adjusted Eurodollar Rate
--------- ------------------------
<S> <C> <C>
Tranche A term loan.......................... 1.75% 2.75%
Tranche B term loan.......................... 2.25% 3.25%
Tranche C term loan.......................... 2.50% 3.50%
Revolving credit facility loans.............. 1.75% 2.75%
</TABLE>
The applicable margins for our Tranche A term loan and our revolving credit
facility loans could be reduced to 1.00% for base rate loans and 2.00% for
adjusted Eurodollar rate loans as a result of changes in our leverage ratio.
Our new senior credit agreement requires us to maintain financial ratios,
including:
.fixed-charge coverage;
.cash interest coverage; and
.leverage ratios.
Our new senior credit agreement also contains covenants which, among other
things, limit:
.capital expenditures;
.the incurrence of additional indebtedness;
.investments, dividends;
.transactions with affiliates;
.asset sales;
.transactions with affiliates;
.mergers and consolidations;
.acquisitions;
.prepayments of other indebtedness including the notes and the exchange
notes; and
.liens and encumbrances and other matters customarily restricted in such
agreements.
Our new senior credit agreement contains customary events of default,
including:
.payment defaults;
.breaches of representations and warranties and covenants;
.defaults under other agreements and indebtedness;
.ERISA matters;
.a change of control of Simmons Holdings; and
.Simmons Holdings ceasing to own 100% of our outstanding capital stock.
Our new senior credit agreement requires that various amounts must be used
to prepay, and/or to reduce commitments under our new senior credit agreement,
including:
. subject to exceptions, 100% or, if we satisfy specified debt to equity
ratios, 75% of the net proceeds of any sale or issuance of equity;
. 100% of the net proceeds from any incurrence of indebtedness after the
closing of the Fenway acquisition by us or any of our subsidiaries,
except for proceeds of up to $125.0 million from the original offering
and subject to other exceptions;
. 100% of the net after tax proceeds of any sale or other disposition by us
or any of our subsidiaries of any assets, including casualties or
condemnations, except for the sale of inventory in the ordinary course of
business and subject to other exceptions;
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<PAGE>
. 75% or, if we satisfy specific debt to equity ratios, 50% of Consolidated
Excess Cash Flow, as defined in our new senior credit agreement for each
year commencing with the year ending in December 1999; and
. 100% of any surplus assets, net of transaction costs and taxes, returned
to us or any of our subsidiaries from a pension plan of ours or any of
our subsidiaries.
In general, the mandatory prepayments described above will be applied first,
to prepay our term loan facility, and then, to prepay and/or permanently reduce
commitments under our revolving credit facility.
We are required to pay to the lenders under our new senior credit agreement
a commitment fee, payable in arrears on a quarterly basis and upon the maturity
or termination of our revolving credit facility, equal to 0.50% per annum times
the daily average unused portion of our revolving credit facility. We are also
required to pay to the lenders a quarterly letter of credit fee with respect to
each letter of credit outstanding equal to the applicable margin for Eurodollar
rate loans under our revolving credit facility times the daily amount available
for drawing on such letter of credit, as well as a fronting fee payable to the
issuing bank for its own account of the greater of $500 and 0.25% of the
average daily amount available to be drawn under all letters of credit issued.
In connection with the original offering, our new senior credit agreement
was amended to:
. allow for the issuance of the notes and the exchange notes;
. require prepayment of amounts outstanding under our new senior credit
agreement to the extent the net proceeds of the original offering
exceeded $125.0 million; and
. provide that voluntary and mandatory prepayments from the net proceeds of
the original offering were applied in forward order of maturity.
As of March 27, 1999, we had no borrowings under our revolving credit
facility, and approximately $166.0 million of borrowings under our term loan
facility.
Securities Purchase Agreement
In connection with the Fenway acquisition, we and Simmons Holdings entered
into a securities purchase agreement with Fenway Investment LLC. Pursuant to
the securities purchase agreement, we issued junior subordinated notes in the
aggregate principal amount of $30.0 million and Simmons Holdings issued junior
subordinated notes in the aggregate principal amount of $10.0 million. On March
16, 1999, with proceeds from the original offering, we repaid the $30.0 million
junior subordinated notes issued by us as well as approximately $1.1 million of
accrued interest.
The maturity date of the junior subordinated notes issued by Simmons
Holdings is October 29, 2011. These notes initially bore interest at 15.0%
through December 30, 1998, which rate increases by 0.5% for every three-month
period thereafter up to a maximum rate of 17.5%. Interest on these notes is
payable in kind by capitalizing such interest through September, 2010.
Manufacturing Facility Loans
We financed the construction costs of our Janesville, Wisconsin and Shawnee,
Kansas facilities with industrial revenue bonds issued by the cities of
Janesville, Wisconsin and Shawnee, Kansas. Each city loaned us the proceeds
from its respective bond issuance. In return, we agreed to pay to each city
amounts sufficient to pay debt service on the bonds. The Janesville bonds, with
a principal amount of $9.7 million, bear interest at a fixed rate of 7.0% and
mature in 2017. The Shawnee bonds, with a principal amount of $5.0 million,
bear interest at a variable rate and mature in 2016.
In December 1997, Simmons Caribbean Bedding Inc., our wholly owned
subsidiary, entered into a loan facility in the amount of $3.2 million. As of
December 26, 1998, approximately $3.2 million was drawn against the loan
facility and is accruing interest at a fluctuating rate equal to 200 basis
points over the London Interbank Offered Rate, adjusted every 90 days.
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<PAGE>
DESCRIPTION OF EXCHANGE NOTES
You can find the definitions of several terms used in this description under
the subheading "Definitions". In this description, the word "Simmons" refers
only to Simmons Company and not to any of its Subsidiaries or Simmons Holdings.
Simmons will issue the exchange notes under the indenture between itself and
SunTrust Bank, Atlanta, as trustee. The terms of the exchange notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The form and terms of the exchange notes are identical in all material
respects to the form and terms of the notes except that:
(1) the exchange notes will bear a Series B designation;
(2) the exchange notes have been registered under the Securities Act
and, therefore, will generally not bear legends restricting their transfer;
and
(3) the holders of the exchange notes will not be entitled to rights
under the registration rights agreement dated as of March 16, 1999 by and
among, us, Goldman Sachs, Fleet Securities, U.S. Bancorp and Warburg Dillon
Reed, including the provision providing for liquidated damages relating to
the timing of the exchange notes.
The exchange notes will evidence the same debt as the notes and will be
entitled to the benefits of the indenture. The exchange notes will be pari
passu with the notes if all of such notes are not exchanged pursuant to the
exchange offer.
The following description is a summary of the material provisions of the
indenture, which is filed as an exhibit to the registration statement of which
this prospectus forms a part. It does not restate the agreement in its
entirety. We urge you to read the indenture because it, and not this
description, defines your rights as holders of the exchange notes. Copies of
the indenture are available as set forth below under the subheading "Additional
Information". Except as the context otherwise requires, references to the notes
shall include the exchange notes.
Brief Description of the Exchange Notes and the Guarantees
The Exchange Notes
The exchange notes:
. are general unsecured obligations of Simmons;
. are subordinated in right of payment to all current and future Senior Debt
of Simmons; and
. are senior in right of payment to any future subordinated Indebtedness of
Simmons.
The Guarantees
The exchange notes initially will not be guaranteed by any of our
subsidiaries.
As a result, the exchange notes will be effectively subordinated to all
indebtedness and other liabilities, including trade payables, of our
subsidiaries. As of the date of the indenture, we will have a single operating
subsidiary, located in Puerto Rico. This subsidiary accounted for less than
1.4% of our consolidated net sales for the year ended December 26, 1998 and
approximately 2.0% of our consolidated assets as of December 26, 1998. In the
event of a bankruptcy, liquidation or reorganization of any non-guarantor
subsidiary, the non-guarantor subsidiaries will pay the holders of their debt
and their trade creditors before they will be able to distribute any of their
assets to us.
Upon completion of the original offering and application of the proceeds as
intended, we had indebtedness senior to the notes aggregating $184.5 million
comprised of total Senior Debt of approximately $181.3 million, excluding
unused commitments under our new senior credit agreement of $76.5 million, and
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<PAGE>
$3.2 million of indebtedness of our sole operating Subsidiary. As indicated
above and as discussed in detail below under the subheading "Subordination",
payments on the exchange notes will be subordinated to the payment of Senior
Debt. The indenture will permit us to incur additional Senior Debt in the
future. Although the indenture contains restrictions on the amount of
additional Senior Debt that we may incur, the amount of Senior Debt could be
substantial.
As of the date of the indenture, all of our subsidiaries were "Restricted
Subsidiaries". However, under the circumstances described below under the
subheading "Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries", we will be permitted to designate some of our subsidiaries as
"Unrestricted Subsidiaries". Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the indenture.
Principal, Maturity and Interest
Simmons will issue exchange notes with a maximum aggregate principal of
$150.0 million in the exchange offer. Simmons may issue up to $50.0 million of
additional notes (the "Additional Notes") from time to time after the exchange
offer. Any offering of Additional Notes is subject to the covenant described
below under the caption "Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock". The exchange notes and any Additional Notes subsequently
issued under the indenture would be treated as a single class for all purposes
under the indenture, including, without limitation, waivers, amendments,
redemptions and offers to purchase. Simmons will issue exchange notes in
denominations of $1,000 and integral multiples of $1,000. The exchange notes
will mature on March 15, 2009.
Interest on the exchange notes will accrue at the rate of 10 1/4% per annum
and will be payable semi-annually in cash in arrears on March 15 and September
15, commencing on September 15, 1999. Simmons will make each interest payment
to the holders of record of the exchange notes on the immediately preceding
March 1 and September 1.
Additional Notes may be issued from time to time after the date of the
exchange offer, subject to the provisions of the indenture, including those
described under the subheading "Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock". The exchange notes and any Additional Notes
subsequently issued under the indenture would be treated as a single class for
all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Methods of Receiving Payment on the Exchange Notes
If a holder has given wire transfer instructions to Simmons, Simmons will
make all principal, premium and interest payments on those exchange notes in
accordance with those instructions. All other payments on the exchange notes
will be made at the office or agency of the Paying Agent and Registrar within
the City and State of New York unless Simmons elects to make interest payments
by check mailed to the holders at their addresses set forth in the register of
holders.
Paying Agent and Registrar for the Exchange Notes
The Trustee will initially act as Paying Agent and Registrar. Simmons may
change the Paying Agent or Registrar without prior notice to the holders of the
exchange notes, and Simmons or any of its Subsidiaries may act as Paying Agent
or Registrar.
Transfer and Exchange
A holder may transfer or exchange exchange notes in accordance with the
indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents
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<PAGE>
and Simmons may require a holder to pay any taxes and fees required by law or
permitted by the indenture. Simmons is not required to transfer or exchange
any exchange note selected for redemption. Also, Simmons is not required to
transfer or exchange any exchange note for a period of 15 days before a
selection of exchange notes to be redeemed.
The registered holder of an exchange note will be treated as the owner of
it for all purposes.
Subordination
The payment of principal, premium, if any, and interest on the exchange
notes will be subordinated to the prior payment in full in cash of all Senior
Debt of Simmons.
The holders of Senior Debt will be entitled to receive payment in full of
all obligations due in respect of such Senior Debt, including interest after
the commencement of the proceedings described below at the rate specified in
the applicable Senior Debt, before the holders of exchange notes will be
entitled to receive any payment with respect to the exchange notes, except
that holders of exchange notes may receive and retain Permitted Junior
Securities and payments made from the trust described under the subheading "--
Legal Defeasance and Covenant Defeasance", in the event of any distribution to
creditors of Simmons:
(1) in a liquidation or dissolution of Simmons;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Simmons or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the assets and liabilities of Simmons.
Simmons also may not make any payment in respect of the exchange notes,
except in Permitted Junior Securities or from the trust described under the
subheading "--Legal Defeasance and Covenant Defeasance", if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on Designated Senior Debt
that permits holders of the Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from Simmons or the holders of any Designated Senior
Debt.
Payments on the exchange notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice; and
(2) all scheduled payments of principal, premium and interest, if any,
on the exchange notes that have come due have been paid in full in cash.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been cured or waived for a period of not less than 180 days.
Simmons must promptly notify holders of Senior Debt if payment of the
exchange notes is accelerated because of an Event of Default.
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As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or insolvency of Simmons, holders of the exchange
notes may recover less ratably than creditors of Simmons who are holders of
Senior Debt. See "Risk Factors--Subordination".
Optional Redemption
At any time prior to March 15, 2002, Simmons may on any one or more
occasions redeem up to 35% of the aggregate principal amount of the exchange
notes ever issued under the indenture at a redemption price of 110.25% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date, with the net cash proceeds of any Public Equity Offering;
provided that
(1) at least 65% of the exchange notes ever issued remain outstanding
immediately after the occurrence of such redemption excluding any exchange
notes held by Simmons and its Subsidiaries; and
(2) the notice of redemption with respect to such redemption shall be
mailed at least 30 days but not more than 60 days after the date of the
closing of any such Public Equity Offering.
Except pursuant to the preceding paragraph, the exchange notes will not be
redeemable at Simmons' option prior to March 15, 2004.
After March 15, 2004, Simmons may redeem all or a part of the exchange notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices,
expressed as percentages of principal amount, set forth below plus accrued and
unpaid interest thereon, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on March 15 of the years indicated
below:
<TABLE>
<CAPTION>
Percentage of
Year Principal Amount
---- ----------------
<S> <C>
2004.................................................... 105.125%
2005.................................................... 103.417%
2006.................................................... 101.708%
2007 and thereafter..................................... 100.000%
</TABLE>
Mandatory Redemption
Simmons is not required to make mandatory redemption or sinking fund
payments with respect to the exchange notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each holder of exchange notes will have the
right to require Simmons to repurchase all or any part equal to $1,000 or an
integral multiple thereof of that holder's exchange notes pursuant to the
Change of Control Offer described below. In the Change of Control Offer,
Simmons will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of exchange notes repurchased plus accrued and
unpaid interest thereon, if any, to the date of purchase. Within ten days
following any Change of Control, the Company will mail a notice to each holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase exchange notes on the Change of Control
Payment Date specified in such notice, pursuant to the procedures required by
the indenture and described in such notice. Simmons will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the exchange notes as a result
of a Change of Control.
On the Change of Control Payment Date, Simmons will, to the extent lawful:
(1) accept for payment all exchange notes or portions thereof properly
tendered pursuant to the Change of Control Offer;
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(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all exchange notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the Trustee the exchange notes
so accepted together with an Officers' Certificate stating the aggregate
principal amount of exchange notes or portions thereof being purchased by
Simmons.
The Paying Agent will promptly mail to each holder of exchange notes so
tendered the Change of Control Payment for such exchange notes, and the Trustee
will promptly authenticate and mail, or cause to be transferred by book entry,
to each holder a new exchange note equal in principal amount to any unpurchased
portion of the exchange notes surrendered, if any; provided that each such new
exchange note will be in a principal amount of $1,000 or an integral multiple
thereof.
Prior to complying with the provisions of this "Change of Control" covenant,
but in any event within 90 days following a Change of Control, Simmons will
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of exchange notes required by this covenant. Simmons will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The provisions described above that require Simmons to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the exchange notes to require
that Simmons repurchase or redeem the exchange notes in the event of a
takeover, recapitalization or similar transaction.
Simmons' outstanding Senior Debt currently prohibits Simmons from purchasing
any exchange notes, and also provides that some change of control events with
respect to Simmons would constitute a default under the agreements governing
the Senior Debt. Any future credit agreements or other agreements relating to
Senior Debt to which Simmons becomes a party may contain similar restrictions
and provisions. In the event a Change of Control occurs at a time when Simmons
is prohibited from purchasing exchange notes, Simmons could seek the consent of
its senior lenders to the purchase of exchange notes or could attempt to
refinance the borrowings that contain such prohibition. If Simmons does not
obtain such a consent or repay such borrowings, Simmons will remain prohibited
from purchasing exchange notes. In such case, Simmons' failure to purchase
tendered exchange notes would constitute an Event of Default under the
indenture which would, in turn, constitute a default under such Senior Debt. In
such circumstances, the subordination provisions in the indenture would likely
restrict payments to the holders of exchange notes.
Simmons will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Simmons and purchases
all exchange notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Simmons and its Subsidiaries taken as a whole. Although there
is a limited body of case law interpreting the phrase "substantially all",
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of exchange notes to require Simmons to
repurchase such exchange notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Simmons and
its Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) Simmons, or the Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of; and
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(2) such fair market value is determined by Simmons' Board of Directors
and evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by Simmons or
such Restricted Subsidiary is in the form of cash or Cash Equivalents. For
purposes of this provision, each of the following shall be deemed to be
cash or Cash Equivalents:
(a) any liabilities, as shown on Simmons' or such Restricted
Subsidiary's most recent balance sheet, of Simmons or any Restricted
Subsidiary, other than contingent liabilities and liabilities that are
by their terms subordinated to the exchange notes or any guarantee
thereof, that are assumed by the transferee of any such assets pursuant
to a customary novation agreement that releases Simmons or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Simmons
or any such Restricted Subsidiary from such transferee that are subject
to ordinary settlement periods, contemporaneously converted by Simmons
or such Restricted Subsidiary into cash or Cash Equivalents, to the
extent of the cash or Cash Equivalents received.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Simmons may apply such Net Proceeds at its option:
(1) to repay Senior Debt and effect a corresponding reduction if such
Senior Debt is a revolving credit borrowing;
(2) to acquire all or more than half of the assets of another Permitted
Business;
(3) to acquire Capital Stock of a Permitted Business; provided that
after any such acquisition of Capital Stock such Permitted Business is or
becomes a Restricted Subsidiary;
(4) to make a capital expenditure; or
(5) to acquire other long-term assets that are used or useful in a
Permitted Business (such long-term assets being referred to herein as
"Additional Assets").
Pending the final application of any such Net Proceeds, Simmons or such
Restricted Subsidiary may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds". When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Simmons will make an
offer to all holders of exchange notes and all holders of other Indebtedness
that is pari passu with the exchange notes containing provisions similar to
those set forth in the indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets (an "Asset Sale Offer") to purchase the
maximum principal amount of exchange notes and such other pari passu
Indebtedness that may be purchased out of the Excess Proceeds. The offer price
in any Asset Sale Offer will be equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon, if any, to the date of purchase, and
will be payable in cash. If any Excess Proceeds remain after consummation of an
Asset Sale Offer, Simmons may use such Excess Proceeds for any purpose not
otherwise prohibited by the indenture. If the aggregate principal amount of
exchange notes and such other pari passu Indebtedness tendered into such Asset
Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the
exchange notes and such other pari passu Indebtedness to be purchased on a pro
rata basis. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Notwithstanding the three immediately preceding paragraphs, Simmons and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent:
(1) at least 75% of the consideration for such Asset Sale constitutes
Additional Assets, cash and/or Cash Equivalents; and
(2) such Asset Sale is for fair market value, as determined in good
faith by Simmons' Board of Directors; and
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(3) any consideration not constituting Additional Assets received by
Simmons or any of its Restricted Subsidiaries in connection with any Asset
Sale permitted to be consummated under this paragraph are treated as Net
Proceeds from an Asset Sale and applied in accordance with the provisions
of the immediately preceding paragraph.
Selection and Notice
If less than all of the exchange notes are to be redeemed at any time, the
Trustee will select exchange notes for redemption as follows:
(1) if the exchange notes are listed, in compliance with the
requirements of the principal national securities exchange on which the
exchange notes are listed; or
(2) if the exchange notes are not so listed, on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate.
No exchange notes of $1,000 in principal amount or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of exchange
notes to be redeemed at its registered address. Notices of redemption may not
be conditional.
If any exchange note is to be redeemed in part only, the notice of
redemption that relates to that exchange note shall state the portion of the
principal amount thereof to be redeemed. A new exchange note in principal
amount equal to the unredeemed portion of the original exchange note will be
issued in the name of the holder thereof upon cancellation of the original
exchange note. Exchange notes called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest ceases to
accrue on exchange notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Simmons' or any of its Restricted Subsidiaries'
Equity Interests, including, without limitation, any payment in connection
with any merger or consolidation involving Simmons or any of its Restricted
Subsidiaries, or to the direct or indirect holders of Simmons' or any of
its Restricted Subsidiaries' Equity Interests in their capacity as such,
other than dividends or distributions payable in Equity Interests, other
than Disqualified Stock, of Simmons or to Simmons or a Restricted
Subsidiary of Simmons;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving Simmons, any Equity Interests of Simmons or any
direct or indirect parent of Simmons;
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the exchange notes, except a payment of interest or
principal at Stated Maturity; or
(4) make any Restricted Investment (all such payments and other actions
set forth in clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(2) Simmons would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have
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been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the subheading "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Simmons and its Restricted Subsidiaries
after the date of the indenture, excluding Restricted Payments permitted by
clauses (2), (3), (4), (6), (7), (8), (9) and (10) of the next succeeding
paragraph, is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of Simmons for the period,
taken as one accounting period, from the beginning of the first fiscal
quarter commencing after the date of the indenture to the end of
Simmons' most recently ended fiscal month for which internal financial
statements are available at the time of such Restricted Payment or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit, plus
(b) 100% of the aggregate net cash proceeds received by Simmons
since the date of the indenture as a contribution to its common equity
capital or from the issue or sale of Equity Interests of Simmons, other
than Disqualified Stock, or from the issue or sale of Disqualified
Stock or debt securities of Simmons that have been converted into or
exchanged for such Equity Interests, other than Equity Interests or
Disqualified Stock or convertible debt securities sold to a Subsidiary
of Simmons, plus
(c) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, 50% of the net cash proceeds to Simmons and its
Restricted Subsidiaries from the sale or liquidation of such Restricted
Investment less the cost of disposition, if any, plus
(d) an amount equal to the fair market value of all Restricted
Investments made since the date of the indenture in any Unrestricted
Subsidiary that is thereafter redesignated as a Restricted Subsidiary,
such amount not to exceed the amount of Restricted Investments
previously made by Simmons or any Restricted Subsidiary in such
Unrestricted Subsidiary that were treated as Restricted Payments since
the date of the indenture.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of Simmons
in exchange for, or out of the net cash proceeds to Simmons from the
substantially concurrent sale, other than to a Subsidiary of Simmons, of,
other Equity Interests of Simmons, other than any Disqualified Stock, or a
contribution to the common equity capital of Simmons, other than from a
Subsidiary of Simmons; provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition shall be excluded from clause (3) (b) of
the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness;
(4) the payments and applications of the proceeds to be received by
Simmons from the issuance of the Notes in connection with the original
offering;
(5) the payment of any dividend by a Restricted Subsidiary of Simmons to
the holders of its Equity Interests on a pro rata basis;
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(6) payments to Holdings for the purpose of permitting, and in an amount
equal to the amount required to permit, Holdings to redeem or repurchase
Holdings' common equity or options in respect thereof, in each case in
connection with the repurchase provisions of employee stock option or stock
purchase agreements, the Stockholders Agreements or other agreements
relating to the compensation of management employees; provided that all
such repurchases or redemptions pursuant to this clause (6) shall not
exceed $2.5 million per annum plus the amount of any proceeds to Simmons
from:
(a) sales of Capital Stock of Holdings to management employees
subsequent to the date of the indenture to the extent contributed to
Simmons as common equity capital; provided that the amount of any such
net cash proceeds that are utilized for any such redemption or
repurchase shall be excluded from clause (3) (b) of the preceding
paragraph; and
(b) any "key-man" life insurance policies that are used to make any
such redemptions or repurchases; provided, further, that the
cancellation of Indebtedness owing to Holdings from members of
management of Simmons or any of its Restricted Subsidiaries in
connection with a repurchase of Capital Stock of Holdings will not be
deemed to constitute a Restricted Payment under the indenture;
provided that any amounts that are not used for repurchases and redemptions
in any year may be carried forward to subsequent years;
(7) the making of distributions, loans or advances to Holdings in an
amount not to exceed $850,000 per annum in order to permit Holdings to pay
the ordinary operating expenses of Holdings, including without limitation,
directors' fees, indemnification obligations, professional fees and
expenses;
(8) payments to Holdings in respect of:
(a) federal income taxes for the tax periods for which a federal
consolidated return is filed by Holdings for a consolidated group of
which Holdings is the parent and Simmons and its Subsidiaries are
members, in an amount not to exceed the hypothetical federal income
taxes that Simmons would have paid if Simmons and its Restricted
Subsidiaries filed a separate consolidated return with Simmons as the
parent, taking into account carryovers and carrybacks of tax
attributes, including net operating losses, that would have been
allowed if such separate consolidated return had been filed; and
(b) state income tax for the tax periods for which a state combined
return is filed by Holdings for a combined group of which Holdings is
the parent and Simmons and its Subsidiaries are members, in an amount
not to exceed the hypothetical state income taxes that Simmons would
have paid if Simmons and its Restricted Subsidiaries had filed a
separate combined return taking into account carryovers and carrybacks
of tax attributes, including net operating losses, that would have been
allowed if such separate combined return had been filed; provided,
however, that in no event shall any such tax payment pursuant to this
clause (7) exceed the amount of federal or state income tax, as the
case may be, that is, at the time Simmons makes such tax payments,
actually due and payable by Holdings to the relevant taxing authorities
or to become due and payable within 30 days of such payment by Simmons;
(9) distributions to Holdings to fund the Transactions;
(10) payments to Holdings to fund the payment of or payment by Simmons
of dividends, loans, distributions or annual contributions calculated in
accordance with the requirements of Section 415 of the Internal Revenue
Code to the Simmons ESOP in amounts equal to amounts expended by Holdings
to repurchase shares of its Capital Stock from deceased or retired
employees in accordance with the terms of the Simmons ESOP as in effect on
the date of the indenture and from employees whose employment with Holdings
or any of its Subsidiaries has terminated for any reason, in each case
contemplated by this clause (10) only to the extent mandatorily required by
the Simmons ESOP as in effect on the date of the indenture, the Internal
Revenue Code or ERISA; and, provided, further, that in each such case
Holdings or
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Simmons has deferred making any cash payments in respect of such repurchase
obligations to the maximum extent possible under the Simmons ESOP as in
effect on the date of the indenture or as modified from time to time to
comply with law;
(11) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise
price thereof;
(12) the payments pursuant to the Fenway Agreement as in effect on the
date of the indenture; and
(13) if the Company would be permitted to incur at least $1.00 of
additional Indebtedness, other than Permitted Debt, in compliance with the
covenant described below under the subheading "--Incurrence of Indebtedness
and Issuance of Preferred Stock", other Restricted Payments in an aggregate
amount not to exceed $5.0 million since the date of the indenture.
The amount of all Restricted Payments other than cash shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Simmons or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment.
Incurrence of Indebtedness and Issuance of Preferred Stock
Simmons will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness, including Acquired Debt, and that
Simmons will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that Simmons or any of its Restricted Subsidiaries may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock
if the Fixed Charge Coverage Ratio for Simmons' most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Stock is issued would have been at least 2.0 to
1, determined on a pro forma basis, including a pro forma application of the
net proceeds therefrom, as if the additional Indebtedness had been incurred,
or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not prohibit
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the notes originally issued under the indenture, the exchange notes
issued in exchange therefor and any Guarantees of any notes or exchange
notes;
(2) Indebtedness of Simmons, and Guarantees thereof by any of the
Company's Restricted Subsidiaries, incurred pursuant to one or more Credit
Facilities in an aggregate principal amount at any time outstanding, with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of Simmons and its Subsidiaries thereunder, not
to exceed $290.0 million less:
(a) the aggregate amount of Indebtedness of Securitization Entities
at the time outstanding less
(b) the amount of all optional or mandatory principal payments
actually made by Simmons or any of its Restricted Subsidiaries since the
date of the indenture in respect of term loans under Credit Facilities,
excluding any such payments to the extent refinanced at the time of
payment under a Credit Facility, and
(c) further reduced by any repayments since the date of the indenture
of revolving credit borrowings under Credit Facilities that are
accompanied by a corresponding commitment reduction thereunder;
(3) other Indebtedness of Simmons and its Subsidiaries outstanding on
the date of the indenture for so long as such Indebtedness remains
outstanding;
(4) Interest Swap Obligations of Simmons covering Indebtedness of
Simmons; provided that any Indebtedness to which any such Interest Swap
Obligations correspond is otherwise permitted to be incurred under the
indenture; and provided, further, that such Interest Swap Obligations are
entered into, in the judgment of Simmons, to protect Simmons from
fluctuation in interest rates on its outstanding Indebtedness;
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(5) Indebtedness of Simmons under Currency Agreements;
(6) the incurrence by Simmons or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Simmons and any of its
Restricted Subsidiaries; provided, however, that:
(a) if Simmons is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the notes and the exchange
notes; and
(b)(1) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Simmons or a Restricted Subsidiary thereof and
(2) any sale or other transfer of any such Indebtedness to a Person
that is not either Simmons or a Restricted Subsidiary of Simmons shall
be deemed, in each case, to constitute an incurrence of such
Indebtedness by Simmons or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (6);
(7) the guarantees by Simmons or any of its Restricted Subsidiaries of
each other's Indebtedness; provided that such Indebtedness is permitted to
be incurred under the indenture;
(8) Indebtedness, including Capitalized Lease Obligations, incurred by
Simmons or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property, real or personal, or equipment, whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets, in an aggregate principal amount not to exceed $15.0
million at any one time outstanding, including any Permitted Refinancing
Indebtedness with respect thereto, which amount may, but need not, be
incurred in whole or in part under the New Senior Credit Agreement;
(9) Indebtedness incurred by Simmons or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims;
(10) obligations in respect of performance and surety bonds and
completion guarantees provided by Simmons or any of its Restricted
Subsidiaries in the ordinary course of business;
(11) the incurrence by Simmons or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness, other than
intercompany Indebtedness, that was permitted by the indenture to be
incurred under the first paragraph hereof or clauses (1), (3), (8), (14)
and (15) of this paragraph or this clause (11) or the first paragraph of
this covenant;
(12) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is Non-Recourse Debt with respect
to Simmons and its other Restricted Subsidiaries, except for Standard
Securitization Undertakings;
(13) the incurrence by Simmons' Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Simmons that was not permitted by this clause (13);
(14) the incurrence of Indebtedness by foreign Restricted Subsidiaries
of Simmons in an aggregate principal amount not to exceed $20.0 million at
any one time outstanding;
(15) the incurrence of up to $25.0 million in aggregate principal amount
of Indebtedness by Simmons or a Restricted Subsidiary of Simmons on or
prior to September 30, 2000, the net proceeds of which are applied to a
concurrent acquisition of a Permitted Business or that is incurred as a
result of the assumption of Indebtedness of a Permitted Business at the
time of the acquisition thereof, provided
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that in each case, the pro forma Fixed Charge Coverage Ratio of Simmons for
the most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the consummation
of such acquisition is higher than the actual historical Fixed Charge
Coverage Ratio of Simmons for such four-quarter period; and
(16) the incurrence by Simmons or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount, or accreted
value, as applicable, at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (16), not to exceed $20.0
million.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (16) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, Simmons shall, in its sole
discretion, classify such item of Indebtedness in any manner that complies with
this covenant.
Accrual of interest costs or fees, accretion or amortization of original
issue discount costs or fees, the payment of interest on any Indebtedness in
the form of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the same
class of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges of Simmons as accrued. Indebtedness under Credit Facilities
outstanding on the date on which the exchange notes are first issued and
authenticated under the indenture will be deemed to have been incurred on such
date in reliance on the exception provided by clause (2) of the definition of
Permitted Debt.
No Senior Subordinated Debt
Simmons will not incur, create, issue, assume, Guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt and senior in any respect in right of payment to the
exchange notes. No Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Debt of any Guarantor and senior in any respect
in right of payment to the Guarantees of the exchange notes.
Liens
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of
any kind securing Indebtedness or trade payables on any asset now owned or
hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or consensual restriction on the ability
of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
to Simmons or any of its Restricted Subsidiaries or with respect to any
other interest or participation in, or measured by, its profits, or pay any
indebtedness owed to Simmons or any of its Restricted Subsidiaries;
(2) make loans or advances to Simmons or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Simmons or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture;
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(2) the New Senior Credit Agreement as in effect as of the date of the
indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are not
materially more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the New
Senior Credit Agreement as in effect on the date of the indenture;
(3) the indenture and the exchange notes;
(4) applicable law;
(5) any instrument governing Indebtedness or Capital Stock of a Person
or assets acquired by Simmons or any of its Restricted Subsidiaries as in
effect at the time of such acquisition except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(6) customary non-assignment provisions in leases, contracts and
licenses entered into in the ordinary course of business;
(7) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (3) of the preceding paragraph on the property so acquired;
(8) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(9) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(10) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
subheading "--Liens" that limit the right of Simmons or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(11) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(12) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(13) Indebtedness or other contractual requirements of a Securitization
Entity in connection with a Qualified Securitization Transaction; provided
that such restrictions apply only to such Securitization Entity;
(14) any agreement or instrument governing Indebtedness, whether or not
outstanding, of foreign Restricted Subsidiaries of Simmons if it
constitutes Permitted Debt incurred pursuant to clause (14) under the
subheading "--Incurrence of Indebtedness and Issuance of Preferred Stock";
and
(15) any amendments to the above agreements, if such amendments are not
materially more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the
agreements being amended.
Merger, Consolidation, or Sale of Assets
Simmons may not, directly or indirectly:
(1) consolidate or merge with or into, whether or not Simmons is the
surviving corporation); or
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(2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person;
unless:
(1) either:
(a) Simmons is the surviving corporation; or
(b) the Person formed by or surviving any such consolidation or
merger, if other than Simmons, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made is a
corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger,
if other than Simmons, or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of Simmons under the registration rights agreement, the
notes, the exchange notes and the indenture pursuant to a supplemental
indenture in form reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists;
(4) except in the case of a merger of Simmons with or into a Wholly
Owned Restricted Subsidiary of Simmons, the Company or the Person formed by
or surviving any such consolidation or merger, if other than Simmons, or to
which such sale, assignment, transfer, conveyance or other disposition
shall have been made will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of Simmons
immediately preceding the transaction; and
(5) except in the case of a merger of Simmons with or into a Wholly
Owned Restricted Subsidiary of Simmons, either:
(a) Simmons or the Person formed by or surviving any such
consolidation or merger, if other than Simmons, or to which such sale,
assignment, transfer, conveyance or other disposition will, immediately
after such transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described above under the subheading "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or
(b) in the case of a merger in which Simmons is the surviving
corporation, Simmons shall, immediately after such transaction after
giving pro forma effect thereto and any related financing transactions
as if the same had occurred at the beginning of the applicable four-
quarter period, be permitted to incur at least $1.00 of additional
Indebtedness, including Permitted Debt, pursuant to the covenant
described under the subheading "--Incurrence of Indebtedness and
Issuance of Preferred Stock".
In addition, Simmons may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. The provisions of this covenant will not be
applicable to a sale, assignment, transfer, conveyance or other disposition of
assets between or among Simmons and any of the Restricted Subsidiaries.
Transactions with Affiliates
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Simmons or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by Simmons or such Restricted
Subsidiary with an unrelated Person; and
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(2) Simmons delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.5 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$7.5 million, an opinion that such Affiliate Transaction is not
materially less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arms-length
basis from a Person that is not an Affiliate of Simmons or such
Restricted Subsidiary issued by an accounting, appraisal or investment
banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by Simmons or any of its
Restricted Subsidiaries in the ordinary course of business of Simmons or
such Restricted Subsidiary;
(2) transactions between or among Simmons and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees and compensation;
(4) any sale or other issuance of Equity Interests, other than
Disqualified Stock, of Simmons;
(5) Restricted Payments that are permitted by the provisions of the
indenture described above under the subheading "--Restricted Payments";
(6) the performance of Simmons' or any Subsidiary's obligations under
the Simmons ESOP as in effect on the date of the indenture;
(7) the performance of Simmons' or any Subsidiary's obligations under
the Fenway Agreement as the same is in effect on the date of the indenture;
(8) reasonable and customary costs and expenses incident to a public
offering of Equity Securities of Holdings to the extent that the proceeds
therefrom are intended to be contributed to Simmons as common equity
capital;
(9) Qualified Securitization Transaction;
(10) the performance of Simmons' or any Subsidiary's obligations under
the Transaction Documents as the same are in effect on the date of the
indenture;
(11) the making of loans to employees or consultants to the extent that
the same constitute Permitted Investments; and
(12) the granting of customary registration rights and/or put or call
options pursuant to the Stockholders Agreements or any similar agreement.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Simmons and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be an Investment made as of the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of the covenant described above under the
subheading "--Restricted Payments" or Permitted Investments, as applicable. All
such outstanding Investments will be valued at their fair market value at the
time of such designation. That designation will only
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be permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if such redesignation would not cause a Default.
Limitations on Issuances of Guarantees of Indebtedness
If Simmons acquires or creates a Restricted Subsidiary that is a Significant
Subsidiary of Simmons, or if any Restricted Subsidiary of Simmons becomes a
Significant Subsidiary of Simmons, then such Significant Subsidiary shall
execute and deliver a supplemental indenture to the indenture providing for the
Guarantee of the payment of the notes and the exchange notes by such
Significant Subsidiary, which Guarantee shall be senior to or pari passu with
all other Indebtedness of such Significant Subsidiary, other than Senior Debt,
and shall be subordinated to all Senior Debt of such Significant Subsidiary to
the same extent as the notes and the exchange notes are subordinated to Senior
Debt.
Notwithstanding the preceding paragraph, any such Guarantee by a Significant
Subsidiary of the notes and the exchange notes shall provide by its terms that
it shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer, to any Person not an Affiliate of Simmons, of all
of Simmons' stock in, or all or substantially all the assets of, such
Significant Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the indenture. The form of such Guarantee
will be attached as an exhibit to the indenture.
Conduct of Business
Simmons will not, and will not permit any of its Restricted Subsidiaries to,
engage in any businesses a majority of whose revenues are not derived from the
same or reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which Simmons and its Restricted
Subsidiaries are engaged on the date of the indenture.
Reports
Whether or not required by the Commission, so long as any exchange notes are
outstanding, Simmons will furnish to the holders of exchange notes, within the
time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Simmons were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the consolidated financial statements included in the
annual information only, a report thereon by our independent accountants;
and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Simmons were required to file such reports.
If Simmons has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation,
either on the face of the financial statements or in the footnotes thereto, and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Simmons and
its Restricted Subsidiaries separate from the financial condition and results
of operations of the Unrestricted Subsidiaries of Simmons.
In addition, whether or not required by the Commission, Simmons will file a
copy of all such information and reports referred to in clauses (1) and (2)
above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations, unless the Commission will
not accept such a filing, and make such information available to securities
analysts and prospective investors upon request.
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Simmons and the Guarantors have also agreed that, for so long as any
exchange notes remain outstanding, they will furnish to the holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
exchange notes, whether or not prohibited by the subordination provisions
of the indenture;
(2) default in payment when due of the principal of or premium, if any,
on the notes or the exchange notes, whether or not prohibited by the
subordination provisions of the indenture;
(3) failure by Simmons or any of its Restricted Subsidiaries to comply
with the provisions described under the subheadings "--Change of Control",
"--Asset Sales", "--Restricted Payments" or "-- Incurrence of Indebtedness
and Issuance of Preferred Stock" and the continuance of such failure after
the receipt by Simmons of written notice from the Trustee or the holders of
at least 25% in aggregate principal amount of the exchange notes, including
Additional Notes, if any, then outstanding of such default;
(4) failure by Simmons or any of its Subsidiaries for 60 days after
written notice is given to Simmons by the Trustee or the holders of at
least 25% in aggregate principal amount of the notes and the exchange
notes, including Additional Notes, if any, then outstanding to comply with
any of its other agreements in the indenture or the notes and the exchange
notes and the continuance of such failure for a period of 60 days after the
receipt by Simmons of written notice from the Trustee or the holders of at
least 25% in aggregate principal amount of the notes and the exchange notes
then outstanding of such default;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Simmons or any of its Subsidiaries, or
the payment of which is guaranteed by Simmons or any of its Subsidiaries,
whether such Indebtedness or guarantee now exists, or is created after the
date of the indenture, if that default:
(a) is caused by a failure to pay principal of or premium, if any,
or interest on such Indebtedness if such payment default is not cured
or waived within 10 Business Days of the occurrence thereof (a "Payment
Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $10.0 million or
more;
(6) failure by Simmons or any of its Subsidiaries to pay final judgments
aggregating in excess of $10.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days;
(7) except as permitted by the indenture, any Guarantee shall be held in
any judicial proceeding to be unenforceable or invalid or shall cease for
any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Guarantee; and
(8) some events of bankruptcy or insolvency with respect to Simmons or
any of its Subsidiaries.
In the case of an Event of Default arising from some events of bankruptcy or
insolvency, with respect to Simmons, any Significant Subsidiary or any group of
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding notes and exchange notes will become due and payable without
further action or notice. If any Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the notes and
exchange notes then outstanding, including any Additional Notes, if any, may
declare all the notes and exchange notes to be due and payable immediately.
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Holders of the exchange notes may not enforce the indenture or the exchange
notes except as provided in the indenture. Subject to limitations, holders of a
majority in principal amount of the then outstanding notes and exchange notes
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from holders of the notes and exchange notes notice of any continuing
Default or Event of Default, except a Default or Event of Default relating to
the payment of principal or interest, if it determines that withholding notice
is in their interest.
The holders of a majority in aggregate principal amount of the notes and
exchange notes then outstanding by notice to the Trustee may on behalf of the
holders of all of the notes and exchange notes waive any existing Default or
Event of Default and its consequences under the indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the notes and exchange notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Simmons with the
intention of avoiding payment of the premium that Simmons would have had to pay
if Simmons then had elected to redeem the exchange notes pursuant to the
optional redemption provisions of the indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the exchange notes. If an Event of Default occurs
prior to March 15, 2004 by reason of any willful action or inaction taken or
not taken by or on behalf of Simmons with the intention of avoiding the
prohibition on redemption of the exchange notes prior to March 15, 2004, then
the premium specified in the indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the exchange
notes.
Simmons is required to deliver to the Trustee annually a statement regarding
compliance with the indenture, and Simmons is required upon becoming aware of
any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Simmons, as
such, shall have any liability for any obligations of Simmons under the
exchange notes or the indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of exchange notes by
accepting an exchange note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the exchange notes.
The waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
Legal Defeasance and Covenant Defeasance
Simmons may, at its option and at any time, elect to have all of its
obligations discharged with respect the exchange notes ("Legal Defeasance")
except for:
(1) the rights of holders of outstanding exchange notes to receive
payments in respect of the principal of, premium, if any, and interest on,
the exchange notes when such payments are due from the trust referred to
below;
(2) Simmons' obligations with respect to such exchange notes concerning
issuing temporary exchange notes, registration of exchange notes,
mutilated, destroyed, lost or stolen exchange notes and the maintenance of
an office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and Simmons' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Simmons may, at its option and at any time, elect to have the
obligations of Simmons released with respect to several covenants that are
described in the indenture ("Covenant Defeasance") and thereafter
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any omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the exchange notes. In the event Covenant
Defeasance occurs, some events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the holders of the exchange notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest, if any, on all outstanding exchange notes on the
stated maturity or on the applicable redemption date, as the case may be,
and Simmons must specify whether such exchange notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Simmons shall have delivered to the
Trustee an Opinion of Counsel in the United States reasonably acceptable to
the Trustee confirming that (a) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (b) since the
date of the indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the holders of the outstanding
exchange notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an Opinion of Counsel in the United States reasonably
acceptable to such Trustee confirming that the holders of the outstanding
exchange notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
(b) insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, including the indenture and the New Senior Credit
Agreement, but other than a default resulting from the borrowing of funds
to be applied to such deposit, to which Simmons or any of its Subsidiaries
is a party or by which Simmons or any of its Subsidiaries is bound;
(6) the Company must have delivered to the Trustee an Opinion of Counsel
to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(7) Simmons must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by Simmons with the intent of
preferring the holders of the exchange notes over the other creditors of
Simmons with the intent of defeating, hindering, delaying or defrauding
creditors of Simmons or others; and
(8) Simmons must deliver to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
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Amendment, Supplement and Waiver
Without the consent of each holder affected, an amendment or waiver may not,
with respect to any exchange notes held by a non-consenting holder:
(1) reduce the principal amount of exchange notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any exchange
note or alter the provisions with respect to the time and amount of
redemption of the exchange notes, other than provisions relating to the
covenants described above under the subheading "--Repurchase at the Option
of Holders";
(3) reduce the rate of or change the time for payment of interest on any
exchange note;
(4) waive a Default or Event of Default in the payment of principal of,
premium, if any, or interest, if any, on the exchange notes, except a
rescission of acceleration of the exchange notes by the holders of at least
a majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration;
(5) make any exchange note payable in money other than that stated in
the exchange notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of exchange notes to
receive payments of principal of or premium, if any, or interest on the
exchange notes;
(7) waive a redemption payment with respect to any exchange note, other
than a payment required by one of the covenants described above under the
subheading "--Repurchase at the Option of Holders"; or
(8) make any change in the foregoing amendment and waiver provisions.
In addition, any amendment to the provisions of the indenture relating to
subordination that adversely affects the rights of the holders of the notes and
exchange notes will require the consent of the holders of at least 75% in
aggregate principal amount of the notes and exchange notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of notes or
exchange notes, Simmons and the Trustee may amend or supplement the indenture
or the notes or exchange notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes or exchange notes in addition to
or in place of certificated notes or exchange notes;
(3) to provide for the assumption of Simmons' obligations to holders of
notes or exchange notes in the case of a merger or consolidation or sale of
all or substantially all of Simmons' assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or exchange notes or that does not
adversely affect the legal rights under the indenture of any such holder;
or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture Act.
Except as provided in the prior paragraphs, the indenture and the notes and
exchange notes may be amended or supplemented with the consent of the holders
of at least a majority in principal amount of the notes and exchange notes then
outstanding, including, without limitation, consents obtained in connection
with a purchase of, or tender offer for, exchange notes, and any existing
default or compliance with any provision of the indenture or the notes and
exchange notes may be waived with the consent of the holders of a majority in
principal amount of the then outstanding notes and exchange notes, including,
without limitation, consents obtained in connection with a purchase of, or
tender offer for notes and exchange notes.
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Concerning the Trustee
If the Trustee become a creditor of Simmons, the indenture limits its right
to obtain payment of claims in some cases, or to realize on some property
received in respect of any such claim as security or otherwise. The Trustee
will be permitted to engage in other transactions; however, if it acquires any
conflicting interest the Trustee must eliminate such conflict within 90 days,
apply to the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
and exchange notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes and exchange notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Additional Information
Anyone who receives this prospectus may obtain copies of the indenture,
without charge, by writing to Simmons Company, One Concourse Parkway, Atlanta,
Georgia 30328, Attention: Treasurer.
Book-Entry, Delivery and Form
The Certificates representing the exchange notes will be issued in fully
registered form, without coupons. Except as described below, the exchange notes
will be deposited with, or on behalf of, The Depository Trust Company ("DTC"),
in New York, New York, and registered in the name of DTC or its nominee in the
form of one or more global certificates (the "Global Notes") or will remain in
the custody of the Trustee pursuant to a FAST Balance Certificate Agreement
between DTC and the Trustee.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to DTC or another nominee of DTC or to a successor of DTC or
its nominee. Except in the limited circumstances described below, owners of
beneficial interests in the Global Notes will not be entitled to receive
physical delivery of Certificated Notes (as defined below). See "--Exchange of
Book-Entry Notes for Certificated Notes." In addition, transfers of beneficial
interests in the Global Notes will be subject to the applicable rules and
procedures of DTC and its direct or indirect participants, including, if
applicable, those of Euroclear and Cedel, which rules and procedures may change
from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The exchange
notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
Depository Procedures
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the settlement system of DTC and are subject to
changes by them from time to time. Simmons takes no responsibility for these
operations and procedures and urges investors to contact the system or its
participants directly to discuss these matters.
DTC has advised Simmons that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and other
organizations. Access to DTC's system is also available to other entities such
as
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banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised Simmons that, pursuant to procedures established by it:
(a) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Trustee with portions of the principal
amount of the Global Notes; and
(b) ownership of such interests in the Global Notes will be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC with respect to the Participants or by the
Participants and the Indirect Participants with respect to other owners of
beneficial interest in the Global Notes.
All interests in a Global Note may be subject to the procedures and
requirements of DTC. The laws of some states require that some persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Note to such persons
will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and some
banks, the ability of a person having beneficial interests in a Global Note to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interest in the Global Notes will not
have exchange notes registered in their names, will not receive physical
delivery of exchange notes in certificated form and will not be considered the
registered owners or "Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, premium and interest, if any, on a
Global Note registered in the name of DTC or its nominee will be payable to DTC
in its capacity as the registered holder under the indenture. Under the terms
of the indenture, Simmons and the Trustee will treat the persons in whose names
the exchange notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither Simmons, the Trustee nor any agent
of Simmons or the Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised Simmons that its current practice, upon receipt of any
payment in respect of securities such as the exchange notes, including
principal and interest, is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in the principal amount of beneficial interest in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of exchange
notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants and
will not be the responsibility of DTC, the Trustee or Simmons. Neither Simmons
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the exchange notes, and Simmons and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Interest in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available
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funds, subject in all cases to the rules and procedures of DTC and its
Participants. See "--Same Day Settlement and Payment".
Subject to the transfer restrictions set forth under "Notice to Investors",
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same day funds.
DTC has advised Simmons that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the exchange notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the exchange notes, DTC reserves
the right to exchange the Global Notes for legended exchange notes in
certificated form, and to distribute such notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants in DTC it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Simmons nor the Trustee nor
any of their respective agents will have any responsibility for the performance
by DTC or its respective participants or indirect participants of their
respective obligations under the rules and procedures governing its operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive exchange notes in registered
certificated form ("Certificated Notes") if:
(1) DTC:
(a) notifies Simmons that it is unwilling or unable to continue as
depositary for the Global Notes and Simmons thereupon fails to appoint
a successor depositary; or
(b) has ceased to be a clearing agency registered under the Exchange
Act;
(2) Simmons, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the exchange notes. In addition, beneficial
interests in a Global Note may be exchanged for Certificated Notes upon
request but only upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of DTC, in accordance with its
customary procedures, and will bear the applicable restrictive legend
referred to in "Notice to Investors", unless Simmons determines otherwise
in compliance with applicable law.
Exchange of Certificated Notes for Book-Entry Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the Trustee a written
certificate in the form provided in the indenture to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors".
Same Day Settlement and Payment
Payments in respect of the exchange notes represented by the Global Notes,
including principal, premium, if any, and interest, if any, will be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note holder. With respect to Certificated Notes, Simmons will make all
payments of
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principal, premium, if any, and interest, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. The exchange notes represented by the Global Notes are
expected to be eligible to trade in the PORTAL market and to trade in the
DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such exchange notes will, therefore, be required by the
DTC to be settled in immediately available funds. Simmons expects that
secondary trading in any Certificated Notes will also be settled in
immediately available funds.
Certain Definitions
Set forth below are some of the defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, including, without limitation, Indebtedness incurred in connection
with, or in contemplation of, such other Person merging with or into or
becoming a Subsidiary of such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Additional Assets" has the meaning assigned to such term in the second
paragraph of the covenant described above under the subheading "Repurchase at
the Option of Holders--Asset Sales".
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback)
other than sales of inventory in the ordinary course of business consistent
with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Simmons and its
Restricted Subsidiaries taken as a whole will be governed by the provisions
of the indenture described above under the subheading "--Change of Control"
and/or the provisions described above under the subheading "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issue or sale by Simmons or any of its Restricted Subsidiaries
of Equity Interests of any of Simmons' Restricted Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $1.0
million; or
(b) results in net proceeds to Simmons and its Restricted
Subsidiaries of less than $1.0 million;
(2) a transfer of assets between or among Simmons and its Wholly Owned
Restricted Subsidiaries;
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(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to Simmons or to another Wholly Owned Restricted Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described
above under the subheading "--Restricted Payments";
(5) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof;
(6) sales of accounts receivable, equipment and related assets,
including contract rights, of the type specified in the definition of
"Qualified Securitization Transaction" to a Securitization Entity for the
fair market value thereof, including cash in an amount at least equal to
75% of the fair market value thereof;
(7) the licensing of intellectual property in the ordinary course of
business; and
(8) the disposal or replacement of obsolete, surplus or worn-out
equipment in the ordinary course of business.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire,
whether such right is currently excercisable or is exercisable only upon the
occurrence of a subsequent condition.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, capital stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of capital stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof (provided
that the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than six months from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers' acceptances
with maturities not exceeding six months and overnight bank deposits, in
each case with any lender party to the New Senior Credit Agreement or with
any domestic commercial bank having capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition; and
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(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Simmons and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is
used in Section 13(d)(3) of the Exchange Act) other than the Principals or
any of their Related Parties;
(2) the adoption of a plan by the stockholders thereof for the
liquidation or dissolution of Simmons or Holdings;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals, their Related Parties or, prior
to the establishment of a Public Market, a Permitted Group, becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the Voting
Stock of Holdings or Simmons (measured by voting power rather than number
of shares);
(4) the first day on which a majority of the members of the Board of
Directors of Holdings or Simmons are not Continuing Directors; or
(5) the first day on which Holdings ceases to own 100% of the
outstanding Equity Interests of Simmons (other than as a result of a merger
of Simmons and Holdings permitted by the indenture).
"Common Equity Documents" means the Recapitalization Agreement, the
Certificate of Merger and each other document executed in connection with the
Common Equity Financing.
"Common Equity Financing" means the issuance by Holdings or the retention by
existing stockholders of Holdings of not less than $177.0 million of common
equity in connection with the Merger, which equity shall consist of:
(1) the contribution by Fenway of not less than $128.1 million in cash to
Holdings,
(2) the retention by the Management Investors of shares (or options to
acquire shares) of common stock of Holdings with an estimated value of
approximately $16.5 million,
(3) the conversion by the Simmons ESOP of its 3,413,672 shares of Simmons'
Series A Preferred Stock which is not allocated to the accounts of ESOP
participants into approximately 3,482,036 shares of Holdings' Class C
Common Stock which will be converted in the Merger into 3,482,036
shares of unallocated common stock of Holdings and the retention of
such unallocated shares with an estimated value of $23.4 million and
(4) the retention by certain affiliates of or entities organized by
Investcorp of approximately 1,336,998 shares of common stock of
Holdings with an estimated value of $9.0 million.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss, plus any net loss
realized in connection with an Asset Sale (without regard to the $1.0
million size limitation set forth in the definition of "Asset Sale"), to
the extent such losses were deducted in computing such Consolidated Net
Income; plus
(2) provision for taxes of such Person and its Subsidiaries for such
period, to the extent that such provision for taxes was deducted in
computing such Consolidated Net Income; plus
(3) consolidated interest expense of such Person and its Subsidiaries
for such period, whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment
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obligations, the interest component of all payments associated with Capital
Lease Obligations commissions, discounts and other fees and charges
incurred in respect of revolving credit facilities and letter of credit or
bankers' acceptance financings, and net payments, if any, pursuant to
Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income; plus
(4) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon, to the extent that
any such expense was deducted in computing such Consolidated Net Income;
plus
(5) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses and charges
(excluding any such non-cash expense and charge to the extent that it
represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period)
of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash expenses and
charges were deducted in computing such Consolidated Net Income; plus
(6) nonrecurring expenses occurring prior to the date of the indenture;
plus
(7) nonrecurring compensation payments occurring, or committed to, on or
prior to the date of the indenture but only to the extent such payments are
disclosed under the subheading "Management" or "Certain Relationships and
Related Transactions" in this prospectus; plus
(8) bad debts charges relating to the bankruptcies of Montgomery Ward &
Co. and Levitz Furniture Inc.; plus
(9) nonrecurring expenses occurring on or prior to December 31, 1999
relating to Simmons' SWIFT and UNITE productivity initiatives and other
strategic management initiatives, in an aggregate amount not to exceed $2.0
million since the date of the indenture; plus
(10) the amortization of the prepaid fees paid to Investcorp
International Inc. prior to the date of the indenture; minus
(11) non-cash items increasing such Consolidated Net Income for such
period, other than items that were accrued in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned
Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded;
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(5) the Net Income (or loss) of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to Simmons or one of its Subsidiaries;
and
(6) nonrecurring payments or charges relating to the Transactions or the
original offering occurring, or committed to, on or prior to the date of
the indenture.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock; less
(3) accumulated deficit; and
(4) all investments as of such date in unconsolidated Subsidiaries and
in Persons that are not Subsidiaries (except, in each case, Permitted
Investments).
All of the foregoing amounts are to be determined in accordance with GAAP.
"Continuing Directors" means as of any date of determination, any member of
the Board of Directors of Simmons who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was designated or nominated for election or elected to such Board of
Directors by any of the Principals or with the approval of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to Simmons, one or more debt
facilities (including, without limitation, the New Senior Credit Agreement) or
commercial paper facilities, in each case with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
Indebtedness under Credit Facilities outstanding on the date on which Notes are
first issued and authenticated under the indenture shall be deemed to have been
incurred on such date in reliance on the exception provided by clause (2) of
the definition of Permitted Debt.
"Currency Agreements" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect Simmons
or any Restricted Subsidiary of Simmons against fluctuations in currency
values.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the New Senior Credit Agreement;
and
(2) any other Senior Debt permitted under the indenture the original
principal amount of which is $10.0 million or more and that has been
designated by Simmons as "Designated Senior Debt".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that
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is 91 days after the date on which the exchange notes mature; provided,
however, that any Capital Stock that would constitute Disqualified Stock
solely because the holders thereof have the right to require Simmons to
repurchase such Capital Stock upon the occurrence of a Change of Control or an
Asset Sale shall not constitute Disqualified Stock if the terms of such
Capital Stock provide that Simmons may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the subheading "--Certain
Covenants--Restricted Payments".
"Domestic Subsidiary" means with respect to Simmons , any Subsidiary of
Simmons that:
(1) was formed under the laws of the United States of America; or
(2) that guarantees or otherwise becomes obligated with respect to any
Indebtedness of Simmons.
"ESOP Stock Sale Agreement" means that certain ESOP Stock Sale and Exchange
Agreement dated as of July 22, 1998 (as amended by Amendment No. 1 thereto,
dated as of September 25, 1998) by and among Holdings, Simmons, Merger Corp.
and State Street Bank & Trust Company, solely in its capacity as trustee of
the ESOP trust, as in effect on the Closing Date.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of Simmons and its Subsidiaries
(other than Indebtedness under the New Senior Credit Agreement) in existence
on the date of the indenture, until such amounts are repaid.
"Existing Notes" means the 10.75% Senior Subordinated Notes due 2006 of
Simmons.
"Fenway" means:
(1) Fenway Partners Capital Fund, L.P., a Delaware limited partnership;
(2) Fenway Partners Capital Fund II, L.P., a Delaware limited
partnership; and
(3) so long as it is controlled and more than 50% owned by one or more
of the entities described in clauses (1) and (2), Simmons Holdings LLC, a
Delaware limited liability company.
"Fenway Agreement" means that certain Advisory Agreement dated as of
October 29, 1998 by and among Fenway Partners, Inc., Simmons and Holdings as
in effect on the date of the indenture.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
revolving credit facilities and letter of credit or bankers' acceptance
financings, and net payments, if any, pursuant to Hedging Obligations, but
excluding the amortization of deferred financing costs); plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) all dividend payments, whether or not in cash, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other
than dividend payments on Equity Interests payable solely in Equity
Interests of Simmons or a Guarantor (other than Disqualified Stock) or to
Simmons or a Restricted Subsidiary of Simmons.
For purposes of the preceding, total interest expense shall be determined
after giving effect to any net payments made or received by Simmons and its
Subsidiaries with respect to Interest Swap Obligations.
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"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the referent
Person or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems, repays, repurchases, defeases or otherwise discharges any Indebtedness
(other than revolving credit borrowings) or issues or redeems preferred stock
subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or
redemption, repayment, repurchase, defeasance or other discharge of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
In addition, unless otherwise specified in a particular provision of the
indenture, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by Simmons or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall
be calculated (including any pro forma expense and cost reductions and
related adjustments to the extent that the same are consistent with
Regulation S-X under the Act, except in the case of clause (15) of
Permitted Debt and except in the case of the covenant described above under
the subheading "Merger, Consolidation, or Sale of Assets") and without
giving effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income; and
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
For purposes of this definition, whenever pro forma effect is to be given to
any acquisition, the amount of Consolidated Cash Flow relating thereto and the
amount of Fixed Charges associated with any Indebtedness incurred in connection
therewith shall be determined in good faith by a responsible financial or
accounting officer of Simmons in a manner that is consistent with this
definition.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each Subsidiary of Simmons that executes a Guarantee in
accordance with the provisions of the indenture, and their respective
successors and assigns except those released in accordance with the terms of
the indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
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(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Holdings" means Simmons Holdings, Inc., a Delaware corporation, and
Simmons' direct parent.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property or any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable;
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"Industrial Revenue Bonds" means:
(1) $9.7 million of 7.0% industrial revenue bonds maturing in 2017 that
Simmons issued to finance the construction of its Janesville, Wisconsin
facility; and
(2) $5.0 million of variable rate industrial revenue bonds maturing in
2016 that Simmons issued to finance the construction of its Shawnee, Kansas
facility.
"Interest Swap Obligations" means the obligations of any Person, pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Persons calculated
by applying a fixed or a floating rate of interest on the same notional amount.
"Investcorp" means INVESTCORP S.A.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, relocation and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. If Simmons or any Subsidiary of Simmons sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of Simmons such that,
after giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of Simmons,
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Simmons shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the subheading "--
Restricted Payments".
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Management Investors" means the management officers and employees of
Simmons and its Subsidiaries identified as management investors in the
Recapitalization Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with:
(a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions, and without regard to the
$1.0 million size limitation set forth in the definition of "Asset
Sale") or
(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss); and
(3) non-cash compensation charges, including, any such non-cash charges
arising from existing stock options resulting from any merger,
recapitalization or other acquisition or disposition.
"Net Proceeds" means the aggregate cash proceeds received by Simmons or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale) and any cash payments received
by way of deferred payments as and when received, net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Senior Debt under a Credit Facility) secured by a Lien on the asset
or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"New Senior Credit Agreement" means that certain senior secured credit
agreement, dated October 29, 1998, consisting of a $270.0 senior secured bank
financing including:
(1) an $80.0 million six-year revolver,
(2) a $70.0 million six-year term loan A,
(3) a $70.0 million seven-year term loan B and
(4) a $50.0 million eight-year term loan C;
entered into by Simmons, Goldman Sachs Credit Partners L.P., as joint lead
arranger, syndication agent and lender, and Warburg Dillon Read LLC, as joint
lead arranger, UBS AG, Stamford Branch, as administrative agent and lender, and
the other institutions party thereto from time to time, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case, as amended, modified, supplemented,
renewed, refunded, replaced, extended, restructured or refinanced from time to
time.
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"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Simmons nor any of its Restricted Subsidiaries:
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable (as a guarantor or otherwise),
or
(c) constitutes the lender; and
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of Simmons or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Simmons or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business (including stock or assets) that
derives a majority of its revenues from the manufacture, distribution and sale
of mattresses, foundation and other bedding products and activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which Simmons and its Restricted
Subsidiaries are engaged on the date of the indenture.
"Permitted Debt" has the meaning assigned to such term in the second
paragraph of the covenant described above under the subheading "Certain
Covenants--Incurrence of indebtedness and Issuance of Preferred Stock".
"Permitted Group" means any group of investors that is deemed to be a
"person" (as such term is used in Section 13(d)(3) of the Exchange Act) by
virtue of the Stockholders Agreements, as the same may be amended, modified or
supplemented from time to time, provided that no single Person (together with
its Affiliates), other than the Principals and their Related Parties, is the
Beneficial Owner (with such beneficial ownership determined without regard to
the Stockholders Agreements, as the same may be amended, modified or
supplemented from time to time), directly or indirectly, of
(a) more than 40% of the Voting Stock of Simmons that is
"beneficially owned" (as defined above) by such group of investors and
(b) more of the Voting Stock of Simmons than is at the time
"beneficially owned" (as defined above) by the Principals and their
Related Parties in the aggregate (Voting Stock, in each case, measured
by voting power rather than number of shares).
"Permitted Investments" means:
(1) any Investment in Simmons or in a Restricted Subsidiary of Simmons
that is a Guarantor;
(2) any Investment in Cash Equivalents;
(3) any Investment by Simmons or any Restricted Subsidiary of Simmons
that is a Guarantor in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Simmons; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Simmons or a Restricted Subsidiary of Simmons that is
a Guarantor;
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(4) any Investment in a Restricted Subsidiary that is not a Guarantor;
provided that the aggregate fair market value of such Investment, when
taken together with the fair market value of all other Investments made
pursuant to this clause (4) that are at that time outstanding, shall not
exceed 10% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value);
(5) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the subheading "--
Repurchase at the Option of Holders--Asset Sales";
(6) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Simmons;
(7) any Investment by Simmons or a Subsidiary of Simmons in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
provided that any Investment in a Securitization Entity is in the form of a
Purchase Money Note or an equity interest;
(8) any Investment existing on the date of the indenture;
(9) loans and advances to employees and officers in the ordinary course
of business not to exceed $5.0 million at any one time outstanding;
(10) Currency Agreements and Interest Swap Obligations;
(11) accounts receivable incurred in the ordinary course of business,
(12) Investments in securities of trade creditors or customers received
pursuant to a plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditor or customer;
(13) guarantees otherwise permitted under the indenture;
(14) Investments the payment of which consists exclusively of Equity
Interests other than Disqualified Stock; and
(15) additional Investments having an aggregate fair market value, taken
together with all other Investments made pursuant to this clause (15) that
are at that time outstanding, not to exceed $10.0 million at the time of
such Investment (with the fair market value of each Investment being
measured at the time made and without giving effect to subsequent changes
in value).
"Permitted Junior Securities" means:
(1) Equity Interests in Simmons, Holdings or any Guarantor; or
(2) debt securities that are subordinated to all Senior Debt (and any
debt securities issued in exchange for Senior Debt) to substantially the
same extent as, or to a greater extent than, the Notes are subordinated to
Senior Debt pursuant to the indenture.
"Permitted Liens" means:
(1) Liens securing Senior Debt that was permitted by the terms of the
indenture to be incurred;
(2) Liens in favor of Simmons;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Simmons or any Subsidiary of
Simmons; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Simmons;
(4) Liens on property existing at the time of acquisition thereof by
Simmons or any Subsidiary of Simmons, provided that such Liens were in
existence prior to the contemplation of such acquisition;
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(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Senior Debt of Simmons that was permitted to be
incurred by the indenture;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) Liens incurred in the ordinary course of business of Simmons or any
Subsidiary of Simmons with respect to obligations that do not exceed $5.0
million at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by Simmons or such Subsidiary;
(10) Liens on assets of Unrestricted Subsidiaries that secure Non-
Recourse Debt of Unrestricted Subsidiaries;
(11) Liens securing the Industrial Revenue Bonds;
(12) Liens on goods (and the proceeds thereof) and documents of title
and the property covered thereby securing Indebtedness in respect of
commercial letters of credit; and
(13) leases or subleases to third parties.
"Permitted Refinancing Indebtedness" means any Indebtedness or Disqualified
Stock of Simmons or any of its Restricted Subsidiaries issued in exchange for,
or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness or Disqualified Stock of Simmons or any of
its Restricted Subsidiaries (other than intercompany Indebtedness); provided
that:
(1) the principal amount (or accreted value or liquidation value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value or liquidation value, if
applicable), plus accrued interest on, the Indebtedness or Disqualified
Stock so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses, costs or premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness or Disqualified Stock being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment to the Notes, such Permitted Refinancing Indebtedness has
a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness or Disqualified Stock being extended,
refinanced, renewed, replaced, defeased or refunded;
(4) such Indebtedness or Disqualified Stock is incurred or issued either
by Simmons or by the Restricted Subsidiary who is the obligor on the
Indebtedness (or issuer of the Disqualified Stock) being extended,
refinanced, renewed, replaced, defeased or refunded; and
(5) if the Indebtedness or Disqualified Stock being extended,
refinanced, renewed, replaced, defeased or refunded provided for payment or
accrual of interest or dividends on a non-cash basis, then such
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Indebtedness or Disqualified Stock contains provisions allowing for the
payment or accrual of interest and dividends on comparable terms.
"Principals" means (a) Fenway and (b) any other Person that owns more than
10% of the Equity Interests of Holdings as of the date of the indenture.
"Public Equity Offering" means any underwritten public offering of Qualified
Capital Stock of Holdings or Simmons; provided that, in the event of any such
public equity offering by Holdings, Holdings contributes to the common equity
capital of Simmons (other than as Disqualified Stock) the portion of the net
cash proceeds of such public equity offering necessary to pay the aggregate
redemption price (plus accrued interest to the redemption date) of the exchange
notes to be redeemed pursuant to the provisions of the second paragraph under
the subheading "Optional Redemption" with respect to the exchange notes.
A "Public Market" shall be deemed to exist if:
(1) a Public Equity Offering has been consummated; and
(2) at least 35% of the total issued and outstanding Common Stock of
Simmons or Holdings (as applicable) immediately prior to the consummation
of such Public Equity Offering has been distributed by means of an
effective registration statement under the Securities Act.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which Simmons or any of its Restricted Subsidiaries
may sell, convey or otherwise transfer to (a) a Securitization Entity (in the
case of a transfer by Simmons or any of its Restricted Subsidiaries) and (b)
any other Person (in case of a transfer by a Securitization Entity), or may
grant a security interest in, any accounts receivable or equipment (whether now
existing or arising or acquired in the future) of Simmons or any of its
Restricted Subsidiaries, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable and equipment, all
contracts and contract rights and all Guarantees or other obligations in
respect such accounts receivable and equipment, proceeds of such accounts
receivable and equipment and other assets (including contract rights) which are
customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable and equipment.
"Recapitalization Agreement" means that certain Agreement and Plan of Merger
dated as of July 16, 1998, by and among Holdings, Simmons and Merger Corp., as
amended by Amendment No. 1 dated as of September 22, 1998, and as amended by
Amendment No. 2 dated as of October 26, 1998.
"Related Party" means:
(1) any controlling stockholder of any of the Principals, any entity
that is more than 50% owned by any one or more Principals or their Related
Parties; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding a 51% or more controlling interest of which consist of the
Principals and/or such other Persons referred to in the immediately
preceding clause (1); or
(3) any Person who, directly or indirectly, controls through a
management agreement or a general partner or is under common control with
any of the Principals; or
(4) any trust, partnership, corporation or other entity, the
benefactors, stockholders, partners or owners of which consist of Persons
referred to in clause (3).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Securitization Entity" means a Wholly Owned Subsidiary of Simmons (or
another Person in which Simmons or any Subsidiary of Simmons makes an
Investment and to which Simmons or any Subsidiary of Simmons transfers
accounts receivable or equipment and related assets) that engages in no
activities other than in connection with the financing of accounts receivable
or equipment and that is designated by the Board of Directors of Simmons (as
provided below) as a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations (contingent
or otherwise) of which
(a) is guaranteed by Simmons or any Restricted Subsidiary of Simmons
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) pursuant to Standard Securitization
Undertakings,
(b) is recourse to or obligates Simmons or any Restricted Subsidiary
of Simmons in any way other than pursuant to Standard Securitization
Undertakings or
(c) subjects any property or asset of Simmons or any Restricted
Subsidiary of Simmons, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings,
(2) with which neither Simmons nor any Restricted Subsidiary of Simmons
has any material contract, agreement, arrangement or understanding other
than on terms no less favorable to Simmons or such Restricted Subsidiary
than those that might be obtained at the time from Persons that are not
Affiliates of Simmons, other than fees payable in the ordinary course of
business in connection with servicing receivables of such entity, and
(3) to which neither Simmons nor any Restricted Subsidiary of Simmons
has any obligation to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating
results.
Any such designation by the Board of Directors of Simmons shall be evidenced
to the Trustee by filing with the Trustee a resolution of the Board of
Directors of Simmons giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"Senior Credit Documents" means the New Senior Credit Agreement, the
guaranties thereunder, any pledge and security agreement, any mortgage and
each other document executed in connection with the issuance of the bank
financing thereunder as each such document may be amended, restated,
supplemented or otherwise modified from time to time.
"Senior Debt" means:
(1) all Indebtedness of Simmons or any Guarantor outstanding on the date
of the indenture under Credit Facilities or thereafter incurred under
Credit Facilities, and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of Simmons or any Guarantor permitted to be
incurred under the terms of the indenture, unless the instrument governing
such Indebtedness expressly provides that it is on a parity with or
subordinated in right of payment to the notes or any Guarantee thereof; and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any Indebtedness represented by Capital Stock;
(2) any liability for federal, state, local or other taxes owed or owing
by Simmons;
(3) any Indebtedness of Simmons to any of its Subsidiaries or other
Affiliates;
(4) any trade payables including any Guarantees thereof or instruments
evidencing such liabilities;
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(5) any Indebtedness that is incurred in violation of the indenture;
(6) the Existing Notes; or
(7) the Industrial Revenue Bonds.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Simmons ESOP" means the Simmons Company Employee Stock Ownership Plan, as
form time to time amended, supplemented or otherwise modified, and a trust
forming a part thereof and its successors.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Simmons or any Subsidiary of Simmons
that are reasonably customary in an accounts receivable or equipment
transactions.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Stockholders Agreements" means those certain Stockholders Agreements
(1) by and among Holdings, Fenway and ESOP, Investcorp and the other
Persons listed therein and Simmons and
(2) by and among Holdings, the Management Investors and the other
Persons listed therein, each as in effect on the date of the indenture.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership
(a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Transaction Documents" means the Senior Credit Documents, the Common Equity
Documents, the Stockholders Agreements, the ESOP Stock Sale Agreement, the
Recapitalization Agreement, the Fenway Agreement and all documents relating to
any of the foregoing.
"Total Assets" means the consolidated assets of Simmons and its Restricted
Subsidiaries calculated in accordance with GAAP.
"Unrestricted Subsidiary" means any Subsidiary of Simmons that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Simmons or any Restricted Subsidiary of Simmons unless
the terms of any such agreement, contract, arrangement or
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understanding are no less favorable to Simmons or such Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Simmons;
(3) is a Person with respect to which neither Simmons nor any of its
Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Simmons or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Simmons or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director
or executive officer of Simmons or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Simmons as an Unrestricted Subsidiary by
the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the subheading "Covenants--Designation of Restricted and
Unrestricted Subsidiaries". If, at any time, any Unrestricted Subsidiary would
fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of Simmons as of such date (and, if such Indebtedness is
not permitted to be incurred as of such date under the covenant described under
the subheading "Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock", Simmons shall be in default of such covenant). The Board of
Directors of Simmons may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of Simmons of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if
(1) such Indebtedness is permitted under the covenant described under
the subheading "Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock", calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period,
(2) no Default or Event of Default would be in existence following such
designation and
(3) if any such Subsidiary is a Domestic Subsidiary,
it shall execute a supplemental indenture to become a Guarantor with respect to
the Notes.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing;
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by
(2) the then outstanding principal amount of such Indebtedness.
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"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
We originally sold the notes to Goldman Sachs, Warburg Dillon Read, Fleet
Securities and U.S. Bancorp Libra pursuant to the Purchase Agreement dated
March 10, 1999. The initial purchasers subsequently resold the notes to
qualified institutional buyers in reliance on Rule 144A under the Securities
Act and to a limited number of persons outside the United States under
Regulation S. As a condition to the purchase agreement, we entered into a
registration rights agreement with the initial purchasers in which we agreed
to:
(1) file a registration statement registering the exchange notes with
the Commission within 105 days after the original issuance of the notes;
(2) use our best efforts to have the registration statement relating to
the exchange notes declared effective by the Commission within 165 days
after the original issuance of the notes;
(3) unless applicable law or Commission policy would not permit the
exchange offer, commence the exchange offer and use our best efforts to
issue exchange notes in exchange for all notes tendered prior to the
expiration date and in no event later than 30 business days after the date
on which the Commission declares the registration statement relating to the
exchange notes effective; and
(4) if obligated to file a shelf registration statement, use our best
efforts to file the shelf registration statement with the Commission within
45 days after such filing obligation arises, to cause the shelf
registration statement to be declared effective by the Commission within 90
days after such obligation arises and to use our best efforts to keep
effective the shelf registration statement for at least two years after the
original issuance of the notes or such shorter period that will terminate
when all securities covered by the shelf registration statement have been
sold pursuant to the shelf registration statement.
We have agreed to keep the exchange offer open for not less than 20 business
days after the date on which the Commission declares the registration statement
relating to the exchange notes effective, or longer if required by applicable
law. The registration rights agreement also requires us to include in the
prospectus for the exchange offer specific information necessary to allow
broker-dealers who hold notes, other than notes purchased directly from us or
an affiliate of us, to exchange such notes pursuant to the exchange offer and
to satisfy the prospectus delivery requirements in connection with resales of
the exchange notes received by such broker-dealers in the exchange offer.
This prospectus covers the offer and sale of the exchange notes pursuant to
the exchange offer and the resale of exchange notes received in the exchange
offer by any broker-dealer who held notes, other than notes purchased directly
from us or one of our affiliates.
For each note surrendered to us pursuant to the exchange offer, the holder
of such note will receive an exchange note having a principal amount equal to
that of the surrendered note. Interest on each exchange note will accrue from
the date of issuance of such exchange note. The holders of notes that are
accepted for exchange will receive, in cash, accrued interest on such notes to,
but not including, the issuance date of the exchange notes. We will pay such
interest with the first interest payment on the exchange notes. Interest on the
notes accepted for exchange will cease to accrue upon issuance of the exchange
notes.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, we believe the exchange notes would
in general be freely tradeable after the exchange offer without further
registration under the Securities Act. If our belief is inaccurate, holders who
transfer exchange notes in violation of the prospectus delivery provisions of
the Securities Act and without an exemption from registration may incur
liability under the Securities Act. We do not assume or indemnify holders
against such liability.
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Any purchaser of the notes who is either an "affiliate" of us, a broker-
dealer who purchased notes directly from us or an affiliate of us for resale,
or who intends to participate in the exchange offer for the purpose of
distributing the exchange notes:
(1) will not be able to rely on the interpretation of the staff of the
Commission;
(2) will not be able to tender its notes in the exchange offer; and
(3) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer
of the notes, unless such sale or transfer is made pursuant to an exemption
from such requirements.
We have agreed to file with the Commission a shelf registration statement to
cover resales of the notes by holders who satisfy specific conditions relating
to the provision of information in connection with the shelf registration
statement if:
(1) we are not required to file the registration statement for the
exchange offer or permitted to consummate the exchange offer because we are
not permitted by applicable law or Commission policy; or
(2) any holder of Transfer Restricted Securities notifies us prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from participating
in such offer;
(b) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the registration statement relating to the
exchange offer is not appropriate or available for such resales; or
(c) that it is a broker-dealer that purchased notes directly from us
or an affiliate of us for resale.
For purposes of the foregoing and below, "Transfer Restricted Securities"
means each note until the earliest to occur of:
(1) the date on which a person other than a broker-dealer for an
exchange note has exchanged such note;
(2) following the exchange by a broker-dealer in the exchange offer of a
note for an exchange note, the date on which such exchange note is sold to
a purchaser who receives from such broker-dealer before the date of such
sale a copy of the prospectus contained in the registration statement
relating to the exchange offer;
(3) the date on which such note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement; or
(4) the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act.
We will pay liquidated damages to each holder of notes if:
(1) we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing;
(2) any of such registration statements is not declared effective by the
Commission on or before the date specified for such effectiveness (the
"Effectiveness Deadline");
(3) we fail to consummate the exchange offer within 30 business days
after the registration statement relating to the exchange offer is first
declared effective by the Commission; or
(4) the shelf registration statement or the registration statement
relating to the exchange offer is declared effective but thereafter ceases
to be effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the registration rights
agreement without being
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succeeded immediately by a post-effective amendment to such registration
statement that cures such failure and is itself declared effective by the
Commission (each such event referred to in clauses (1) through (4) above a
"Registration Default").
The amount of liquidated damages will be $.05 per week per $1,000 in
principal amount of Transfer Restricted Securities held by each holder, with
respect to the first 90-day period immediately following the occurrence of the
first Registration Default. The amount of liquidated damages will increase by
$.05 per week per $1,000 principal amount of Transfer Restricted Securities
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of liquidated damages for all
Registration Defaults of $.50 per week per $1,000 principal amount of Transfer
Restricted Securities provided that we shall in no event be required to pay
liquidated damages for more than one Registration Default on the notes at any
time. We will pay all accrued liquidated damages on each interest payment date
in the manner provided for the payment of interest in the indenture. Following
the cure of all Registration Defaults, the accrual of liquidated damages will
cease.
As contemplated by the aforementioned no-action letters and the registration
rights agreement, each holder tendering notes in the exchange offer is required
to represent to us in the letter of transmittal, that, among things:
(1) the person receiving the exchange notes pursuant to the exchange
offer, whether or not such person is the holder, is receiving them in the
ordinary course of business;
(2) neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
exchange notes and that each such holder that is not a broker-dealer is not
engaged in, and does not intend to engage in, a distribution of exchange
notes;
(3) neither the holder nor any such other person is an "affiliate" of us
within the meaning of Rule 405 under the Securities Act;
(4) the holder acknowledges and agrees that:
(a) any person participating in the exchange offer for the purpose
of distributing the exchange notes must comply with the registration
and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction with respect to the
exchange notes acquired by such person and cannot rely on the position
of the staff of the Commission set forth in no-action letters that are
discussed above and under the heading "--Purpose and Effect of the
exchange offer," and
(b) any broker-dealer that receives exchange notes for its own
account in exchange for notes pursuant to the exchange offer must
deliver a prospectus in connection with any resale of such exchange
notes, but by so acknowledging, the holder shall not be deemed to admit
that, by delivering a prospectus, it is an "underwriter" within the
meaning of the Securities Act; and
(5) the holder understands that a secondary resale transaction described
in clause (4)(a) above should be covered by an effective registration
statement containing the selling security holder information required by
Item 507 or 508 of Regulation S-K of the Commission.
Although a broker-dealer may be an "underwriter" within the meaning of the
Securities Act, the letter of transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of exchange notes received in exchange
for notes.
The Commission has taken the position that participating broker-dealers may
fulfill their prospectus delivery requirements with respect to the exchange
notes, other than a resale of an unsold allotment from the original sale of the
notes, with a prospectus contained in the registration statement relating to
the exchange offer. Under the registration rights agreement, we are required to
allow broker-dealers to use the prospectus contained in the registration
statement relating to the exchange offer in connection with the resale of such
exchange notes.
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We will, in the event of the filing of a shelf registration statement,
provide to each holder of notes eligible to participate in such shelf
registration statement copies of the prospectus which is a part of the shelf
registration statement, notify each such holder when the shelf registration
statement for the notes has become effective and take other actions as are
required to permit resales of the notes. A holder of notes that sells such
notes pursuant to the shelf registration statement generally will be required
to be named as a selling securityholder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the registration rights agreement which are
applicable to such a holder, including indemnification obligations. In
addition, each such holder will be required to deliver information to be used
in connection with the shelf registration statement and to provide comments on
the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the
shelf registration statement and to benefit from the provisions regarding
liquidated damages.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and the accompanying letter of transmittal, we will accept all notes validly
tendered prior to 5:00 p.m., New York City time, on the expiration date. We
will issue $1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding notes accepted in the exchange offer.
Holders may tender some or all of their notes pursuant to the exchange offer in
integral multiples of $1,000.
The form and terms of the exchange notes are identical in all material
respects to the form and terms of the notes except for the following:
(1) the exchange notes bear a Series B designation and different CUSIP
number from the notes;
(2) the exchange notes have been registered under the Securities Act
and, therefore, will not bear legends restricting their transfer; and
(3) the holders of the exchange notes will not be entitled to rights
under the registration rights agreement, including the provisions providing
for liquidated damages in circumstances relating to the timing of the
exchange offer, all of which rights will terminate when the exchange offer
is terminated.
The exchange notes will evidence the same debt as the notes and will be
entitled to the benefits of the indenture. As of the date of this prospectus,
$150.0 million aggregate principal amount of the notes is outstanding. Solely
for reasons of administration and no other reason, we have fixed the close of
business on , 1999 as the record date for the exchange offer for purposes
of determining the persons to whom this prospectus and the letter of
transmittal will be mailed initially. Only a registered holder of notes, or
such holder's legal representative or attorney-in-fact, as reflected on the
records of the Trustee under the indenture may participate in the exchange
offer. There will be no fixed record date, however, for determining registered
holders of the notes entitled to participate in the exchange offer.
The holders of notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the indenture. We intend to conduct
the exchange offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission.
We shall be deemed to have accepted validly tendered notes when, as and if
the holder of such note has given oral or written notice thereof to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purpose of receiving the exchange notes from us.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events set forth in this prospectus or
otherwise, the certificates for any such unaccepted notes will be returned,
without expense, to the tendering holder as promptly as practicable after the
expiration date.
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Those holders who tender notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of notes. We will
pay all charges and expenses, other than applicable taxes, in connection with
the exchange offer. See "--Fees and Expenses."
Expiration Dates; Extensions; Amendments
The "expiration date" shall be 5:00 p.m., New York City time, on ,
1999 unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date shall be the latest date to which the exchange offer
is extended. Notwithstanding the foregoing, we will not extend the expiration
date beyond , 1999.
We have no current plans to extend the exchange offer. In order to extend
the expiration date, we will notify the exchange agent of any extension by oral
or written notice and will make a public announcement of such extension, in
each case prior to 9:00 a.m., New York City time, no later than the next
business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion, to
(1) delay accepting any notes;
(2) extend the exchange offer; or
(3) terminate the exchange offer
if any of the conditions set forth below under "--Conditions of the Exchange
Offer" shall not have been satisfied, in each case by giving oral or written
notice of such delay, extension or termination to the exchange agent, and to
amend the terms of the exchange offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement of such event. If we amend the exchange
offer in a manner determined by us to constitute a material change, we will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders of the notes and the exchange offer
will be extended for a period of five to ten business days, as required by law,
depending upon the significance of the amendment and the manner of disclosure
to the registered holders, assuming the exchange offer would otherwise expire
during such five to ten business day period.
Without limiting the manner in which we may choose to make public
announcement of any delay, extension, termination or amendment of the exchange
offer, we shall not have an obligation to publish, advertise, or otherwise
communicate any such public announcement other than by making a timely release
to the Dow Jones News Service.
Interest on the Exchange Notes
The exchange notes will bear interest from their date of issuance. Interest
is payable semiannually on March 15 and September 15 of each year commencing on
September 15, 1999, at the rate of 10 1/4% per annum. The holders of notes that
are accepted for exchange will receive, in cash, accrued interest on such notes
to, but not including, the issuance date of the exchange notes. Such interest
will be paid with the first interest payment on the exchange notes.
Consequently, holders who exchange their notes for exchange notes will receive
the same interest payment on September 15, 1999 which is the first interest
payment date with respect to the notes that they would have received had they
not accepted the exchange offer. Interest on the notes accepted for exchange
will cease to accrue upon issuance of the exchange notes.
Procedures for Tendering
Only a registered holder of notes may tender such notes in the exchange
offer. To effectively tender in the exchange offer, a holder must complete,
sign and date a copy or facsimile of the letter of transmittal, have the
signatures thereon guaranteed if required by the letter of transmittal, and
mail or otherwise deliver such letter of
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transmittal or such facsimile, together with the notes and any other required
documents, to the exchange agent at the address set forth below under "exchange
agent" for receipt prior to 5:00 p.m., New York City time, on the expiration
date. Delivery of the notes also may be made by book-entry transfer in
accordance with the procedures described below. If you are effecting delivery
by book-entry transfer,
(1) confirmation of such book-entry transfer must be received by the
exchange agent prior to the expiration date; and
(2) you must transmit to the exchange agent on or prior to the
expiration date a computer-generated message transmitted by means of the
Automated Tender Offer Program System of the Depository Trust Company in
which you acknowledge and agree to be bound by the terms of the letter of
transmittal and which, when received by the exchange agent, forms a part of
the confirmation of book-entry transfer.
By executing the letter of transmittal or effecting delivery by book-entry
transfer, each holder is making to us those representations set forth under the
heading "--Resale of the Exchange Notes."
The tender by a holder of notes will constitute an agreement between such
holder and us in accordance with the terms and subject to the conditions set
forth herein and in the letter of transmittal.
The method of delivery of the notes and the letter of transmittal and all
other required documents to the exchange agent is at the election and sole risk
of the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure delivery to the exchange agent before the
expiration date. No letters of transmittal or notes should be sent to us.
Holders may request that their respective brokers, dealers, commercial banks,
trust companies or nominees effect the above transactions for such holders.
Only a registered holder of notes may tender such notes in connection with
the exchange offer. The term "holder" with respect to the exchange offer means
any person in whose name notes are registered on our books or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose notes are held of record by DTC who desires to deliver such
notes by book-entry transfer at DTC.
If your notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender, you should
promptly contact the person in whose name the notes are registered and instruct
such registered holder to tender on your behalf. If a beneficial owner wishes
to tender on his or her own behalf, the holder must, prior to completing and
executing the letter of transmittal and delivering the notes, either make
appropriate arrangements to register ownership of the notes in his or her name
or to obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (defined below) unless
the notes tendered are tendered:
(1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(2) for the account of an Eligible Institution.
If signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed, such guarantee must be by a participant in a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the letter of transmittal is signed by a person other than the registered
holder of any notes listed therein, such notes must be endorsed or accompanied
by a properly completed bond powers, signed by such registered holder as such
registered holder's name appears on such notes with the signature thereon
guaranteed by an Eligible Institution.
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If the letter of transmittal or any notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and submit with the letter of
transmittal evidence satisfactory to so act.
We understand that the exchange agent will make a request, promptly after
the date of this prospectus, to establish accounts with respect to the notes at
the book-entry transfer facility of DTC for the purpose of facilitating this
exchange offer, and subject to the establishment of these accounts, any
financial institution that is a participant in the book-entry transfer facility
system may make book-entry delivery of notes by causing the transfer of such
notes into the exchange agent's account with respect to the notes in accordance
with DTC's procedures for such transfer. Although delivery of the notes may be
effected through book-entry transfer into the exchange agent's account at the
book-entry transfer facility, unless the holder complies with the procedures
described in the following paragraph or the guaranteed delivery procedures
described below, an appropriate letter of transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
exchange agent at its address set forth below before the expiration date. The
delivery of documents to the book-entry transfer facility does not constitute
delivery to the exchange agent.
The exchange agent and DTC have confirmed that the exchange offer is
eligible for the Automated Tender Offer Program ("ATOP") of DTC. Accordingly,
DTC participants may electronically transmit their acceptance of the exchange
offer by causing DTC to transfer notes to the exchange agent in accordance with
the procedures for transfer established under ATOP. DTC will then send an
Agent's Message to the exchange agent. The term "Agent's Message" means a
message transmitted by DTC, which when received by the exchange agent forms
part of the confirmation of a book-entry transfer, and which states that DTC
has received an express acknowledgment from the participant in DTC tendering
notes which are the subject of such book-entry confirmation that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and that we may enforce such agreement against such participant. In
the case of an Agent's Message relating to guaranteed delivery, the term means
a message transmitted by DTC and received by the exchange agent which states
that DTC has received an express acknowledgment from the participant in DTC
tendering notes that such participant has received and agrees to be bound by
the Notice of Guaranteed Delivery.
All questions as to the validity, form, eligibility and time of receipt,
acceptance and withdrawal of the tendered notes will be determined by us in our
sole discretion, which determinations will be final and binding. We reserve the
absolute right to reject any and all notes not validly tendered or any notes
the acceptance of which would, in the opinion of our counsel, be unlawful. We
also reserve the absolute right to waive any defects, irregularities or
conditions of tender as to particular notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of notes must be cured
within such time as we shall determine. Although we intend to notify holders of
defects or irregularities with respect to the tender of notes, neither we, the
exchange agent nor any other person shall incur any liability for failure to
give such notification. Tenders of notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any notes
received by the exchange agent that are not validly tendered and as to which
the defects or irregularities have not been cured or waived, or if notes are
submitted in a principal amount greater than the principal amount of notes
being tendered by such tendering holder, such unaccepted or non-exchanged notes
will be returned by the exchange agent to the tendering holders (or, in the
case of notes tendered by book-entry transfer into the exchange agent's account
at the book-entry transfer facility pursuant to the book-entry transfer
procedures described above, such unaccepted or non-exchanged notes will be
credited to an account maintained with such book-entry transfer facility),
unless otherwise provided in the letter of transmittal designated for such
notes, as soon as practicable following the expiration date.
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Guaranteed Delivery Procedures
Those holders who wish to tender their notes and
(1) whose notes are not immediately available; or
(2) who cannot deliver their notes, the letter of transmittal or any
other required documents to the exchange agent before the expiration date;
or
(3) who cannot complete the procedures for book-entry transfer before
the expiration date;
may effect a tender if:
(1) the tender is made through all Eligible Institution;
(2) before the expiration date, the exchange agent receives by facsimile
transmission, mail or hand delivery from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery setting
forth the name and address of the holder, the certificate number or numbers
of such notes and the principal amount of notes tendered, stating that the
tender is being made thereby, and guaranteeing that, within five business
days after the expiration date, either:
(a) a copy or facsimile of the letter of transmittal, or facsimile
thereof, together with the certificate(s) representing the notes and any
other documents required by the letter of transmittal, will be deposited
by the Eligible Institution with the exchange agent, or
(b) that a confirmation of book-entry transfer of such notes into the
exchange agent's account at DTC,
will be delivered to the exchange agent; and
(3) either:
(a) a copy or facsimile of such properly completed and executed
letter of transmittal together with the certificate(s) representing all
tendered notes in proper form for transfer and all other documents
required by the letter of transmittal, or
(b) if applicable, confirmation of a book-entry transfer into the
exchange agent's account at DTC, are actually received by the exchange
agent within five business days after the expiration date.
Upon request to the exchange agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the expiration date.
To validly withdraw a tender of notes in the exchange offer, the exchange
agent must receive a telegram, telex, letter or facsimile transmission notice
of withdrawal at its address set forth herein prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn (the "Depositor");
(2) identify the notes to be withdrawn, including the certificate number
or numbers and the aggregate principal amount of such notes or, in the case
of notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited;
(3) be signed by the holder in the same manner as the original signature
on the letter of transmittal by which such notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfers sufficient to permit the Trustee with respect to the notes to
register the transfer of such notes into the name of the person withdrawing
the tender; and
(4) specify the name in which any such notes are to be registered, if
different from that of the Depositor.
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All questions as to the validity, form and eligibility, including time of
receipt, of such notices will be determined by us, and our determination shall
be final and binding on all parties. Any notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no
exchange notes will be issued in exchange for withdrawn notes unless those
notes so withdrawn are validly retendered. Any notes which have been tendered
but which are not accepted for exchange because of the rejection of the tender
due to uncured defects or the prior termination of the exchange offer, or
which have been validly withdrawn, will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the exchange offer. Properly withdrawn notes may
be retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the expiration date.
Conditions of the Exchange Offer
The offer is subject to the condition that the exchange offer, or the
making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the Commission. If there has been a
change in policy of the Commission such that in the reasonable opinion of
counsel to us there is a substantial question whether the exchange offer is
permitted by applicable federal law, we have agreed to seek a no-action letter
or other favorable decision from the Commission allowing us to consummate the
exchange offer.
If we determine that the exchange offer is not permitted by applicable
federal law, it may terminate the exchange offer. In connection with such
termination we may:
(1) refuse to accept any notes and return any notes that have been
tendered by the holders thereof;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration date, subject to the rights of such holders of tendered notes to
withdraw their tendered notes; or
(3) waive such termination event with respect to the exchange offer and
accept all properly tendered notes that have not been properly withdrawn.
If such waiver constitutes a material change in the exchange offer, we will
disclose such change by means of a supplement to this prospectus that will be
distributed to each registered holder of notes, and we will extend the
exchange offer for a period of five to ten business days, depending upon the
significance of the waiver, if the exchange offer would otherwise expire
during such period.
Exchange Agent
SunTrust Bank, Atlanta, the Trustee under the indenture, has been appointed
as exchange agent for the exchange offer. Questions and requests for
assistance, requests for additional copies of this prospectus or the letter of
transmittal and requests for the Notice of Guaranteed Delivery should be
directed to the exchange agent addressed as follows:
By Registered or Certified Mail or Hand Delivery:
SunTrust Bank, Atlanta
25 Park Place
24th Floor
Atlanta, GA 30303-2900
Attention: Olga Warren
Facsimile Transmission: (404) 588-7335
Confirm by Telephone: (404) 588-7067
Any requests or deliveries to all address or facsimile number other than as
set forth above will not constitute a valid delivery.
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<PAGE>
Fees and Expenses
The expenses of soliciting tenders will be borne by us. The principal
solicitation for lenders is being made by mail. Additional solicitations,
however, may be made by our officers and regular employees and our affiliates
in person, by telegraph or telephone.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We will pay the exchange agent,
however, reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with the
exchange offer.
We will pay the cash expenses incurred in connection with the exchange
offer. Such expenses include fees and expenses of the exchange agent and the
Trustee, accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of the
notes pursuant to the exchange offer. If, however, a transfer tax is imposed
for any reason other than the exchange of the notes pursuant to the exchange
offer, then the amount of any such transfer taxes, whether imposed on the
registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the notes,
which is face value, as reflected in our accounting records on the date of
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes. The costs of the exchange offer will be amortized over the term of
the exchange notes.
Consequences of Failure to Exchange
The notes that are not exchanged for exchange notes pursuant to the exchange
offer will remain transfer restricted securities. Accordingly, such notes may
be resold only as follows:
(1) to us, upon redemption thereof or otherwise;
(2) (a) so long as the notes are eligible for resale pursuant to Rule
144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule
144A,
(b) in accordance with Rule 144 under the Securities Act,
(c) to an institutional accredited investor in a transaction exempt
from the registration requirements of the Securities Act, or
(d) pursuant to another exemption from the registration requirements
of the Securities Act and based upon an opinion of counsel reasonably
acceptable to us;
(3) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 903 or Rule 904 under the Securities Act;
or
(4) pursuant to an effective registration statement under the Securities
Act.
Persons who acquire the exchange notes are responsible for compliance with
the state securities or blue sky laws regarding resales. We assume no
responsibility for compliance with these requirements.
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<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Scope of Discussion
This general discussion of some United States federal income and estate tax
consequences applies to you if you acquired notes at original issue for cash
and you exchange those notes for exchange notes in the exchange offer. This
discussion only applies to you if you hold the exchange notes as a "capital
asset," generally, for investment, under Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). This summary, however, does not
consider state, local or foreign tax laws. In addition, it does not include
all of the rules which may affect the United States tax treatment of your
investment in the exchange notes. For example, special rules not discussed
here may apply to you if you are:
. a broker-dealer, a dealer in securities or a financial institution;
. an S corporation;
. an insurance company;
. a tax-exempt organization;
. subject to the alternative minimum tax provisions of the Internal Revenue
Code;
. holding the exchange notes as part of a hedge, straddle or other risk
reduction or constructive sale transaction; or
. a nonresident alien or foreign corporation subject to net-basis United
States federal income tax on income or gain derived from an exchange note
because such income or gain is effectively connected with the conduct of
a United States trade or business.
This discussion only represents our best attempt to describe some federal
income tax consequences that may apply to you based on current United States
federal tax law. This discussion may in the end inaccurately describe the
federal income tax consequences which are applicable to you because the law
may change, possibly retroactively, and because the Internal Revenue Service
("IRS") or any court may disagree with this discussion.
This summary may not cover your particular circumstances because it does
not consider foreign, state or local tax rules, disregards some federal tax
rules, and does not describe future changes in federal tax rules. Please
consult your tax advisor rather than relying on this general description.
United States Holders
If you are a "United States Holder," as defined below, this section applies
to you. Otherwise, the next section, "Non-United States Holders," applies to
you.
Definition of United States Holder. You are a "United States Holder" if you
hold notes and you are:
. a citizen or resident of the United States, including an alien individual
who is a lawful permanent resident of the United States or meets the
"substantial presence" test under Section 7701(b) of the Internal Revenue
Code;
. a corporation or partnership created or organized in the United States or
under the laws of the United States or of any political subdivision;
. an estate the income of which is subject to United States federal income
tax regardless of its source; or
. a trust, if
(a) a United States court can exercise primary supervision over the
administration of the trust and one or more United States persons can control
all substantial decisions of the trust, or
(b) the trust was in existence on August 20, 1996 and has properly elected
to continue to be treated as a United States person.
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Taxation of Stated Interest. You generally must pay federal income tax on
the interest on the exchange notes:
. when it accrues, if you use the accrual method of accounting for United
States federal income tax purposes; or
. when you receive it, if you use the cash method of accounting for United
States federal income tax purposes.
Redemption and Repurchase Rights. As described elsewhere in this prospectus,
we may under some circumstances be required to repurchase the exchange notes
and we have the option to redeem some or all of the exchange notes at some
times under some circumstances.
Based on our current expectations, the chance that we will repurchase or
redeem the exchange notes is remote. Accordingly, we intend to take the
position that the payments contingent on the repurchase or redemption of the
exchange notes do not, as of the issue date, cause the exchange notes to have
original issue discount ("OID") and do not affect the yield to maturity or the
maturity date of the exchange notes. You may not take a contrary position
unless you disclose your contrary position in the proper manner to the IRS.
You should consult your tax adviser with respect to the contingent payments
described above. If, contrary to our expectations, we repurchase or redeem the
notes, or if the IRS takes the position that the contingent payments described
were not remote as of the issue date, you may have to redetermine the amount
and timing of interest income you must include in taxable income.
Sale or Other Taxable Disposition of the Exchange Notes. You must recognize
taxable gain or loss on the sale, exchange, redemption, retirement or other
taxable disposition of an exchange note. The amount of your gain or loss equals
the difference between the amount you receive for the exchange note in cash or
other property valued at fair market value, minus the amount attributable to
accrued interest on the exchange note, minus your adjusted tax basis in the
exchange note. Your initial tax basis in an exchange note equals the price you
paid for the note which you exchanged for the exchange note.
Your gain or loss will generally be a long-term capital gain or loss if your
holding period in the exchange note is more than one year. Otherwise, it will
be a short-term capital gain or loss. Payments attributable to accrued interest
which you have not yet included in income will be taxed as ordinary interest
income.
Receipt of Exchange Notes. Because the economic terms of the exchange notes
and the notes are identical, your exchange of notes for exchange notes under
the exchange offer will not constitute a taxable exchange of the notes. Even if
you received exchange notes in exchange for notes on which additional interest
was paid because of a registration default, the exchange should not be taxable
because the exchange would occur by operation of the notes' original terms. As
a result:
. you should not recognize taxable gain or loss when you receive exchange
notes in exchange for notes;
. your holding period in the exchange notes should include your holding
period in the notes; and
. your basis in the exchange notes should equal your basis in the notes.
Backup Withholding. You may be subject to a 31% backup withholding tax when
you receive interest payments on the exchange note or proceeds upon the sale or
other disposition of an exchange note. Some holders, including, among others,
corporations and some tax-exempt organizations, are generally not subject to
backup withholding. In addition, the 31% backup withholding tax will not apply
to you if you provide your taxpayer identification number ("TIN") in the
prescribed manner unless:
. the IRS notifies us or our agent that the TIN you provided is incorrect;
. you fail to report interest and dividend payments that you receive on
your tax return and the IRS notifies us or our agent that withholding is
required; or
. you fail to certify under penalties of perjury that you are not subject
to backup withholding.
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If the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your United States federal income tax
liability as long as you provide the relevant information to the IRS.
Non-United States Holders
Definition of Non-United States Holder. A "Non-United States Holder" is any
person other than a United States Holder. If you are subject to United States
federal income tax on a net basis on income or gain with respect to an exchange
note because such income or gain is effectively connected with the conduct of a
United States trade or business, this disclosure does not cover the United
States federal tax rules that apply to you.
Interest.
Portfolio Interest Exemption. You will generally not have to pay United
States federal income tax on interest or OID on the exchange notes, if any,
paid on the exchange notes because of the "portfolio interest exemption" if
either:
. you represent that you are not a United States person for United States
federal income tax purposes and you provide your name and address to us
or our paying agent on a properly executed IRS Form W-8 or a suitable
substitute form signed under penalties of perjury; or
. a securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its business
holds the exchange note on your behalf, certifies to us or our agent
under penalties of perjury that it has received IRS Form W-8 or a
suitable substitute from you or from another qualifying financial
institution intermediary, and provides a copy to us or our agent.
You will not, however, qualify for the portfolio interest exemption
described above if:
. you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our capital stock;
. you are a controlled foreign corporation with respect to which we are a
"related person" within the meaning of Section 864(d)(4) of the Internal
Revenue Code; or
. you are a bank receiving interest described in Section 881(c)(3)(A) of
the Internal Revenue Code.
Withholding Tax if the Interest Is Not Portfolio Interest. If you do not
claim, or do not qualify for, the benefit of the portfolio interest exemption,
you may be subject to 30% withholding tax on interest payments made on the
exchange notes. However, you may be able to claim the benefit of a reduced
withholding tax rate under an applicable income tax treaty. The required
information for claiming treaty benefits is generally submitted under current
regulations on Form 1001. Successor forms will require additional information,
as discussed below. See "Non-United States Holders--New Withholding
Regulations."
Reporting. We may report annually to the IRS and to you the amount of
interest paid to, and the tax withheld, if any, with respect to you.
Sale or Other Disposition of the Exchange Notes. You generally will not be
subject to United States federal income tax or withholding tax on gain
recognized on a sale, exchange, redemption, retirement, or other disposition of
an exchange note. You may, however, be subject to tax on such gain if:
. you are an individual who was present in the United States for 183 days
or more in the taxable year of the disposition, in which case you may
have to pay a United States federal income tax of 30% or a reduced treaty
rate on such gain, and you may also be subject to withholding tax; or
. you are an individual who is a former citizen or resident of the United
States, your loss of citizenship or residency occurred within the last
ten years and, if you are a former resident, on or after
February 6, 1995, and it had as one of its principal purposes the
avoidance of United States tax, in
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<PAGE>
which case you may be taxed on the net gain derived from the sale under
the graduated United States federal income tax rates that are applicable
to United States citizens and resident aliens, and you may be subject to
withholding.
Even if you are an individual described in one of the two paragraphs above,
you should not recognize gain subject to United States federal income tax as a
result of exchanging notes for exchange notes under the exchange offer. See the
more complete discussion above under "United States Holders--Receipt of
Exchange Notes."
United States Federal Estate Taxes. If you qualify for the portfolio
interest exemption under the rules described above when you die, the exchange
notes will not be included in your estate for United States federal estate tax
purposes.
Back-up Withholding and Information Reporting.
Payments from United States Office. If you receive payments of interest or
principal directly from us or through the United States office of a custodian,
nominee, agent or broker, there is a possibility that you will be subject to
both backup withholding at a rate of 31% and information reporting.
With respect to interest payments made on the exchange note, however, back-
up withholding and information reporting will not apply if you certify,
generally on a Form W-8 or substitute form, that you are not a United States
person in the manner described above. See "Non-United States Holders--
Interest."
Moreover, with respect to proceeds received on the sale, exchange,
redemption, or other disposition of an exchange note, back-up withholding or
information reporting generally will not apply if you properly provide,
generally on Form W-8 or a substitute form, a statement that you are an "exempt
foreign person" for purposes of the broker reporting rules, and other required
information. If you are not subject to United States federal income or
withholding tax on the sale or other disposition of an exchange note, as
described above under the heading "Non-United States Holders--Sale or Other
Disposition of Exchange Notes," you generally will qualify as an "exempt
foreign person" for purposes of the broker reporting rules.
Payments from Foreign Office. If payments of principal and interest are made
to you outside the United States by or through the foreign office of your
foreign custodian, nominee or other agent, or if you receive the proceeds of
the sale of an exchange note through a foreign office of a "broker," as defined
in the pertinent United States Treasury Regulations, you generally will not be
subject to backup withholding or information reporting. You will, however, be
subject to backup withholding and information reporting if the foreign
custodian, nominee, agent or broker has actual knowledge or reason to know that
the payee is a United States person. You will also be subject to information
reporting, but not backup withholding, if the payment is made by a foreign
office of a custodian, nominee, agent or broker that is a United States person
or a controlled foreign corporation for United States federal income tax
purposes, or that derives 50% or more of its gross income from the conduct of a
United States trade or business for a specified three year period, unless the
broker has in its records documentary evidence that you are a Non-United States
Holder and other conditions are met.
Refunds. Any amounts withheld under the backup withholding rules may be
refunded or credited against your federal income tax liability, provided that
you furnish the required information to the IRS.
New Withholding Regulations. New regulations relating to withholding tax on
income paid to foreign persons (the "New Withholding Regulations") will
generally be effective for payments made after December 31, 1999, subject to
applicable transition rules. The New Withholding Regulations modify and, in
general, unify the way in which you establish your status as a non-United
States "beneficial owner" eligible for withholding exemptions, including the
portfolio interest exemption, a reduced treaty rate or an exemption from backup
withholding. For example, the New Withholding Regulations will require new
forms, which you
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generally will have to provide earlier than you would have had to provide
replacements for expiring existing forms.
The New Withholding Regulations clarify withholding agents' reliance
standards. They also require additional certifications for claiming treaty
benefits. For example, you may be required to provide a TIN, and you may have
to certify that you "derive" the income with respect to which the treaty
benefit is claimed within the meaning of applicable regulations. The New
Withholding Regulations also provide somewhat different procedures for foreign
intermediaries and flow-through entities, such as foreign partnerships, to
claim the benefit of applicable exemptions on behalf of non-United States
beneficial owners for which or for whom they receive payments. The New
Withholding Regulations also amend the foreign broker office definition as it
applies to partnerships.
The New Withholding Regulations are complex and this summary does not
completely describe them. Please consult your tax advisor to determine how the
New Withholding Regulations will affect your particular circumstances.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer in exchange for notes which such broker-dealer acquired
as a result of market-making or other trading activities must acknowledge that
it will deliver a prospectus in connection with any resale of such exchange
notes. Any such broker-dealer may use this prospectus, as we may amend or
supplement it from time to time, in connection with resales of exchange notes
received in exchange for notes. For a period of one year after we complete the
exchange offer, we will promptly send additional copies of this prospectus and
any amendment or supplement to this prospectus to any broker-dealer that
requests such documents in the letter of transmittal. All resales must be made
in compliance with state securities or blue sky laws. We assume no
responsibility with regard to compliance with these requirements.
We will not receive any proceeds from any sales of the exchange notes by
broker-dealers. Broker-dealers may sell exchange notes received for their own
account pursuant to the exchange offer from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to the purchaser or to or through brokers-dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any broker-
dealer that resells the exchange notes that it received for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have been advised by the initial purchasers of the notes that following
completion of this exchange offer they intend to make a market in the exchange
notes. Such entities, however, are under no obligation to do so and any market
activities with respect to the exchange notes may be discontinued at any time.
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LEGAL MATTERS
Legal matters in connection with the exchange notes will be passed upon for
Simmons by Jones, Day, Reavis & Pogue, Atlanta, Georgia.
EXPERTS
The consolidated balance sheets as of December 26, 1998 and December 27,
1997 and the consolidated statements of operations, common stockholders equity
(deficit), and cash flows for the years ended December 26, 1998, December 27,
1997, the period from March 22, 1996 to December 28, 1996 and from December 31,
1995 through March 21, 1996, included in this prospectus, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-4 under the Securities Act
with the Securities and Exchange Commission with respect to the exchange notes.
This prospectus, which forms a part of the registration statement, does not
contain all of the information included in the registration statement. We
omitted parts of this registration statement in accordance with the rules and
regulations of the Commission. For further information about us and the
exchange notes, we refer you to the registration statement. You should be aware
that none of the statements in this prospectus as to the contents of any
agreement or other document filed as an exhibit to the registration statement
are necessarily complete. We refer you to the copy of such documents filed as
exhibits to the registration statement.
We are not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934. We have
agreed that for so long as any of the exchange notes remain outstanding, we
will furnish to the holders of the exchange notes and, if permitted, will file
with the Commission, within the time periods specified in the rules and
regulations of the Commission:
(i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if we were required to file such forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the consolidated financial statements included in the
annual information only, a report thereon by our independent accountants;
and
(ii) all reports that would be required to be filed with the Commission
on Form 8-K if we were required to file such reports in each case.
Any reports or documents we file with the Commission, including the
registration statement, may be inspected and copied at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 14th Floor,
500 West Madison Street, Chicago, Illinois 60661. Copies of such reports or
other documents may be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Commission maintains a web site that contains reports and other
information that is filed through the Commission's Electronic Data Gathering
Analysis and Retrieval System. The web site can be accessed at
http://www.sec.gov.
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this prospectus. We will
provide without charge to each person to whom a copy of this prospectus is
delivered, upon written or oral request of any such person, a copy of any and
all of such information. Requests for such copies should be directed to the
Treasurer, Simmons Company, One Concourse Parkway, Atlanta, Georgia 30328
(Telephone Number (770) 512-7700). You should request any such information at
least five days in advance of the date on which you expect to make your
decision with respect to the exchange offer. In any event, you must request
such information prior to , 1999.
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SIMMONS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 26, 1998 and December 27,
1997................................................................... F-3
Consolidated Statements of Operations for the year ended December 26,
1998, the year ended December 27, 1997, the period from March 22, 1996
through December 28, 1996 (Successor Periods) and the period from
December 31, 1995 through March 21, 1996 (Predecessor Period).......... F-4
Consolidated Statements of Common Stockholders' Equity for the year
ended December 26, 1998, the year ended December 27, 1997, the period
from March 22, 1996 through December 28, 1996 (Successor Periods) and
the period from December 31, 1995 through March 21, 1996
(Predecessor Period)................................................... F-5
Consolidated Statements of Cash Flows for the year ended December 26,
1998, the year ended December 27, 1997, the period from March 22, 1996
through December 28, 1996 (Successor Periods) and the period from
December 31, 1995 through March 21, 1996 (Predecessor Period) ......... F-6
Notes to Consolidated Financial Statements.............................. F-7
Condensed Consolidated Balance Sheet (Unaudited) as of March 27, 1999... F-24
Condensed Consolidated Statements of Operations (Unaudited) for the
quarters ended March 27, 1999 and March 28, 1998, respectively......... F-25
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
quarters ended March 27, 1999 and March 28, 1998, respectively......... F-26
Notes to Condensed Consolidated Financial Statements (Unaudited)........ F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Simmons Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, common stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Simmons Company (the "Company") at December 26, 1998 and
December 27, 1997, and the results of its operations and its cash flows for
the years ended December 28, 1998 and December 27, 1997, the period from March
22, 1996 through December 28, 1996 and the period from December 31, 1995
through March 21, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1, the parent of Simmons Company entered into a
recapitalization on October 29, 1998.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 24, 1999
F-2
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 6,004 $ 9,108
Accounts receivable, less allowance for doubtful
accounts of $4,177 and $3,938.................. 71,354 65,488
Inventories..................................... 20,462 19,970
Deferred income taxes........................... 7,440 3,229
Other current assets............................ 14,792 13,808
-------- --------
Total current assets.......................... 120,052 111,603
Property, plant and equipment, net................ 54,153 47,564
Patents, net of accumulated amortization of $7,666
and $4,870....................................... 9,366 12,162
Goodwill, net of accumulated amortization of
$13,290 and $8,457............................... 180,017 184,850
Deferred income taxes............................. 17,704 8,453
Other assets...................................... 18,769 10,493
-------- --------
$400,061 $375,125
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 29,950 $ 27,847
Accrued wages and benefits...................... 5,323 8,830
Accrued advertising and incentives.............. 15,321 15,457
Accrued interest................................ 3,260 3,793
Other accrued expenses.......................... 13,627 9,435
Current maturities of long-term obligations..... 1,832 10,873
-------- --------
Total current liabilities..................... 69,313 76,235
Noncurrent liabilities:
Long-term obligations........................... 311,637 173,570
Postretirement benefit obligations other than
pensions....................................... 7,702 7,612
Other........................................... 11,626 13,864
-------- --------
Total liabilities............................. 400,278 271,281
-------- --------
Commitments and contingencies
Redeemable Series A Preferred Stock under ESOP,
net of related unearned compensation of $17,122.. -- 11,230
Redemption Obligation--ESOP, net of related
unearned compensation of $11,400................. 12,084 --
Common stockholders' equity (deficit):
Common stock, $.01 par value; 50,000,000 shares
authorized, 31,964,452 shares issued and
outstanding.................................... 320 320
Additional paid-in capital...................... -- 84,680
Retained earnings (accumulated deficit)......... (12,535) 7,674
Accumulated other comprehensive income (loss)... (86) (55)
Treasury stock, 974 shares in 1997 at cost...... -- (5)
-------- --------
Total common stockholders' equity (deficit)... (12,301) 92,614
-------- --------
$400,061 $375,125
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------- ------------
Period from Period from
March 22, December 31,
Year ended Year ended 1996 through 1995 through
December 26, December 27, December 28, March 21,
1998 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales............... $ 600,773 $550,085 $423,870 $106,431
Costs and expenses:
Cost of products
sold................. 348,842 319,074 254,127 66,630
Selling, general and
administrative....... 202,213 183,556 135,762 35,846
ESOP expense.......... 6,453 6,230 3,797 1,203
Amortization of
intangibles.......... 7,629 7,679 5,650 1,324
Interest expense,
net.................. 22,454 19,088 15,277 1,489
Other expense
(income), net........ 3,321 1,571 (2,528) 96
Management
compensation--
transaction related.. 14,223 -- 4,085 --
--------- -------- -------- --------
Income (loss) before in-
come taxes and extraor-
dinary item............ (4,362) 12,887 7,700 (157)
Provision (benefit) for
income taxes........... (345) 6,525 4,682 282
--------- -------- -------- --------
Income (loss) before
extraordinary
item............... (4,017) 6,362 3,018 (439)
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit of $7,079 and
$1,137................. 15,002 -- 1,706 --
--------- -------- -------- --------
Net income (loss)....... $ (19,019) $ 6,362 $ 1,312 $ (439)
========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Retained Accumulated Total Common
Additional Unearned Earnings Other Stockholders'
Common Common Paid-In Compensation (Accumulated Comprehensive Treasury Equity
Shares Stock Capital Under ESOP Deficit) Income Stock (Deficit)
---------- ------ ---------- ------------ ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor
December 30, 1995....... 36,311,967 $363 $176,501 $(47,531) $(78,894) $(288) $(5,779) $ 44,372
ESOP share
allocations........... -- -- (2,298) 3,501 -- -- -- 1,203
Income tax benefit on
ESOP.................. -- -- 896 -- -- -- -- 896
Net loss............... -- -- -- -- (439) -- -- (439)
Other comprehensive
income:
Change in foreign
currency translation.. -- -- -- -- -- 9 -- 9
Purchase of treasury
stock................. -- -- -- -- -- -- (660) (660)
---------- ---- -------- -------- -------- ----- ------- --------
March 21, 1996.......... 36,311,967 $363 $175,099 $(44,030) $(79,333) $(279) $(6,439) $ 45,381
========== ==== ======== ======== ======== ===== ======= ========
Successor
March 22, 1996 (reflects
the new basis of
31,964,452 common
shares in connection
with the Investcorp
Acquisition)........... 31,964,452 $320 $ 84,680 $ -- $ -- $ (2) $ -- $ 84,998
Net income............. -- -- -- -- 1,312 -- -- 1,312
Other comprehensive
income (loss):
Change in foreign
currency translation.. -- -- -- -- -- (19) -- (19)
---------- ---- -------- -------- -------- ----- ------- --------
December 28, 1996....... 31,964,452 320 84,680 -- 1,312 (21) -- 86,291
Net income............. -- -- -- -- 6,362 -- -- 6,362
Other comprehensive
income (loss):
Change in foreign
currency translation.. -- -- -- -- -- (34) -- (34)
Purchase of treasury
stock................. -- -- -- -- -- -- (5) (5)
---------- ---- -------- -------- -------- ----- ------- --------
December 27, 1997....... 31,964,452 320 84,680 -- 7,674 (55) (5) 92,614
Net loss............... -- -- -- -- (19,019) -- -- (19,019)
Other comprehensive
income (loss):
Change in foreign
currency translation.. -- -- -- -- -- (31) -- (31)
Purchase of treasury
stock................. -- -- -- -- -- -- (55) (55)
Excess of ESOP expense
at fair market value
over cost............. -- -- 731 -- -- -- -- 731
Increase in ESOP
Redemption Obligation
based on fair market
value................. -- -- (10,582) -- -- -- -- (10,582)
Distribution to
Holdings.............. -- -- (74,829) -- (1,190) -- 60 (75,959)
---------- ---- -------- -------- -------- ----- ------- --------
December 26, 1998....... 31,964,452 $320 $ -- $ -- $(12,535) $ (86) $ -- $(12,301)
========== ==== ======== ======== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------------------- ------------
Period from Period from
March 22, December 31,
Year ended Year ended 1996 through 1995 through
December 26, December 27, December 28, March 21,
1998 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)....... $ (19,019) $ 6,362 $ 1,312 $ (439)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and
amortization.......... 16,593 13,549 9,118 2,198
ESOP expense........... 6,453 6,230 3,797 1,203
Non-cash portion of
extraordinary loss.... (921) -- 1,706 --
Gain from sale of
investment............ -- -- (4,011) --
Provision for bad
debts................. 75 2,750 1,273 566
Provision for deferred
income taxes.......... (1,902) 6,226 4,420 282
Other, net............. 1,072 613 46 472
Net changes in operating
assets and liabilities:
Accounts receivable.... (10,335) (1,604) (17,288) (1,732)
Inventories............ (492) (1,137) (769) 1,229
Other assets........... (5,208) (5,235) (3,724) (531)
Accounts payable....... 2,103 3,047 9,117 (7,250)
Accrued liabilities.... (2,427) 1,500 (11,443) 6,341
--------- -------- --------- ------
Cash provided by (used
in) operating
activities............. (14,008) 32,301 (6,446) 2,339
--------- -------- --------- ------
Cash flows from
investing activities:
Purchases of property,
plant and equipment,
net................... (15,553) (15,355) (13,546) (1,567)
Proceeds from sale of
investment............ -- -- 4,700 --
Payment to the seller
for the acquisition... -- -- (151,625) --
Payments to option
holders............... -- -- (6,950) --
Payments of acquisition
costs................. -- -- (16,040) --
--------- -------- --------- ------
Net cash used in
investing activities... (15,553) (15,355) (183,461) (1,567)
--------- -------- --------- ------
Cash flows from
financing activities:
Distribution to
Holdings.............. (75,959) -- -- --
Distribution to
Holdings for purchase
of ESOP shares........ (15,450) -- -- --
Proceeds of New Credit
Facility.............. 200,000 -- -- --
Payments on New Credit
Facility.............. (10,000) -- -- --
Proceeds of Senior
Bridge Loans.......... 75,000 -- -- --
Proceeds of Junior
Simmons Notes......... 30,000 -- -- --
Payment of 10.75%
Senior Sub Notes...... (100,000) -- -- --
Proceeds of other
Successor long-term
borrowings............ 33,871 34,329 317,700 --
Payments on other
Successor long-term
borrowings............ (99,845) (46,701) (131,473) --
Proceeds from
Predecessor revolving
line of credit and
long-term borrowings.. -- -- -- 3,334
Payments on Predecessor
debt.................. -- -- (76,134) (3,490)
Payments of financing
costs................. (11,074) -- (9,744) --
Proceeds from issuance
of Successor common
stock................. -- -- 85,000 --
Treasury stock
purchases............. (55) (5) -- (660)
--------- -------- --------- ------
Net cash provided by
(used in) financing
activities............. 26,488 (12,377) 185,349 (816)
--------- -------- --------- ------
Net effect of exchange
rate changes on cash... (31) (34) (19) 9
--------- -------- --------- ------
Increase (decrease) in
cash and cash
equivalents............ (3,104) 4,535 (4,577) (35)
Cash and cash
equivalents, beginning
of period.............. 9,108 4,573 9,150 9,185
--------- -------- --------- ------
Cash and cash
equivalents, end of
period................. $ 6,004 $ 9,108 $ 4,573 $9,150
========= ======== ========= ======
Supplemental cash flow
information:
Cash paid for
interest.............. $ 19,517 $ 17,526 $ 11,798 $ 803
========= ======== ========= ======
Cash paid for income
taxes................. $ 322 $ 60 $ 93 $2,315
========= ======== ========= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. The Company
Simmons Company ("Simmons" or "the Company") is one of the largest bedding
manufacturers in the United States. The Company manufactures and distributes
mattresses, box springs, bedding frames and sleep accessories. Simmons sells
bedding products to certain institutional customers, such as schools and
government entities, and to the lodging industry and licenses its patents and
trademarks to various domestic and foreign manufacturers.
The Transactions
On July 16, 1998, the Company's parent, Simmons Holdings, Inc. ("Holdings")
entered into a recapitalization agreement with the Company and REM Acquisition,
Inc., a transitory Delaware merger corporation ("REM"), sponsored by Fenway
Partners, Inc., ("Fenway"). Pursuant to the agreement on October 29, 1998 REM
merged with and into Holdings (the "Recapitalization"), with Holdings being the
surviving corporation. The Recapitalization resulted in certain stockholders of
Holdings who are affiliates of or investors arranged by INVESTCORP S.A.
("Investcorp") receiving an aggregate amount of cash equal to approximately
$193.4 million, and certain stockholders of Holdings who are members of
management of the Company receiving an aggregate amount of cash equal to
approximately $14.0 million. Investcorp retained shares of common stock of
Holdings with an estimated fair value of $9.0 million and management retained
shares of stock and options to purchase stock of Holdings with an estimated
fair value of $16.5 million. As part of the Recapitalization, REM purchased the
outstanding shares of Series A Preferred Stock of the Company (the "Series A
Preferred Stock") owned by the Simmons Employee Stock Ownership Plan (the
"ESOP") that had been allocated to its participants for an aggregate purchase
price of $15.4 million, and the ESOP exchanged its remaining outstanding shares
of Series A Preferred Stock for shares of common stock of Holdings. The Series
A Preferred Stock purchased by REM was cancelled in connection with the
Transactions, as defined below. The ESOP retained shares of stock of Holdings
with an estimated fair value of $23.4 million.
Financing for the Recapitalization, the related transactions, and the fees
and expenses incurred therewith, was provided by (i) the Company's borrowings
under a new $270.0 million senior credit facility (the "New Senior Credit
Facility") which refinanced the majority of the Company's existing senior and
subordinated obligations, (ii) the Company's borrowings of $75.0 million Senior
Subordinated Bridge Loans (the "Senior Bridge Loans"), (iii) the Company's
borrowings of $30.0 million under the Junior Subordinated Notes (the "Junior
Simmons Notes") issued to an affiliate of Fenway, (iv) Holdings' borrowings of
$10.0 million under the Junior PIK Notes issued to an affiliate of Fenway, and
(v) $177.0 million of capital provided by Fenway, affiliates of Investcorp,
management and certain other investors of Holdings.
The Recapitalization, the refinancing under the New Senior Credit Facility,
the Senior Bridge Loans financing and the Junior Simmons Notes financing are
collectively referred to herein as the "Transactions". As a result of the
Recapitalization and related transactions, Fenway Investment LLC, an entity
controlled by funds managed by Fenway, acquired 75.1% of the outstanding voting
shares of Holdings, and management, the ESOP and Investcorp retained
approximately 5.9%, 13.7% and 5.3%, respectively, of the outstanding shares of
Holdings. The Company has accounted for the Transactions as a leveraged
recapitalization, whereby the historical bases of the assets and liabilities of
the Company have been maintained.
F-7
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
The Investcorp Acquisition
On March 22, 1996, Holdings acquired 100% of the outstanding common stock of
the Company (the "Investcorp Acquisition"). Holdings was formed to consummate
the Investcorp Acquisition on behalf of affiliates of Investcorp, management
and certain other investors. For purposes of identification and description,
Simmons Company is referred to as the "Predecessor" for the period prior to the
Investcorp Acquisition, the "Successor" for the period subsequent to the
Investcorp Acquisition, and the "Company" for both periods. For purposes of
financial reporting, the period from December 31, 1995 through March 21, 1996
is referred to as "Predecessor '96" and the period from March 22, 1996 through
December 28, 1996 is referred to as "Successor '96".
The purchase price for the Investcorp Acquisition was approximately $269.6
million (including approximately $94.6 million in refinancing or assumption of
existing indebtedness, purchase of certain stock options, and the payments of
fees and expenses) which was allocated to the assets and liabilities of the
Company based upon their estimated fair market value at the date of the
Investcorp Acquisition, under the purchase method of accounting. The financing
for the Investcorp Acquisition (including the refinancing of outstanding debt)
was provided by (i) borrowings under a new $115.0 million Senior Credit
Facility, which refinanced the Company's existing senior and subordinated
loans, (ii) the $100.0 million proceeds under a new Subordinated Loan Facility,
and (iii) $85.0 million of capital provided by affiliates of Investcorp,
management and certain other investors from Holdings.
As part of the Investcorp Acquisition, the ESOP sold 6,001,257 shares of the
Company's common stock (representing all of the allocated shares) to Holdings.
The remaining 5,670,406 shares of common stock of the Company (unallocated
shares) were converted into 5,670,406 shares of Series A Preferred Stock.
On April 18, 1996, the Company issued $100.0 million in 10.75% Senior
Subordinated Notes, pursuant to an offering (the "Offering") (See Note 8). The
proceeds of the offering were used to retire loans under the Subordinated Loan
Facility mentioned above.
The following condensed pro forma disclosures for net sales and net income
are adjusted to give effect to (i) the Investcorp Acquisition and (ii) the
Offering of the Notes and the application of the net proceeds therefrom to
repay the Subordinated Loan Facility (collectively, the "Investcorp
Transactions"). This pro forma disclosure assumes that the Investcorp
Transactions were consummated as of December 31, 1995 and does not purport to
be indicative of the results that would actually have been obtained if the
Investcorp Transactions had occurred on the date indicated or of the results
that may be obtained in the future.
<TABLE>
<CAPTION>
Unaudited
Combined
1996
---------
<S> <C>
Pro Forma (in thousands):
Net sales.................................................... $530,301
========
Net income................................................... $ 4,657
========
</TABLE>
F-8
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
2. Principal Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
the Company and all its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates and Reclassifications
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. Such financial
statements include estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities and the
amounts of revenues and expenses. Actual results could differ from those
estimates. Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the current presentation.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last Saturday
in December. Fiscal years 1998, 1997 and 1996 (Successor '96 and Predecessor
'96, combined) comprised 52 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
net realizable value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation expense is
determined principally using the straight-line method over the estimated useful
lives for financial reporting and accelerated methods for income tax purposes.
Expenditures that substantially increase asset values or extend useful lives
are capitalized. Expenditures for maintenance and repairs are expensed as
incurred. When property items are retired or otherwise disposed of, amounts
applicable to such items are removed from the related asset and accumulated
depreciation accounts and any resulting gain or loss is credited or charged to
income. Useful lives are generally as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................... 10-25 years
Machinery and equipment....................................... 5-15 years
Computers and software........................................ 3- 7 years
</TABLE>
Whenever events or changes in circumstances indicate that the carrying value
may not be recoverable, management assesses whether there has been a permanent
impairment in the value of long-lived assets by comparing anticipated
undiscounted future cash flows from operating activities with the carrying
value of the long-lived asset. The factors considered by management in this
assessment include operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors. If a
permanent impairment is deemed to exist, management would record an impairment
charge equal to the excess of the carrying value over discounted cash flows.
F-9
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Patents and Goodwill
For all periods, the cost of patents acquired are being amortized using the
straight-line method over the estimated remaining economic lives of the
respective patents, principally over seven years. Amortization expense was
approximately $2,796, $2,799, $2,072 and $438 for 1998, 1997, Successor '96 and
Predecessor '96, respectively.
Goodwill is being amortized on a straight-line basis, over the estimated
periods benefited (principally 40 years). Amortization expense was $4,833,
$4,880, $3,578 and $886 for 1998, 1997, Successor '96 and Predecessor '96,
respectively.
Whenever events or changes in circumstances indicate that the carrying value
may not be recoverable, management assesses whether there has been a permanent
impairment in the value of intangible assets by comparing anticipated
undiscounted future cash flows from operating activities with the carrying
value of the intangible asset. The factors considered by management in this
assessment include operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors. If a
permanent impairment is deemed to exist, management would record an impairment
change equal to the excess of the carrying value over discounted cash flows.
Revenue Recognition
The Company recognizes revenue at the time the product is shipped to the
customer.
ESOP Expense
The Company follows the provisions of Statement of Position No. 93-6 of the
American Institute of Certified Public Accountants, "Employers' Accounting for
Employee Stock Ownership Plans", whereby ESOP expense is recognized as an
amount equal to the fair market value of the shares commited to be released to
participants' accounts. The unearned compensation balance continues to be
amortized using the shares allocated method (i.e., at cost). The difference in
these two amounts, if any, is recorded as an adjustment to additional paid-in
capital.
Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. Prior periods have been reclassified to reflect the
adoption of this standard. The adoption of SFAS No. 130 has no material impact
on the Company's results of operations, financial position or cash flows.
Comprehensive income equals net income plus other comprehensive income. Other
comprehensive income refers to revenue, expenses, gains and losses which are
reflected in stockholders' equity but excluded from net income. The component
comprising other comprehensive income is foreign currency translation
adjustment.
Product Development Costs
Costs associated with the development of new products and changes to
existing products are charged to expense as incurred. These costs amounted to
approximately $1,112, $1,185, $862 and $270 for 1998, 1997, Successor '96 and
Predecessor '96, respectively, and are included in cost of products sold in the
accompanying consolidated statements of operations.
F-10
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Advertising Costs
The Company records the cost of advertising as an expense when incurred.
Advertising expense was $61,869, $54,802, $43,652 and $9,861 for 1998, 1997,
Successor '96 and Predecessor '96, respectively, and is included as a component
of selling, general and administrative expenses in the accompanying
consolidated statements of operations.
Significant Concentrations of Risk
The Company manufactures and markets sleep products, including mattresses
and box springs to retail establishments primarily in the United States. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Sales to three of the
Company's major customers aggregated approximately 21% of total sales for each
of 1998, 1997 and Successor '96 and Predecessor '96, combined. Accounts
receivable from one customer was approximately 7% and 9% of total accounts
receivable at December 26, 1998 and December 27, 1997, respectively. Sales to
Heilig Meyers entities represented approximately 11.8% and 10.7% of net sales
for 1998 and 1997, respectively. Sales to no one customer represented more than
10% of net sales for Successor '96 and Predecessor '96, combined.
Purchases of raw materials from one vendor represented approximately 23%,
24% and 23% of cost of products sold for 1998, 1997 and Successor '96 and
Predecessor '96, combined, respectively.
The Company maintains cash balances in excess of FDIC insurance limits at
certain large financial institutions. The Company monitors the financial
condition of such institutions and considers the risk of loss to be remote.
Accounting Pronouncements
In June 1998, the 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 including those embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Financial statements for prior periods need not be restated. The Company
is currently reviewing the provisions of SFAS No. 133 and does not believe that
the financial statements will be materially impacted by the adoption of this
pronouncement.
3. Employee Stock Ownership Plan
The Company is structured so that the employees of the Company have a
beneficial ownership of the stock of Holdings or, prior to the Transactions, of
the Company through their participation in the ESOP.
The Company makes annual contributions to the Simmons ESOP in an amount up
to 25% of eligible participant compensation, subject to certain limitations and
conditions. The Simmons ESOP then uses all such contributions to repay the
internal ESOP Loan. As a result, there is no cash cost associated with the
contributions to the Simmons ESOP.
On October 29, 1998, REM purchased 2,295,110 shares of the Company's Series
A Preferred Stock from the ESOP, representing all the shares held by the ESOP
that had been allocated to plan participants as of such date for an aggregate
purchase price of approximately $15.4 million, which amount was reinvested, at
the
F-11
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
direction of the participants, into diversified investments in the respective
accounts of such participants in the ESOP. The Series A Preferred Stock
purchased by REM was cancelled in connection with the Transactions. Immediately
prior to the Recapitalization, the ESOP exchanged its remaining outstanding
shares of Series A Preferred Stock for 3,482,036 shares of common stock of
Holdings.
In connection with the Investcorp Acquisition, the ESOP sold 6,001,257
shares of common stock of the Company to Holdings (representing all the shares
held by the ESOP that had been allocated to plan participants as of such date)
for $31.2 million in the aggregate, which amount was reinvested, at the
direction of the participants, into diversified investments in the respective
accounts of such participants in the ESOP. Each of the remaining 5,670,406
shares of common stock of the Company was converted into one share of Series A
Preferred Stock. As stated above, all outstanding shares of the Series A
Preferred Stock were exchanged for shares of common stock of Holdings in
connection with the Transactions.
The ESOP pledged all of its shares of Holdings common stock or, prior to the
Transactions, the Company's common stock as collateral for the internal ESOP
loans from the Company. These shares are held by State Street Bank and Trust
Company, the ESOP trustee, in a suspense account and are released to the ESOP
participants' accounts based on debt service. In 1997, 1,096,000 shares were
released to participant's accounts for the 1996 ESOP allocation. In 1998,
1,160,734 shares were released to participant's accounts for the 1997 ESOP
allocation. As of December 26, 1998, 1,140,000 shares of Holdings common stock
have been committed to be released. The remaining unallocated shares of
Holdings common stock held in the ESOP had an estimated fair value of
approximately $15,765 ($6.7315 per share) at December 26, 1998.
Under the ESOP, employees are eligible to participate in the ESOP following
the date when the employee has completed at least one year of service and has
reached age 21. All employees of the Company, except employees who are covered
by a negotiated collective bargaining agreement (unless the collective
bargaining agreement provides for participation in the ESOP) or who are
nonresident aliens, are covered by the ESOP. Approximately 60% of the Company's
full-time employees are participants in the ESOP. The participants and
beneficiaries of the ESOP are not subject to income tax with respect to
contributions made on their behalf until they receive distributions from the
ESOP.
Under the provisions of the ESOP, the Company or Holdings is obligated to
repurchase participant shares which have been distributed under the terms of
the ESOP, as long as the shares are not publicly traded or if the shares are
subject to trading limitations. The Company repurchased approximately 18,452
shares from ESOP participants in 1996 (prior to the Investcorp Acquisition) at
a price of $4.50 per share, 974 shares from ESOP participants in 1997 at a
price of $5.00 per share and 5,711 shares from ESOP participants in 1998 (prior
to the Transactions) at a price of $5.00 per share. These shares are reflected
as treasury stock in the common stockholders' equity section of the balance
sheet for periods prior to the Transactions.
Because of the Company's or Holdings' obligation to repurchase its shares
from the ESOP under certain circumstances for their then current fair value,
the Company has classified the redemption value of such shares in the
accompanying consolidated balance sheets as Redeemable Series A Preferred Stock
under ESOP as of December 27, 1997 and as Redemption Obligation under ESOP as
of December 26, 1998. Additionally, pursuant to generally accepted accounting
principles, the Company has classified a proportional amount of unearned
compensation under ESOP in the same manner.
F-12
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
4. Accounts Receivable
Accounts receivable consisted of the following at December 26, 1998 and
December 27, 1997:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable........................... $79,628 $73,239
Allowance for doubtful accounts............... (4,177) (3,938)
Allowance for cash discounts and other........ (4,097) (3,813)
------- -------
$71,354 $65,488
======= =======
</TABLE>
5. Inventories
Inventories consisted of the following at December 26, 1998 and December
27, 1997:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials................................... $12,823 $12,209
Work-in-progress................................ 1,376 1,531
Finished goods.................................. 6,263 6,230
------- -------
$20,462 $19,970
======= =======
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 26,
1998 and December 27, 1997:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Land, buildings and improvements.............. $16,343 $11,945
Machinery and equipment....................... 46,050 39,309
Construction in progress...................... 7,336 3,713
------- -------
69,729 54,967
Less accumulated depreciation................. (15,576) (7,403)
------- -------
$54,153 $47,564
======= =======
</TABLE>
Depreciation expense for 1998, 1997, Successor '96 and Predecessor '96 was
$8,964, $5,870, $3,468 and $874, respectively.
7. Other Assets
Other assets consisted of the following at December 26, 1998 and December
27, 1997:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Long-term notes receivable.................... $ 6,594 $ 2,200
Debt issuance costs, net of accumulated
amortization of $177 and $1,165,
respectively................................. 11,405 7,259
Other......................................... 770 1,034
------- -------
$18,769 $10,493
======= =======
</TABLE>
F-13
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Debt issuance costs are amortized using the effective interest method.
Amortization of $777, $613, $521 and $84 for 1998, 1997, Successor '96 and
Predecessor '96, respectively, is included as a component of interest expense
in the accompanying consolidated statements of operations.
8. Long-Term Obligations
Long-term obligations consisted of the following at December 26, 1998 and
December 27, 1997:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Senior loans:
Tranche A Term Loan....................... $ 70,000 $ --
Tranche B Term Loan....................... 70,000 --
Tranche C Term Loan....................... 50,000 --
Previous Credit Agreement................. -- 67,700
Industrial Revenue Bonds, 7.00%, due 2017... 9,700 9,700
Industrial Revenue Bonds, 3.90%, due 2016... 5,000 5,000
Banco Santander loan........................ 3,164 1,329
Senior Bridge Loans......................... 75,000 --
Junior Simmons Notes........................ 30,000 --
10.75% Series A Senior Subordinated Notes
due 2006................................... -- 100,000
Other, including capital lease obligations.. 605 714
-------- --------
313,469 184,443
Less current portion........................ (1,832) (10,873)
-------- --------
$311,637 $173,570
======== ========
</TABLE>
In connection with the Transactions, the Company entered into the New Senior
Credit Facility. The New Senior Credit Facility is collateralized by
substantially all of the Company's assets and provides for loans of up to
$270.0 million, consisting of (i) the Tranche A Term Loan of up to $70.0
million in term loans, (ii) the Tranche B Term Loan of up to $70.0 million in
term loans, (iii) the Tranche C Term Loan of up to $50.0 million in term loans,
and (iv) the Revolving Loan of up to $80.0 million in revolving credit loans,
letters of credit and swing line loans. The Company distributed a portion of
the proceeds of the Term Loan Facility and the Company's initial borrowings
under the Revolving Credit Facility to Holdings to provide a portion of the
funds necessary to consummate the Transactions.
The Tranche A Term Loan matures in quarterly installments from December 1999
until final payment in October 2004. The Tranche B Term Loan matures in
quarterly installments from December 1998 until final payment in October 2005.
The Tranche C Term Loan matures in quarterly installments from December 1998
until final payment in October 2006. The Revolving Loan matures on October
2004.
The interest rates applicable to the loans under the New Senior Credit
Facility are based upon a Base Rate or Eurodollar Rate (as defined), plus their
respective margin. The Applicable Margin for Base Rate Loans for the Tranche B
and Tranche C Loans is 2.25% and 2.50%, respectively. The Applicable Margin for
Eurodollar Loans for the Tranche B and Tranche C Loans is 3.25% and 3.50%,
respectively. For the Tranche A Loans and
F-14
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
loans under the Revolving Credit Facility, the Applicable Margin for Base Rate
Loans and Eurodollar Loans is initially 1.75% and 2.75%, respectively, subject
to reduction according to a pricing grid based upon the Leverage Ratio (as
defined).
The interest rates per annum in effect at December 26, 1998 for the Tranche
A Term Loan, Tranche B Term Loan and Tranche C Term Loan were 7.75%, 8.25% and
8.50%, respectively.
At December 26, 1998, the amount under the Revolving Credit Facility that
was available to be drawn was approximately $76.5 million, after giving effect
to $3.5 million that was reserved for the Company's reimbursement obligations
with respect to outstanding letters of credit. The remaining availability under
the Revolving Credit Facility may be utilized to meet the Company's current
working capital requirements, including issuance of stand-by and trade letters
of credit. The Company also may utilize the remaining availability under the
Revolving Credit Facility to fund acquisitions and capital expenditures.
The New Senior Credit Facility requires the Company to maintain certain
financial ratios including fixed-charge, cash interest coverage and leverage
ratios. The New Senior Credit Facility also contains covenants which, among
other things, limit capital expenditures, the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset
sales, mergers and consolidations, prepayments of other indebtedness, liens and
encumbrances and other matters customarily restricted in such agreements. As of
December 26, 1998, the Company was in compliance with respect to all covenants
under the New Senior Credit Facility.
In connection with the Transactions, the Company entered into a bridge loan
agreement (the "Senior Bridge Loan Agreement"). The Senior Bridge Loan
Agreement provided for $75.0 million in aggregate principal amount of the
Senior Bridge Loans. If the Senior Bridge Loans are not repaid in full by
October 29, 1999, the outstanding principal balance of the Senior Bridge Loans
may be converted into term loans due October 29, 2008. Once converted, the
lenders may elect to exchange all or any portion of the term loans for exchange
notes which are required to be registered under the Securities Act. The Senior
Bridge Loans bear interest at 9.6%, which rate increases by 1.0% on January 27,
1999 and increases by 0.5% for every three-month period thereafter up to a
maximum rate of 15.0%.
In connection with the Transactions, the Company issued the Junior Simmons
Notes to Fenway in the aggregate principal amount of $30.0 million. The
maturity date of the Simmons Junior Notes is October 29, 2010. The Junior
Simmons Notes bear interest at 13.0% through December 30, 1998, which rate
increases by 0.5% for every three-month period thereafter up to a maximum rate
of 16.0%. Such interest is to be paid upon maturity. If certain financial
conditions are met, up to 7.0% of the interest of the Junior Simmons Notes may
be payable in cash while the Senior Bridge Loans are outstanding, which cash
interest may increase to 12.0% once the Senior Bridge Loans have been repaid.
No such conditions have been met as of December 26, 1998.
Concurrently with the consummation of the Transactions, the Company called
the Previously Existing Notes for redemption and paid $115.9 million of the
proceeds ($100.0 million of principal and a $15.9 million redemption premium
(See Note 10)) to satisfy and discharge the Company's obligations thereunder.
In November 1998, Simmons Caribbean Bedding, Inc., a wholly owned subsidiary
of the Company, entered into a permanent loan facility with Banco Santander in
the amount of $3.2 million accruing interest at a fluctuating rate based on the
London Interbank Offered Rate (or LIBOR), which was 7.1% as of December 26,
1998.
F-15
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Future maturities of long-term obligations as of December 26, 1998 are as
follows:
<TABLE>
<S> <C>
1999................................ $ 1,832
2000................................ 11,842
2001................................ 11,853
2002................................ 16,865
2003................................ 16,779
Thereafter.......................... 254,298
--------
$313,469
========
</TABLE>
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
The fair value of long-term debt approximates the carrying value at December
26, 1998.
9. Other Expense (Income), Net
Other expense (income), net is comprised of the following:
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------- -----------
Period from Period from
March 22, December
1996 31, 1995
Year ended Year ended through through
December 26, December 27, December March 21,
1998 1997 28, 1996 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Recapitalization/acquisition
related expenses........... $1,012 $ -- $ 298 $--
Management advisory fee..... 1,074 $1,000 833 --
Gain on sale of investment.. -- -- (4,011) --
Other non-operating
expenses................... 1,235 571 352 $96
------ ------ ------- ---
$3,321 $1,571 $(2,528) $96
====== ====== ======= ===
</TABLE>
The gain on sale of investment was related to the Company's minority
interests in Simmons Asia, Ltd. (10.0%), Simmons Bedding & Furniture (HK) Ltd.
(8.1%) and Simmons Company, Ltd. (6.8%).
10. Extraordinary Items
In October 1998, the Company recorded a $15,002 charge, net of income tax
benefit of $7,079 representing the remaining unamortized debt issuance costs
related to long-term obligations repaid as a result of the refinancing of
certain debt in connection with the recapitalization of $4,184 (net of income
tax benefit of $1,974) and the redemption premium obligation of $10,818 (net of
income tax benefit of $5,105) related to the early redemption of the Company's
then outstanding 10.75% Senior Subordinated Notes due 2006.
In April 1996, the Company recorded a $1,706 charge, net of income tax
benefit of $1,137 representing the remaining unamortized debt issuance costs
related to long-term obligations repaid as a result of the refinancing of
certain Investcorp Acquisition debt.
F-16
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
11. Leases
The Company leases certain facilities and equipment under operating leases.
Rent expense was $12,705, $11,258, $9,709 and $2,388 for 1998, 1997, Successor
'96 and Predecessor '96, respectively.
The following is a schedule of the future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 26, 1998:
<TABLE>
<S> <C>
1999................................. $11,061
2000................................. 9,775
2001................................. 9,370
2002................................. 9,119
2003................................. 6,520
Thereafter........................... 15,158
-------
$61,003
=======
</TABLE>
12. Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock incentive plans. Under APB
25, because the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recorded. The Company has adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123").
At the time of the Investcorp Acquisition, the board of directors
established a Management Stock Incentive Plan (the "1996 Plan"), which provided
for the granting of nonqualified options for Class C common stock of Holdings
to members of management and certain key employees. The options outstanding
under the 1996 Plan were granted at prices which equate to or were above the
market value of the Class C stock on the date of grant.
In connection with the Investcorp Acquisition, the Company entered into an
agreement with Holdings whereby if Holdings grants any options to purchase
shares of common or Class C Stock of Holdings to a director, employee or
consultant of the Company, the Company will grant to Holdings corresponding
options, exercisable only upon exercise of the Holdings options, to purchase
the same number of shares of common stock of the Company at the same per share
exercise price and subject to substantially the same terms and conditions as
the Holdings options. All references to stock options under the 1996 Plan
pertain to the Holdings options which have been attributed to the Company for
disclosure purposes. Information relating to stock options during 1998, 1997
and 1996 is as follows:
F-17
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
---------- --------
<S> <C> <C>
Shares under option at December 28, 1996................ 3,158,330 $2.73
Granted................................................. 50,000 $2.95
Forfeited............................................... (39,728) $2.66
---------- -----
Shares under option at December 27, 1997................ 3,168,602 $2.73
Granted................................................. 59,000 $5.15
Forfeited............................................... (17,062) $2.66
Canceled................................................ (1,571,463) $2.72
---------- -----
Shares under option at December 26, 1998................ 1,639,077 $2.83
========== =====
Shares exercisable at December 28, 1996................. 0 $2.66
========== =====
Shares exercisable at December 27, 1997................. 574,369 $2.66
========== =====
Shares exercisable at December 26, 1998................. 1,639,077 $2.83
========== =====
</TABLE>
All outstanding options were nonqualified options. No compensation expense
related to stock option grants was recorded in 1998, 1997 or 1996 as the option
exercise prices were equal to fair market value on the date of grant.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for the employee stock options
under the fair value method under that Statement. The fair value for these
options was estimated at the date of grant using the minimum present value
method with the following weighted average assumptions for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.47% 6.08% 6.32%
Expected life..................................... 7 years 7 years 7 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected life. The Company's
pro forma net earnings were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Net earnings (loss)--as reported................ $(19,019) $6,362 $1,312
Net earnings (loss)--proforma................... (20,309) 6,133 1,155
Weighted average fair value of options granted
during the year................................ 1.60 1.00 0.93
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts.
As a result of the Transactions, the vesting of the issued and outstanding
stock options under the 1996 plan was accelerated. At the time of the
Transaction option holders under the 1996 plan elected to cancel a portion of
their options. For option shares canceled, each holder received reasonable
compensation for the
F-18
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
options, which was equal to the spread between the Recapitalization price of
$6.7315 and the respective per share exercise price for the canceled options.
The remaining option shares are fully vested and are exercisable at their
respective issuance price (ranging from $2.66 to $5.15). No additional option
shares have been granted post-Transactions.
13. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------------- -----------
Period from Period from
March 22, December
Year 1996 31, 1995
Year ended ended through through
December 26, December December 28, March 21,
1998 27, 1997 1996 1996
------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
Current tax provision:
Federal....................... $ 657 -- -- --
State......................... 600 -- -- --
Foreign....................... 300 $ 299 $ 262 --
------- ------ ------ -----
1,557 299 262 --
------- ------ ------ -----
Deferred tax provision:
Federal....................... (1,530) 5,230 3,627 $ 231
State......................... (372) 996 793 51
------- ------ ------ -----
(1,902) 6,226 4,420 282
------- ------ ------ -----
$ (345) $6,525 $4,682 $ 282
======= ====== ====== =====
</TABLE>
The reconciliation of the statutory federal income tax rate to the effective
income tax rate for 1998, 1997, Successor '96 and Predecessor '96 provision for
income taxes is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
--------------------------------------- -----------
Period from Period from
March 22, December
1996 31, 1995
Year ended Year ended through through
December 26, December 27, December 28, March 21,
1998 1997 1996 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income taxes at federal
statutory rate.......... $(1,483) $4,382 $2,618 $(53)
State income taxes, net
of federal benefit...... (218) 657 556 (18)
Goodwill amortization.... 1,643 1,393 1,216 301
Other, net............... (287) 93 292 52
------- ------ ------ ----
$ (345) $6,525 $4,682 $282
======= ====== ====== ====
</TABLE>
In addition, the Company recorded a deferred tax benefit of $7,079 and
$1,137 for 1998 and Successor '96, respectively, associated with the
extraordinary item.
F-19
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Components of the net deferred income tax asset (liability) at December 26,
1998 and December 27, 1997 are as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Current deferred income taxes:
Accounts receivable and inventory reserves....... $ 3,757 $ 3,646
Accrued liabilities not currently deductible..... 8,253 9,002
Net operating loss carryforwards................. -- 82
Prepaids and other assets, not currently
taxable......................................... (4,570) (9,501)
------- -------
7,440 3,229
Noncurrent deferred income taxes:
Property basis differences....................... (7,382) (2,896)
Patents basis differences........................ (3,222) (4,214)
ESOP liability basis differences................. 6,247 8,710
Net operating loss carryforwards................. 19,610 2,638
Valuation allowance.............................. (3,999) (2,638)
Other noncurrent accrued liabilities, not
currently deductible............................ 6,450 6,853
------- -------
17,704 8,453
------- -------
Net deferred tax asset........................... $25,144 $11,682
======= =======
</TABLE>
At December 26, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $50,281, all of which are limited
to utilization under the Internal Revenue Code. Due to such limitations, the
Company believes it is more likely than not that it will not realize the full
benefit of the loss carryforwards and has provided a valuation allowance of
approximately $3,999 to reserve such amounts as of December 26, 1998. These
carryforwards expire through 2018. Undistributed earnings to be permanently
reinvested by the international subsidiaries totaled approximately $2,360 at
December 26, 1998. Because these earnings are to be permanently reinvested, no
U.S. deferred income tax has been recorded for them.
14. Retirement Plans
The Company has a defined contribution pension plan (a 401(K) plan) for
substantially all employees other than employees subject to collective
bargaining agreements. Eligible participants may make limited contributions to
the defined contribution plan; however, no employer contributions are allowed.
Certain union employees participate in multi-employer pension plans
sponsored by their respective unions. Amounts charged to pension cost,
representing the Company's required contributions to these plans for 1998, 1997
and Successor '96 and Predecessor '96, combined, were $1,633, $1,439 and
$1,495, respectively.
The Company had accrued $2,653 and $2,679 at December 26, 1998 and December
27, 1997, respectively, for a supplemental executive retirement plan for a
former executive. Such amounts are included in postretirement benefit
obligations other than pensions in the accompanying consolidated balance
sheets.
The Company also has an unfunded nonqualified employee stock ownership plan
to provide benefits to certain employees who were not eligible to participate
in the ESOP. Benefits are to be paid in cash and are computed based on the
value of shares the participants would have received had they participated in
the ESOP.
F-20
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
Participants are entitled to receive accrued benefits upon termination of
employment with the Company, retirement, death, or permanent disability.
Benefits vest based on the provisions of the ESOP. The Company charged
approximately $184, $64 and $128 to expense for 1998, 1997 and Successor '96
and Predecessor '96, combined, respectively. The accrued benefits under the
nonqualified plan were $373 and $189 at December 26, 1998 and December 27,
1997, respectively, and are included in other long-term liabilities in the
accompanying consolidated balance sheets. Vested interests of current
participants in the plan were distributed upon consummation of the Investcorp
Acquisition.
The Company provides certain health care and life insurance benefits to
eligible retired employees. Eligibility is defined as retirement from active
employment, having reached age 55 with 15 years of service, and previous
coverage as a salaried or nonunion employee. Additionally, dependents are
eligible to receive benefits, provided the dependent was covered prior to
retirement. The medical plan pays a stated percentage of most medical expenses
reduced for any deductible and payments made by government programs and other
group coverage. Additionally, there is a $20 lifetime maximum benefit for
participants age 65 and over. The Company also provides life insurance to all
retirees who retired before 1979. These plans are unfunded.
The Company accrues the cost of providing postretirement benefits, including
medical and life insurance coverage, during the active service period of the
employee.
F-21
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
The following table presents a reconciliation of the plan's status at
December 26, 1998 and December 27, 1997:
<TABLE>
<CAPTION>
December December
26, 1998 27, 1997
-------- --------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation, beginning of year................. $ 5,138 $ 5,551
Service cost.......................................... 205 187
Interest cost......................................... 347 338
Benefits paid......................................... (93) (386)
Actuarial (gain)/loss................................. (131) (552)
------- -------
Benefit obligation, end of year....................... $ 5,466 $ 5,138
======= =======
Change in Plan Assets:
Fair value of assets, beginning of year............... $ -- $ --
Employer contributions................................ 93 386
Benefits paid......................................... (93) (386)
------- -------
Fair value of assets, end of year..................... $ -- $ --
======= =======
Reconciliation of Accrued Benefit Cost:
Funded status......................................... $(5,466) $(5,138)
Unrecognized prior service cost....................... (213) (243)
Unrecognized net gain................................. (867) (748)
------- -------
Accrued benefit cost, end of year..................... $(6,546) $(6,129)
======= =======
Weighted-Average Assumptions:
Discount rate, December 31............................ 6.75% 7.00%
Components of Net Periodic Benefit Cost:
Service cost.......................................... $205 $187
Interest cost......................................... 347 338
Amortization of:
Prior service cost.................................. (30) (30)
Gain................................................ (12) (22)
------- -------
Net periodic benefit cost............................. $ 510 $ 473
======= =======
A 10.0% annual rate of increase in the cost of health care benefits was
assumed for 1998; the rate was assumed to decrease 0.5% per year until 5.0% is
reached. A 1.0% change in assumed health care cost trend rates would have the
following effects:
<CAPTION>
1% 1%
Increase Decrease
-------- --------
<S> <C> <C>
Effect on Total of Service and Interest Cost
Components............................................. $ 83 $ (70)
Effect on Benefit Obligation............................ $ 552 $ (496)
</TABLE>
F-22
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share amounts)
15. Contingencies
From time to time, the Company has been involved in various legal
proceedings. Management believes that all such litigation is routine in nature
and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect on the financial condition or results of operations of the
Company.
16. Related Party Transactions
The Company, Holdings and Fenway entered into a management agreement (the
"Fenway Advisory Agreement") effective upon consummation of the Transactions
pursuant to which Fenway agreed to provide strategic advisory services to the
Company. In exchange for such services, the Company agreed to pay Fenway (i)
annual management fees of 0.25% of net sales for the prior fiscal year, (ii)
fees in connection with the consummation of any acquisition transactions for
Fenway's assistance in negotiating such transactions and (iii) certain fees and
expenses, including legal and accounting fees and any out-of-pocket expenses
incurred by Fenway in connection with providing services to the Company.
In connection with the Investcorp Acquisition, the Company entered into an
agreement for management advisory and consulting services (the "Investcorp
Management Agreement") with Investcorp International Inc. ("International")
pursuant to which the Company agreed to pay International $1.0 million per
annum for a five-year term. At the closing of the Investcorp Acquisition, the
Company paid International $3.0 million for the first three years of the term
of the Investcorp Management Agreement in accordance with its terms. In
connection with the Transactions, this agreement was terminated.
The Company entered into an agreement with Holdings pursuant to which the
Company agreed to reimburse Holdings for certain expenses incident to Holdings'
ownership of the Company's capital stock for as long as Holdings and the
Company file consolidated federal income tax returns. Such expenses include
franchise taxes and other fees required to maintain Holdings' corporate
existence; operating costs incurred by Holdings attributable to its ownership
of the Company's capital stock not to exceed $850 per fiscal year; federal,
state and local taxes paid by Holdings and attributable to income of the
Company and its subsidiaries other than taxes arising from the sale or exchange
by Holdings of the Company's common stock; the purchase price of capital stock
or options to purchase capital stock of Holdings owned by former employees of
the Company or its subsidiaries not to exceed $2.0 million per year permitted
under the New Senior Credit Facility; and registration expenses incurred by
Holdings incident to a registration of any capital stock of Holdings under the
Securities Act.
F-23
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 27, 1999
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 8,706
Accounts receivable, less allowance for doubtful accounts of
$4,577 ..................................................... 75,545
Inventories.................................................. 21,130
Deferred income taxes........................................ 10,886
Other current assets........................................ 15,304
--------
Total current assets........................................ 131,571
--------
Property, plant and equipment, net............................ 55,037
Patents, net of accumulated amortization of $8,364............ 8,668
Goodwill, net of accumulated amortization of $14,498.......... 178,809
Deferred income taxes......................................... 16,899
Other assets.................................................. 20,060
--------
$409,044
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 16,282
Accrued advertising and incentives........................... 20,109
Accrued wages and benefits................................... 7,243
Other accrued expenses....................................... 16,784
Current maturities of long-term obligations.................. 532
--------
Total current liabilities................................... 60,950
--------
Noncurrent liabilities:
Long-term obligations........................................ 333,908
Other noncurrent liabilities................................. 19,244
--------
Total liabilities........................................... 414,102
--------
Commitments and contingencies
Redemption Obligation--ESOP, net of related unearned
compensation of $10,095...................................... 13,389
Common stockholders' deficit:
Common stock, $0.1 par value; 50,000,000 shares authorized,
31,964,452 shares issued and outstanding.................... 320
Accumulated deficit.......................................... (18,701)
Accumulated other comprehensive loss......................... (66)
--------
Total common stockholders' deficit.......................... (18,447)
--------
$409,044
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-24
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
Net sales.................................................. $146,348 $139,392
Costs and expenses:
Cost of products sold.................................... 85,586 83,435
Selling, general and administrative...................... 55,192 51,068
ESOP expense............................................. 1,792 1,475
Amortization of intangibles.............................. 1,906 1,908
Interest expense, net.................................... 7,941 4,643
Other expense, net....................................... 521 408
-------- --------
Loss before income taxes and extraordinary item........ (6,590) (3,545)
Benefit for income taxes................................... (2,110) (1,719)
-------- --------
Loss before extraordinary item......................... (4,480) (1,826)
Extraordinary loss from early extinguishment of debt, net
of income
tax benefit of $1,095..................................... 2,173 --
-------- --------
Net loss................................................... (6,653) (1,826)
Other comprehensive income:
Foreign currency translation adjustment.................. 20 4
-------- --------
Comprehensive loss......................................... $ (6,633) $ (1,822)
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
Net cash used in operating activities....................... $(11,736) $(1,755)
-------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment, net............ (1,374) (3,755)
-------- -------
Net cash used in investing activities..................... (1,374) (3,755)
-------- -------
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........................... -- 9,204
Payments on long-term borrowings........................... (24,029) (4,008)
Payments of financing costs................................ (4,788) --
Treasury stock purchases................................... -- (1)
-------- -------
Net cash provided by financing activities................. 15,792 5,195
-------- -------
Net effect of exchange rate changes on cash................. 20 4
-------- -------
Change in cash and cash equivalents......................... 2,702 (311)
Cash and cash equivalents, beginning of period.............. 6,004 9,108
-------- -------
Cash and cash equivalents, end of period.................... $ 8,706 $ 8,797
======== =======
Supplemental cash flow information:
Depreciation............................................... $ 2,490 $ 2,195
======== =======
</TABLE>
F-26
<PAGE>
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
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 March 27, 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
included elsewhere herein. Operating results for the period ended March 27,
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 March 27, 1999 (in thousands):
<TABLE>
<S> <C>
Raw materials..................................................... $13,947
Work in progress.................................................. 1,304
Finished goods.................................................... 5,879
-------
$21,130
=======
</TABLE>
3. Long-term Obligations
Long-term obligations consisted of the following at March 27, 1999 (in
thousands):
<TABLE>
<S> <C>
New Senior Credit Agreement:
Tranche A Term Loan............................................ $ 48,607
Tranche B Term Loan............................................ 68,657
Tranche C Term Loan............................................ 48,764
Industrial Revenue Bonds, 7.00%, due 2017....................... 9,700
Industrial Revenue Bonds, 3.20%, due 2016....................... 5,000
Banco Santander Loan............................................ 3,129
10.25% Senior Subordinated Notes due 2009....................... 150,000
Other, including capital lease obligations...................... 583
--------
334,440
Less current portion............................................ (532)
--------
$333,908
========
</TABLE>
The New 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 to provide a portion of the funds necessary to consummate a
recapitalization agreement (as amended to date, 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 will require no principal amortization payments in 1999. Our
indebtedness under the New Senior Credit Agreement bears
F-27
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 27, 1999 for the Tranche A
term, Tranche B term and Tranche C term loans were 7.73%, 8.24% and 8.49%,
respectively.
At March 27, 1999, the amount under the Revolving Credit Facility that was
available to be drawn was approximately $79.4 million, after giving effect to
$0.6 million that was reserved for our reimbursement obligations with respect
to outstanding letters of credit.
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 Financing and the Junior
Simmons Notes and accrued interest;
(2) repay the amounts outstanding under the Revolving Credit Facility and
accrued interest; and
(3) prepay a portion of the amounts outstanding under the Term Loan
Facility and accrued interest.
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 7.0% as of March 27, 1999.
Future maturities of long-term obligations as of March 27, 1999 are as
follows:
<TABLE>
<S> <C>
1999............................................................. $ 532
2000............................................................. 799
2001............................................................. 3,974
2002............................................................. 16,865
2003............................................................. 18,008
Thereafter....................................................... 294,262
--------
$334,440
========
</TABLE>
4. 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 including those embedded in other contracts by
requiring that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. 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.
5. Contingencies
Serta filed an action against us in 1998 alleging that some Simmons
products--including those sold in connection with the trademarks Connoisseur(R)
collection, Crescendo(TM), and some World Class Beautyrest(R) and Back Care(R)
Ultimate models--infringe their U.S. patent and that our use of the term
"Crescendo" infringes
F-28
<PAGE>
SIMMONS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
their alleged common-law trademark, "Crescendo". 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 the 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.
6. Subsequent Event
On April 21, 1999, we filed a registration statement on Form S-4 to issue
10.25% Series B Senior Subordinated Notes due 2009 (the "New Notes") pursuant
to an exchange offer whereby holders of the Notes have the opportunity to
receive New Notes which will be registered under the Securities Act of 1933,
but are otherwise identical to the Notes.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only upon the information contained in this prospectus. We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
Simmons Company
Exchange Offer
$150,000,000
Series B Senior Subordinated
Notes due 2009
10 1/4%
----------------
[LOGO OF SIMMONS(TM) FPO COLOR]
----------------
, 1999
Until , 1999, all dealers effecting transactions in the Notes or the
Exchange Notes, whether or not participating in the Exchange Offer, may be
required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
a corporation to indemnify and advance reasonable expenses to any person who
was a party, is a party, or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Our Certificate of Incorporation and Bylaws each include indemnification
provisions that mirror the language of the statute. In addition, our Bylaws
provide that, subject to any limitation in the Certificate of Incorporation, we
may indemnify a director or officer to the fullest extent permitted by law,
including, without limitation, DGCL (S)145. Consequently, any of our directors
or officers or any person serving at our request in those capacities will be
fully indemnified against such judgments, penalties, fines, settlements and
reasonable expenses actually incurred, except if: (1) he did not conduct
himself in good faith and did not reasonably believe his conduct was in the
corporation's best interests; or (2) in the case of any criminal action or
proceeding, he had reasonable cause to believe his conduct was unlawful. No
indemnification may be made in respect of any claim, issue or matter as to
which such person is adjudged to be liable to us unless and only to the extent
that the Court of Chancery or the court in which the action was brought
determines that, despite the adjudication of liability but in view of all of
the circumstances of the case, he was fairly and reasonably entitled to
indemnity for the expenses which the court deems proper.
Our Certificate of Incorporation also contain a provision eliminating
liability to us or our shareholders for monetary damages from breach of
fiduciary duty as a director. The inclusion of these indemnification provisions
in our Certificate of Incorporation and Bylaws is intended to enable us to
attract qualified persons to serve as directors and officers who might
otherwise be reluctant to serve.
II-1
<PAGE>
ITEM 21. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*2.1 Agreement and Plan of Merger (the "Merger Agreement") dated July 16,
1998 by and among Simmons Company (the "Company"), Simmons Holdings,
Inc. ("Simmons Holdings") and REM.
*2.2 Amendment No. 1 to Merger Agreement dated as of September 22, 1998.
*2.3 Amendment No. 2 to Merger Agreement dated as of October 26, 1998.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company.
*4.1 Indenture between the Company and SunTrust Bank, Atlanta, as
Trustee, dated as of March 16, 1999.
*4.2 Registration Rights Agreement between the Company and Goldman, Sachs
& Co. dated March 16, 1999.
*4.3 Form of Letter of Transmittal.
*4.4 Form of Notice of Guaranteed Delivery.
*4.5 Exchange Agent Agreement.
5 Opinion of Jones, Day, Reavis & Pogue.
*10.1 ESOP Stock Sale and Exchange Agreement (the "ESOP Purchase
Agreement") dated as of July 22, 1998 by and among Simmons Holdings,
the Company, State Street Bank & Trust Company ("State Street"),
solely in its capacity as trustee of the Simmons ESOP and REM.
*10.2 Amendment No. 1 to ESOP Purchase Agreement dated as of September 25,
1998.
*10.3 1998 Stockholders' Agreement (the "1998 Stockholders' Agreement")
dated as of October 29, 1998 among Simmons Holdings, the Company,
Simmons Holdings, LLC ("Fenway Investment LLC"), Investcorp, and
State Street, solely as trustee of the Simmons ESOP.
*10.4 Joinder to 1998 Stockholders' Agreement dated as of October 29, 1998
by SH Investment Limited.
*10.5 1998 Stockholders' Agreement dated as of October 29, 1998 by and
among Simmons Holdings, Fenway Investment LLC and the Management
Investors listed therein.
*10.6 Credit and Guaranty Agreement (the "Credit and Guaranty Agreement")
dated as of October 29, 1998, among the Company, Simmons Holdings
and Certain Subsidiaries of the Company, as Guarantors, the
financial institutions listed therein, as Lenders, Goldman Sachs
Credit Partners L.P., as a Joint Lead Arranger and as Syndication
Agent, Warburg Dillon Read LLC as a Joint Lead Arranger, and UBS
A.G., Stamford Branch, as Administrative Agent.
*10.7 First Amendment to Credit and Guaranty Agreement dated as of March
1, 1999.
*10.8 Advisory Agreement dated as of October 29, 1998 by and between
Simmons Holdings, the Company and Fenway Partners, Inc.
*10.9 Simmons 1996 Management Stock Incentive Plan.
*10.10 Form of Stock Option Agreement.
*10.11 Form of Management Bonus Agreement.
*10.12 Labor Agreement between the Company and The United Steel Workers,
Local No. 425 for all employees at the Jacksonville, Florida plant
of the Company excluding executives, sales employees, office
workers, supervisors, inspectors, departmental coordinators or
persons in any way identified with management for the period from
October 16, 1997 to October 15, 2001.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.13 Labor Agreement between the Company and The United Steel Workers,
Local No. 422 for all production and maintenance employees at the
Dallas, Texas plant of the Company excluding supervisors, foremen,
factory clerks, office employees, time keepers, watchmen or persons
in any way identified with management for the period from October
16, 1997 to October 15, 2001.
*10.14 Labor Agreement between the Company and The United Steel Workers,
Local No. 2401 for all production at the Atlanta, Georgia plant of
the Company excluding office workers, supervisors, foremen,
inspectors, watchmen, plant guards, departmental coordinators,
carload checkers or persons in any way identified with management
for the period from October 16, 1997 to October 15, 2001.
*10.15 Labor Agreement between the Company and The United Steel Workers,
Local No. 173 for all employees at the Shawnee, Kansas plant of the
Company excluding executives, sales employees, office workers,
supervisors, foremen, time keepers, mechanics or machinist for the
period from April 23, 1997 to April 22, 1999.
*10.16 Labor Agreement between the Company and The United Steel Workers,
Local No. 515U for all employees at the Los Angeles, California
plant of the Company excluding executives, sales employees, office
workers, and supervisors for the period from October 16, 1997 to
October 15, 2001.
*10.17 Labor Agreement between the Company and The United Steel Workers,
Local No. 420 for employees at the Piscataway, New Jersey plant of
the Company excluding watchmen, office janitors, maintenance
department employees, truck drivers, tool makers, machinists,
supervisors, porters, matrons, main office, clerical, and
maintenance helpers for the period of October 16, 1997 to October
15, 2001.
*10.18 Labor Agreement between the Company and The United Steel Workers,
Local No. 424 for all production employees at the Columbus, Ohio
plant of the Company excluding executives, sales employees, office
workers, timekeepers, watchmen, office janitors, maintenance
department employees, truck drivers, foremen, supervisors, private
chauffeurs, main office, clerical, and engine room and power plant
employees for the period from October 16, 1997 to October 15, 2001.
*10.19 Lease Agreement Concourse at Landmark Center between Concourse I,
Ltd., as Landlord, and the Company, as Tenant, dated February 7,
1992.
*10.20 Lease between Beaver Ruin Business Center-Phase V between St. Paul
Properties, Inc., as Landlord, and the Company, as Tenant, dated
October 19, 1994, as amended by Addendum to Lease, dated September
1, 1995.
*10.21 Loan Agreement, dated as of November 1, 1982, between the City of
Janesville, Wisconsin and the Company, as successor by merger to
Simmons Manufacturing Company, Inc., relating to $9,700,000 City of
Janesville, Wisconsin Industrial Development Revenue Bond, Series
A.
*10.22 Loan Agreement between the City of Shawnee and the Company relating
to the Indenture of Trust between City of Shawnee, Kansas and State
Street Bank and Trust Company of Missouri, N.A., as Trustee, dated
December 1, 1996 relating to $5,000,000 Private Activity Revenue
Bonds, Series 1996.
*10.23 Loan Agreement dated December 12, 1997 between Simmons Caribbean
Bedding, Inc. and Banco Santander Puerto Rico.
10.23A English Language Summary of Appendix to Exhibit 10.23.
*10.24 Securities Purchase Agreement, dated as of October 29, 1998 among
the Company, Simmons Holdings and the Purchasers listed on Schedule
I attached thereto.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.25 Warrant to purchase 601,346.63 shares of common stock of Simmons
Holdings.
*10.26 Warrant to purchase 2,104,713.22 shares of common stock of Simmons
Holdings dated October 29, 1998.
*10.27 Escrow Agreement dated as of October 29, 1998 by and among Simmons
Holdings, the Company, Fenway Investment LLC and Ropes & Gray, as
Escrow agent.
*10.28 Employment Agreement between the Company and Zenon S. Nie, dated as
of November 25, 1993, as amended.
*10.29 Employment Agreement between the Company and Martin R. Passaglia,
dated as of June 29, 1998, as amended.
*10.30 Employment Agreement between the Company and Jonathan C. Daiker,
dated as of June 29, 1998, as amended.
*10.31 Employment Agreement between the Company and Robert K. Barton, dated
as of June 29, 1998, as amended.
*10.32 Employment Agreement between the Company and Joseph Ulicny, dated as
of June 29, 1998, as amended.
*10.33 Purchase Agreement dated as of March 10, 1999 among the Company,
Goldman, Sachs & Co., Warburg Dillon Read LLC, Fleet Securities,
Inc. and US Bancorp Libra.
*21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5).
*24 Power of Attorney.
*25 Statement of Eligibility of Trustee.
*27 Financial Data Schedule.
</TABLE>
- --------
*Previously filed
ITEM 22. UNDERTAKINGS
(1) The Company undertakes:
(a) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(x) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(y) to reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered, if the total
dollar value of securities offered would not exceed that which was
registered, and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(z) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement.
II-4
<PAGE>
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934, and where applicable, each filing of employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934, that is incorporated by reference in this registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities, other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by that director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(4) The undersigned registrant undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this registration statement, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of this registration
statement through the date of responding to the request.
(5) The undersigned registrant undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Simmons Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the second day of July, 1999.
Simmons Company
By: /s/ Jonathan C. Daiker
-------------------------------
Name: Jonathan C. Daiker
Title: Executive Vice
President--Finance
and Administration
Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the second day of July, 1999.
<TABLE>
<S> <C>
Signature Title
/s/ Zenon S. Nie* Chairman of the Board of Directors
- ------------------------------------- and Chief Executive Officer and
Zenon S. Nie President (principal executive
officer)
/s/ Jonathan C. Daiker Executive Vice President--Finance
- ------------------------------------- and Administration Chief Financial
Jonathan C. Daiker Officer and Director (principal
financial and accounting officer)
/s/ Martin R. Passaglia* Senior Executive Vice President,
- ------------------------------------- Secretary and Director
Martin R. Passaglia
/s/ Peter Lamm* Director
- -------------------------------------
Peter Lamm
/s/ Richard C. Dresdale* Director
- -------------------------------------
Richard C. Dresdale
/s/ Andrea Geisser* Director
- -------------------------------------
Andrea Geisser
/s/ Gregory P. Meredith* Director
- -------------------------------------
Gregory P. Meredith
/s/ Mark R. Genender* Director
- -------------------------------------
Mark R. Genender
/s/ Jonathan C. Daiker
- -------------------------------------
Jonathan C. Daiker
Attorney-in-fact*
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*2.1 Agreement and Plan of Merger (the "Merger Agreement") dated July 16,
1998 by and among the Company, Simmons Holdings and REM.
*2.2 Amendment No. 1 to Merger Agreement dated as of September 22, 1998.
*2.3 Amendment No. 2 to Merger Agreement dated as of October 26, 1998.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company.
*4.1 Indenture between the Company and SunTrust Bank, Atlanta, as
Trustee, dated as of March 16, 1999.
*4.2 Registration Rights Agreement between the Company and Goldman, Sachs
& Co. dated March 16, 1999.
*4.3 Form of Letter of Transmittal.
*4.4 Form of Notice of Guaranteed Delivery.
*4.5 Exchange Agent Agreement.
5 Opinion of Jones, Day, Reavis & Pogue.
*10.1 ESOP Stock Sale and Exchange Agreement (the "ESOP Purchase
Agreement") dated as of July 22, 1998 by and among Simmons Holdings,
the Company, State Street Bank & Trust Company ("State Street"),
solely in its capacity as trustee of the Simmons ESOP and REM.
*10.2 Amendment No. 1 to ESOP Purchase Agreement dated as of September 25,
1998.
*10.3 1998 Stockholders' Agreement (the "1998 Stockholders' Agreement")
dated as of October 29, 1998 among Simmons Holdings, the Company,
Fenway Investment LLC, Investcorp, and State Street, solely as
trustee of the Simmons ESOP.
*10.4 Joinder to 1998 Stockholders' Agreement dated as of October 29, 1998
by SH Investment Limited.
*10.5 1998 Stockholders' Agreement dated as of October 29, 1998 by and
among Simmons Holdings, Fenway Investment, LLC and the Management
Investors listed therein.
*10.6 Credit and Guaranty Agreement (the "Credit and Guaranty Agreement")
dated as of October 29, 1998, among the Company, Simmons Holdings
and Certain Subsidiaries of the Company, as Guarantors, the
financial institutions listed therein, as Lenders, Goldman Sachs
Credit Partners L.P., as a Joint Lead Arranger and as Syndication
Agent, Warburg Dillon Read LLC as a Joint Lead Arranger, and UBS
A.G., Stamford Branch, as Administrative Agent.
*10.7 First Amendment to Credit and Guaranty Agreement dated as of March
1, 1999.
*10.8 Advisory Agreement dated as of October 29, 1998 by and between
Simmons Holdings, the Company and Fenway Partners, Inc.
*10.9 Simmons 1996 Management Stock Incentive Plan.
*10.10 Form of Stock Option Agreement.
*10.11 Form of Management Bonus Agreement.
*10.12 Labor Agreement between the Company and The United Steel Workers,
Local No. 425 for all employees at the Jacksonville, Florida plant
of the Company excluding executives, sales employees, office
workers, supervisors, inspectors, departmental coordinators or
persons in any way identified with management for the period from
October 16, 1997 to October 15, 2001.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.13 Labor Agreement between the Company and The United Steel Workers,
Local No. 422 for all production and maintenance employees at the
Dallas, Texas plant of the Company excluding supervisors, foremen,
factory clerks, office employees, time keepers, watchmen or persons
in any way identified with management for the period from October
16, 1997 to October 15, 2001.
*10.14 Labor Agreement between the Company and The United Steel Workers,
Local No. 2401 for all production at the Atlanta, Georgia plant of
the Company excluding office workers, supervisors, foremen,
inspectors, watchmen, plant guards, departmental coordinators,
carload checkers or persons in any way identified with management
for the period from October 16, 1997 to October 15, 2001.
*10.15 Labor Agreement between the Company and The United Steel Workers,
Local No. 173 for all employees at the Shawnee, Kansas plant of the
Company excluding executives, sales employees, office workers,
supervisors, foremen, time keepers, mechanics or machinist for the
period from April 23, 1997 to April 22, 1999.
*10.16 Labor Agreement between the Company and The United Steel Workers,
Local No. 515U for all employees at the Los Angeles, California
plant of the Company excluding executives, sales employees, office
workers, and supervisors for the period from October 16, 1997 to
October 15, 2001.
*10.17 Labor Agreement between the Company and The United Steel Workers,
Local No. 420 for employees at the Piscataway, New Jersey plant of
the Company excluding watchmen, office janitors, maintenance
department employees, truck drivers, tool makers, machinists,
supervisors, porters, matrons, main office, clerical, and
maintenance helpers for the period of October 16, 1997 to October
15, 2001.
*10.18 Labor Agreement between the Company and The United Steel Workers,
Local No. 424 for all production employees at the Columbus, Ohio
plant of the Company excluding executives, sales employees, office
workers, timekeepers, watchmen, office janitors, maintenance
department employees, truck drivers, foremen, supervisors, private
chauffeurs, main office, clerical, and engine room and power plant
employees for the period from October 16, 1997 to October 15, 2001.
*10.19 Lease Agreement Concourse at Landmark Center between Concourse I,
Ltd., as Landlord, and the Company, as Tenant, dated February 7,
1992.
*10.20 Lease between Beaver Ruin Business Center-Phase V between St. Paul
Properties, Inc., as Landlord, and the Company, as Tenant, dated
October 19, 1994, as amended by Addendum to Lease, dated September
1, 1995.
*10.21 Loan Agreement, dated as of November 1, 1982, between the City of
Janesville, Wisconsin and the Company, as successor by merger to
Simmons Manufacturing Company, Inc., relating to $9,700,000 City of
Janesville, Wisconsin Industrial Development Revenue Bond, Series
A.
*10.22 Loan Agreement between the City of Shawnee and the Company relating
to the Indenture of Trust between City of Shawnee, Kansas and State
Street Bank and Trust Company of Missouri, N.A., as Trustee, dated
December 1, 1996 relating to $5,000,000 Private Activity Revenue
Bonds, Series 1996.
*10.23 Loan Agreement dated December 12, 1997 between Simmons Caribbean
Bedding, Inc. and Banco Santander Puerto Rico.
10.23A English Language Summary of Appendix to Exhibit 10.23.
*10.24 Securities Purchase Agreement, dated as of October 29, 1998 among
the Company, Simmons Holdings and the Purchasers listed on Schedule
I attached thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*10.25 Warrant to purchase 601,346.63 shares of common stock of Simmons
Holdings.
*10.26 Warrant to purchase 2,104,713.22 shares of common stock of Simmons
Holdings dated October 29, 1998.
*10.27 Escrow Agreement dated as of October 29, 1998 by and among Simmons
Holdings, the Company, Fenway Investment LLC and Ropes & Gray, as
Escrow agent.
*10.28 Employment Agreement between the Company and Zenon S. Nie, dated as
of November 25, 1993, as amended.
*10.29 Employment Agreement between the Company and Martin R. Passaglia,
dated as of June 29, 1998, as amended.
*10.30 Employment Agreement between the Company and Jonathan C. Daiker,
dated as of June 29, 1998, as amended.
*10.31 Employment Agreement between the Company and Robert K. Barton, dated
as of June 29, 1998, as amended.
*10.32 Employment Agreement between the Company and Joseph Ulicny, dated as
of June 29, 1998, as amended.
*10.33 Purchase Agreement dated as of March 10, 1999 among the Company,
Goldman, Sachs & Co., Warburg Dillon Read LLC, Fleet Securities,
Inc. and U.S. Bancorp Libra.
*21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5).
*24 Power of Attorney.
*25 Statement of Eligibility of Trustee.
*27 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 5
JONES, DAY, REAVIS & POGUE
3500 SunTrust Plaza
303 Peachtree Street, NE
Atlanta, Georgia 30308-3242
(404) 521-3939
July 1, 1999
Simmons Company
One Concourse Parkway
Atlanta, Georgia 30328
Ladies and Gentlemen:
We are acting as counsel to Simmons Company (the "Company"), a corporation
organized under the laws of the State of Delaware, in connection with (i) the
offer to exchange (the "Senior Note Exchange Offer") $1,000 principal amount at
maturity of the Company's 10 1/4% Senior Subordinated Notes due 2009 (the
"Exchange Notes") for each $1,000 principal amount at maturity of the Company's
outstanding 10 1/4% Senior Subordinated Notes due 2009 (the "Private Notes") and
(ii) the preparation of the prospectus (the "Prospectus") contained in the
registration statement on Form S-4 (the "Registration Statement") (No. 333-
76723) filed with the Securities and Exchange Commission by the Company for the
purpose of registering the Exchange Notes under the Securities Act of 1933 (the
"Act"). The Private Notes have been, and the Exchange Notes will be, issued
pursuant to an Indenture, dated as of March 16, 1999 (the "Indenture"), between
the Company and SunTrust Bank, Atlanta, as Trustee. Unless otherwise defined
herein, terms defined in the Prospectus are used herein as defined therein.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such corporate records, agreements, documents, and other
instruments and such certificates or comparable documents of public officials
and representatives of the Company and have made such other and further
investigations as we have deemed relevant and necessary as a basis for the
opinions hereinafter set forth. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents.
Based on the foregoing, and subject to the qualifications and limitations
stated herein, we are of the opinion that when the Exchange Notes, substantially
in the form as set forth on an exhibit to the Indenture filed as Exhibit 4.1 to
the Registration Statement, have been duly executed by the Company and
authenticated by the Trustee in accordance with the Indenture and duly delivered
in exchange for the Private Notes in accordance with the Senior Note Exchange
Offer in the manner described in the Registration Statement, the Exchange Notes
will constitute valid and legally binding obligations of the Company enforceable
in accordance with their terms,
<PAGE>
except to the extent enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally and general equitable
principles (whether considered in a proceeding in equity or at law).
We hereby consent to the use of our name under the caption "Legal Matters"
in the Prospectus forming part of the Registration Statement and to the filing
of this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ Jones, Day, Reavis & Pogue
-2-
<PAGE>
Exhibit 10.23A
--------------
English Language Summary of Appendix to Exhibit 10.23
-----------------------------------------------------
UPDATE OF THE REPORT
Case: Simmons Caribbean ("Compania de Fomento Industrial")
Case Number: 1222.6270
Number of properties: 6436, 11778 and 4003 registered at pages 82, 78 and 129 of
Volumes Trujillo Alto, Section Fourth of San Juan Nos. 128, 238 and 90.
The real estate properties have been grouped and registered at entry No. 87 of
the Book of Original Entry of Deeds for Record No. 96. Their surface is 48.42
acres (see original studies).
The deed No. 14 granted in San Juan on June 2, 1993 before the Notary Edgardo R.
Martinez Nazario was submitted after the original study and recorded on November
6, 1997 at the entry No. 17 of the Book of Original Entry of Deeds for Record
No. 155. (Segregation and Sale)
Segregated and Sold by........ The Puerto Rico Industrial Development Company.
Lot No. 6 of the Industrial Park Las Cuevas (see
description below)
Purchased by.................. Simmons Caribbean Bedding Inc. represented by
Hector Osorio, of legal age, married to Lydia
Lartigue Enrique (no documents evidencing that
the representative is empowered to represent the
purchaser have been submitted)
Price......................... $447,250.00
Description:
Urban Property. Parcel of land located in Las Cuevas de Trujillo Alto Puerto
Rico identified as No. 6 of the Industrial Park Las Cuevas with a surface of
10,687.79 m2 (equivalent to 2.719 acres), which adjoins at the north with the
lot No. 5 and with the turning point of the street C of such industrial park; at
the south with the street A of the Industrial Park; at the east with the area
for public use of the industrial park, the lot No. 17 and the turning point of
the street A, and at the west with the street C of the Industrial Park.
The Certificate from Arpe and the Plan approving the project 96-19-B-210 CGT
under AFF. 3392 of April 24, 1997 granted before the notary Olga Iris Marcano
Benites and the Clarification Deed No. 15 granted in San Juan on June 3, 1997
before the notary Edgardo L. Martinez Nazario clarifying the surface of the
remainder of the property after the segregation have been attached. The surface
of the main real estate property is equal to 159,634.2308 m2, which amounts to
40.921 acres.
<PAGE>
Note: The segregated land carries the sale conditions that are set forth in the
mentioned deed No. 14, including the conditions restricting the sale, lese,
assignment or transfer of the property to E.L.A of P.R. for ten years. The
property cannot be sold, mortgaged or leased without the written consent of the
company.
The rest of the study remains as the original one.
The following have been searched: Mortgage Books until pages 59 No. 26; Federal
Books until page (53 A-), 108 A-3; Judgment Books until page 53 No. 145 and the
Logbook No. 13 until entry 264 of the Book of Original Entry of Deeds for Record
No. 157.
December 9, 1997
C. Arroyo
-2-
<PAGE>
TITLE SEARCH
Case: Simmons Caribbean ("Compania de Fomento Industrial de P.R.")
Case Number: 1222.6270
Number of properties: 6436; 11,778 and 4003 registered at pages 82, 78 and 129
of the Volumes Trujillo Alto, Section Fourth of San Juan Nos. 128, 238 and 90.
Description:
Rural real estate property. Part of the land located in the neighborhood Las
Cuevas del Termino Municipal de Trujillo, which consists of 5.00 acres
(equivalent to 1 hectare, 96 areas, 51 square meters and 59 miliares). It
adjoins at the north and at the west with a vicinal road that separates the land
from the land owned by Diazlite Inc and adjoins at the south and at the east
with the main property owned by Faustino Betancourt, from which this land is
segregated from.
This is the land No. 6436 recorded at page 82 of the Volume Trujillo Alto No.
128.
Origin:
It is segregated from the land No. 1803 registered at pages 250 and 181 of the
volumes Nos. 27 and 29.
Rural real estate property. Portion of the land located in the neighborhood Las
Cuevas del Termino Municipal de Trujillo Alto, which consists of 8.08 acres
(equivalent to 31,757,5445 m2) and which adjoins at the north with the land
owned by Antonio R. Diaz, at the south with the river Grande de Loiza, at the
east with the land owned by Metropol Development Corp. and Antonio R. Diaz and
at the west with the land owned by Diazlite Inc.
This is the land No. 11,778 registered at page 78 of the Volume Trujillo Alto
No. 238.
It is segregated from the real estate property No. 46 at page 154 of the Volume
Trujillo Alto No. 50.
Rural real estate property. It is located in the neighborhood Cuevas de
Trujillo Alto with a surface of 35.35 acres (equivalent to 13 hectares, 89
areas, 64 square meters and 79 miliares), which adjoins at the north with the
municipal road that separates it from the land owned by Daniel Vazquez, Jose
Fernandez and Hipolito O'Farril, at the south with the vicinal road and the land
owned by Francisco Betancourt and Rio Grande de Loiza, at the east with the land
owned by Emilio Torres e Hipolito O'Farril and at the west with the municipal
road separating it from Daniel Velazquez and Jose Fernandez and the municipal
road which begins with the municipal road that runs towards the south and the
land owned by Faustino Betancourt.
-3-
<PAGE>
Page 2 CASE 1222.6270 (SIMMONS CARIBBEAN)
This is the real estate property No. 4003 at page 129 of the Volume Trujillo
Alto No. 90.
It has the following constructions: a building to store raw materials that is
made of steel with a "durotex" roof and a floor made of earth, a hut for an
office and a concrete building for switches and a dining room. The owners used
to have factories for the manufacturing of light compounds and machinery in
these buildings and in the land above described.
Additionally, the following constructions are described: a brick chimney, a
steel building with a roof and wall of "durotex" (the wall and the roof have
been vandalized), a steel building with walls and roof of "durotex", a steel
structure (conveyors), a raw clay feedler, a steel structure which holds the
belt conveyor that carries an equipment known as "apron feeder," six steel rings
which are part of an oven with a mud interior used to prepare the light
compounds.
This is made of the agrupation of the land No. 2493 and the land No. 1802
registered at pages 170 vto 247 of the Volume Trujillo Alto No. 57 and No. 27.
All the real estate properties are registered in favor of Compania de Fomento
Industrial de Puerto Rico.
Acquire the first two properties No. 6436 and No. 11778 by assignment from
Antonio R. Diaz, single, and with a value of $175,000.00 and $121,000.00
respectively as shown in deed No. 4 granted in San Juan on March 26, 1975 before
the notary Gilberto Alfaro Berrios and registered at page 82vto 78 of the Volume
Trujillo Alto No. 128 and 238 (according to the second registration, which is
last one and first one and the single one).
The land No. 4003 was acquired by groupation - Purchased from Diazlite Inc. for
the price of $1,299,000.00 by means of deed No. 3 granted in San Juan on March
26, 1975 before the notary Gilberto Alfaro Berrios by means of the registration
No. 6th at page 135 of Volume Trujillo Alto No. 90.
And the buildings have been acquired by a public auction for the price of
$1,000.00 by means of the deed No. 6 granted in San Juan on November 21, 1984
before the notary Ramon Siaca Poupart by registration No. 8th at page 85 vto of
the Volume Trujillo Alto No. 284.
Encumbrances and Liens
Land No. 6436: Right-of-way easement, expired rent (over a parcel of lot of
1,000 acres) in favor of Manuel Quinones, married with Carmen Rivera, and De
Manuel Perez, married with Guillermina Rodriguez, for the term of seven years
with a monthly royalty of $45.00. The lessees also have the right to extract
the gravel in accordance with the deed No. 9 granted in San Juan on January 11,
1955 before the notary Vicente Hita Jr. in accordance with the registration 4th
at page 180 of Volume Trujillo Alto No. 29 (from real estate property No. 1803).
-4-
<PAGE>
Page 3 CASE 1222.6270 (SIMMONS CARIBBEAN)
Land: 11,778; free of encumbrances
Land: 4403. By its origin. Right-of-way easement in favor of Central Victoria
Inc.
By itself. Mortgage guaranteeing the promissory note in favor of the
Government - Development Bank for P.R. for the principal amount of $200,000.00
and 6% interest. It expires on February 1, 1979 in accordance with the deed No.
56 granted in San Juan on February 7, 1964 before the notary Jorge M. Morales in
accordance with the registration I at page 129 of the Volume Trujillo Alto
No. 90.
Cancellation of the mortgage stated in the entry No. 86 of the Book of Original
Entry of Deeds for Record No. 96. (See below)
The above-mentioned properties have been grouped and have a surface equal to
48.42 acres. See entry No. 87 of the Book of Original Entry of Deeds for
Records 96.
Logbook:
Entry No. 86 of the Book of Original Entry of Deeds for Record No. 96 dated
May 8, 1995 - The request for the cancellation of the mortgage of $200,000.00
(that encumbered the land No. 4003) submitted by Antonio Maldonado Lopez,
President and General manager of Compania de Fomento Industrial de Puerto Rico,
was submitted and the cancellation was ordered by the Superior Court of P.R.,
San Juan Chambers, in accordance with the judgment entered on October 6, 1992.
Civil Case # KCD-91-0703 (803) "Lost Promissory Note."
Entry No. 87 of the Book of Original Entry of Deeds for Record No. 96 dated
May 8, 1995 - Deed No. 20 granted on December 4, 1992 before the notary public
Edgardo L. Martinez Rosario was submitted. ("Agrupacion")
Compania de Fomento Industrial de Puerto Rico appears and, in its capacity of
owner of the real estate properties Nos. 6436, 11778 and 4003 with a value of
$1,600,000.00, groups them together. The properties are described as follows:
Rural real estate property. Property located in the neighborhood Las Cuevas de
Trujillo Alto Puerto Rico with surface of 48.42 acres (equivalent to
190,349.059 m), which adjoins at the north with a municipal road, which used to
be the state highway 8860, the land owned by Hipolito O'Farril and the land
owned by Antonio R. Diaz, at the south with the land owned by Faustino
Betancourt Pomales and the river Grande de Loiza and at the east with the land
owned by Metropol Development Corporation and the land owned by Antonio R. Diaz
and at the west by the municipal road, which used to be the state highway 8860.
-5-
<PAGE>
Page 4 CASE 1222.6270 (SIMMONS CARIBBEAN)
The clarifying deed No. 6 granted in San Juan on February 27, 1977 before the
notary Edgardo L. Martinez, by means of which Compania de Fomento Industrial de
Puerto Rico clarifies that correct surface is 48.11 acres (equivalent to
189,111.92 m2), and not the one stated in the document relating to the group of
properties is submitted.
Entry No. 359 of the Book of Original Entry of Deeds for Record No. 84 dated
August 11, 1994 -Deed No. 11 granted in San Juan on August 5, 1994 before the
notary public Edgardo L. Martinez Nazario was submitted (segregation and sale).
Sold by.......................... Compania de Fomento Industrial de Puerto
Rico, who segregates land from the lots
grouped together No. 7 (see description below)
Purchased by..................... Inter American Industrial Development Inc.
Price............................ $309,709.93
Rural real estate property. Property No. 7 located in the industrial area
Las Cuevas in the neighborhood Las Cuevas del Termino Municipal de Trujillo Alto
Puerto Rico with a surface of 9385.832 m2 (equivalent to 2.388 acres), which
adjoins at the north with the land No. 3; at the south with the street N; at the
east with the street C and at the west with the land No. 8.
It is stated in the document that the segregation was approved by means of the
resolution from Arpe dated July 14, 1992, Project No. 92-19-A 263 CGT, which is
attached.
After the segregation, the remaining land consists of 46.032 acres, which are
equivalent to 179,725,360 m2.
The following documents are attached:
1. Deed No. 5 containing the Clarifying Deed granted in San Juan on March 7,
1997 before the notary Manuel L. Correa Marquez by means of which it is
clarified the surface of the remaining land.
2. Deed No. 20 containing the clarifying statement granted in San Juan on
March 7, 1997 before the notary Manuel L. Correa Marquez by means of which
it is clarified that the surface of the remaining land is equal to 48.11
acres or 189,111,192 m2.
3. The corporate resolution of the purchaser resolving to issue the clarifying
statement is attached.
-6-
<PAGE>
Page 5 CASE 1222.6270 (SIMMONS CARIBBEAN)
Entry No. 320 of the Book of Original Entry of Deeds for Record No. 84 dated
August 20, 1994. The Deed No. 6 granted in San Juan on August 5, 1994 before the
Notary Noel Gonzalez Miranda, by means of which Inter-American Industrial
Development Inc. constitutes a mortgage on the lot No. 7 above segregated, was
submitted. It guarantees the demand promissory note issued to the bearer for
the principal amount of $1,830,000.00, with an interest rate of 1% over the
preferred rate prevailing at Citibank de N.Y.
Entry No. 276 of the Book of Original Entry of Deeds for Record No. 139 dated
May 7, 1997 - Deed No. 7 granted in San Juan on March 7, 1994 before the notary
public Edgardo L. Martinez Nazario (segregation and sale).
Sold by........................ Compania de Fomento Industrial de Puerto Rico.
The Lot No. 8 is segregated from the group of
properties (see description below) and sold to:
Purchased by................... InterAmerican Industrial Development Corp.,
represented by Manuel Quintana Puente Mayor,
married with Carmen Rita Soler Garcia)
[illegible text follows]
Price.......................... $319,621.00
Rural Real Estate Property. Lot No. 8 located in the industrial area Las Cuevas
in the neighborhood Las Cuevas del Termino Municipal de Trujillo Alto Puerto
Rico, which adjoins at the north with the lots No. 2 and No 3 of the same
Industrial Park; at the south with the street A of the same Industrial Park; at
the east with the land No. 7 of the same Industrial Park and at the west by the
street B of the same Industrial Park. It has a surface of 9403.4292 m2,
equivalent to 2.392 acres.
The remaining of the land amounts to 43.330 acres.
The deed No. 20 granted in San Juan on August 22, 1997 before the notary Edgardo
L. Martinez Nazario, which clarifies the remaining land, is submitted.
Entry No. 277 of the Book of Original Entry of Deeds for Record No. 139 dated
May 7, 1997 Deed No. 19 granted in San Juan on March 7, 1997 before the notary
Manuel Correa Marquez - Mortgage on the lot No. 8 securing the demand promissory
note issued by Inter American Industrial Development Inc. and granted in the
name of Banco Santander P.R. for the amount of $250,000.00, with a preferred
floating rate from the Citibank N.Y. and/or the Chase Manhattan Bank.
-7-
<PAGE>
Page 6 CASE 1222.6270 (SIMMONS CARIBBEAN)
The Clarifying Deed No. 8 granted in San Juan on March 7, 1997 before the notary
Edgardo L. Martinez Nazario, in which it is clarified that the purchaser is
authorized to constitute a mortgage in favor of Banco Santander P.R. in the
segregation and purchase deed, is submitted.
Entry No. 91 of the Book of Original Entry of Deeds for Record No. 152 dated
October 7, 1997. Deed No. 21 granted in San Juan on August 27, 1997 before the
notary Edgardo L. Martinez (segregation and purchase).
Sold by....................... P.R. Industrial Development Co. - Lot No. 5
(see description below) and sells it to:
Purchased by.................. Caribbean Paper Company represented by
Adrian Silva Reollana, of majority of age,
married with Gail Silva, and empowered to
represent the company in accordance with the
corporate resolution dated June 4, 1996 AFF
2869 - Notary Jose Vladimir Diaz Tejera
(attached)
Price......................... $443,090.00
The resolution above mentioned is attached and the purchaser is authorized to
constitute the mortgage in favor of Banco Popular for the amount of $1,944,800.
Rural Real Estate Property. Price of the lot No. 5 located in the industrial
area Las Cuevas de Trujillo Alto Puerto Rico with a surface of 13,032.036 m2
(equivalent to 3.316 acres) and which adjoins at the north with the land No. 4
of the industrial area and with the turning point of the street C of the same
industrial area, at the south with the lot No. 17 and the area of public use of
the same industrial area; at the east with land owned by E.L.A. and at the west
with the lot No. 6 of the same industrial area.
The remaining of the land amounts to 37.605 acres, which are equivalent to
146,602.1948 m2.
Entry No. 92 of the Book of Original Entry of Deeds for Record No. 152 dated
October 7, 1997. Deed No. 379 granted in San Juan on August 27, 1997 before the
notary Jose David Medina - Mortgage that guarantees the promissory note issued
in the name of Banco Popular de P.R. for the principal amount of $1,944.800 with
an interest rate of 1 1/2% over the preferential floating rate published by the
Wall Street Journal. The mortgage was constituted by Caribbean Paper Co. Inc.,
represented by Adrian Silva Riollano. The resolution stating his powers is
attached.
-8-
<PAGE>
Page 7 CASE 1222.6270 (SIMMONS CARIBBEAN)
Read: all the segregations include sale conditions, among others: the purchaser
cannot sell, lease, transfer or mortgage without the written consent of the
Compania de Fomento for the term of 10 years.
All the segregations are subject to the easement in favor of Central Victoria
Inc. and the expired, but not canceled, lease.
Note: According to the logbook, nothing related to Simmons Caribbean has been
submitted.
The Mortgage Books have been revised up to the pages 59 # 237. The Federal Book
has been revised up to the entry 105 A-2, the Judgment Book has been revised up
to the page 50 # 136 and the Logbook # 13 of T. Alto up to the entry 286 of the
Book of Original Entry of Deeds for Record No. 153.
Note: Part of this booklog has been transcribed.
October 29, 1997
C. Arroyo
-9-
<PAGE>
TITLE SEARCH
UPDATE
CASE: COMPANIA DE FOMENTO INDUSTRIAL
RE: #1222.6270/Simmons Caribbean Bedding Inc. - Parcel of Land of 48.42 acres
PROPERTY: #4003, recorded in registry at entry 129, volume 90 of Trujillo Alto,
1st recording Section IV of San Juan.
DESCRIPTION: Taken from 1st recording.
RURAL: Located at "Barrio Las Cuevas" of Trujillo Alto with a superficial area
of 35.35 acres equivalent to 13 hectares, 89 areas, 64 "centiareas" and 79
"miliareas", adjoining with municipal road, which it separates from properties
of Daniel Vazquez de Jose Fernandez and Hipolito O'Farril. South, with
neighboring road, with properties of Faustino Betancourt and Rio Grande de
Loiza. East with properties of Emilio Torres and Hipolito O'Farril. West, with
municipal road, separated from properties of Daniel Velazquez and Jose Fernandez
and local road which begins at the municipal road and passes unto the Southeast
and Faustino Betancourt's land.
OBSERVATION: Non conveyed at North.
BUILDINGS: Warehouse building of prime material, of steel frame with durotex
ceiling and soil floor. Booth for office and concrete shop, switch booth and
concrete building for dining room. In these buildings and in the building
described above, the owners had factories for the manufacture of light compounds
and machineries, etc.
The following constructions, taken from the 7th recording are described as
follows:
a) A brick chimney.
b) Building of steel frame and durotex walls and roof. The walls and roof
have been vandalized.
c) Building of steel with durotex walls and roof.
d) Steel structure for conveyors.
e) "Ray-Clay Feeder".
f) Steel structure which holds, at upper side, a belt conveyor which has an
attached gear known as the Apron Feeder.
g) Six steel rings which form part of the rotary oven with interior resistant
clay coatings for the baking of light compounds.
-10-
<PAGE>
Page 2
Property #4003 of Trujillo Alto
ORIGIN: It is formed by the grouping of the properties:
1. #2493, recorded in registry at entry 170, Volume 57 of Trujillo Alto
2. #1802, recorded in registry at entry 247, Volume 27 of Trujillo Alto
REGISTERED OWNER: Fomento Industrial Company, who acquired through the
following:
a) The land: by purchase from Diazlite Inc., for $1,299,000.00, through deed #3
in San Juan on March 26, 1975, before Gilberto Alfaro Berrias, recorded in
registry at entry 135, Volume 90 of Trujillo Alto, 6th recording.
b) The buildings (related to registry 7th) through public auction, for
$1,000.00. According to deed #6, executed in Carolina, on November 21, 1984,
before Ramon Siaca Poupart, recorded in registry at entry 85, volume 284 of
Trujillo Alto, 8th and last recording.
LIENS AND ENCUMBRANCES:
By its origin:
Right of way in favor of the land property of Central Victoria Inc.
By itself:
1- Mortgage: For the sum of $200,000.00, at 6% annual interest and 7% in case
of breach, in guaranty promissory note to Government Development Bank of Puerto
Rico, or by its order, which is due on February 1, 1979. According to deed #56,
executed in San Juan, on February 7, 1964, before Jorge M. Morales, recorded in
registry at entry 129, Volume 90 of Trujillo Alto, 1st registry.
LOGBOOK:
- -------
ENTRY 86 BOOK OF REGISTRY 96, of May 8, 1995: Presented and Pending Resolution:
- -------------------------------------------------------------------------------
Petition subscribed on December 28, 1992, by Antonio Maldonado Lopez, President
and General Manager of "Compania de Fomento Industrial de Puerto Rico," through
which we request the cancellation of the mortgage for the sum of $200,000.00
which encumbrances this land by order of the Superior Court of San Juan,
according to Judgement dated October 6, 1997, in civil case KCD-91-0703 (808) on
Cancellation of Lost Payment.
Attached is a certified copy of the judgment, certified copy of affidavit of "El
Nuevo Dia" on "Publication of Summons."
-11-
<PAGE>
Page 3
Property #4003 of Trujillo Alto
ENTRY 87 BOOK OF REGISTRY 96, of May 8, 1995: Presented and Pending Resolution:
- -------------------------------------------------------------------------------
Deed #20 of Grouping executed in San Juan, on December 4, 1992, before Edgardo
L. Martinez Rosario, through which the "Compania Fomento Industrial de Puerto
Rico" as owner of properties #11778, #6436 and #4003 of Trujillo Alto, group
these with a value of $1,600,000.00, and describes the grouped land as follows:
RURAL: Property located in "Barrio Las Cuevas" of Trujillo Alto, Puerto Rico,
- -----
with a superficial area of (forty eight point forty three (48.42) acres
----- -----
equivalent to 190,349.059 square meters. It adjoins through the North, with
municipal road previously State Road #8860 now with property of Hipolito
O'Farril and with land property of Antonio R. Diaz, through the South, with land
property of Faustino Betancourt Pomales and with Rio Grande de Loiza, through
the East, with land property of Metropol Development Corporation and land
property of Antonio R. Diaz and through the West, with municipal road,
previously State Road #8860.
NOTE: Attached is "Clarifying Deed" (Acta Aclaratoria) #6, executed in San
- ----
Juan, on February 27, 1997, before Edgardo L. Martinez through which the
"Compania de Fomento Industrial de Puerto Rico," exposes and clarifies that the
correct capacity is 48.11 acres, equivalent to 189,111.92 square meters and not
what has been expressed in the document aforementioned.
ENTRY 359 BOOK OF REGISTRY 84, of August 11, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #11, of Segregation and Purchase and Sale, executed in San
- ----------
Juan, on August 5, 1994, before Edgardo L. Martinez Nazario, through which
"Compania de Fomento Industrial de Puerto Rico," as owner of the grouped land
with superficial capacity of 48.42 acres, segregates and sells to Inter-American
-----------
Industrial Development Inc. for the price of $309,709.93 the following lot:
RURAL: Parcel located in "Barrio Las Cuevas del Termino Municipal" of Trujillo
Alto with a superficial capacity of 9386.832 square meters, equivalent to 2.388
acres, adjoining through the North, with lot #3. Through the South, with Calle
N. Este, Calle C. and through the West, with lot #8.
As indicated in the document the segregation was approved through "Resolution of
ARPE" (Resolucion de ARPE) dated July 14, 1992, Project #92-19-A-263 CGT,
attached to the deed.
That after the segregation was completed the principal piece of land was left
with a remnant of 46.032 acres, equivalent to 180,963.227 square meters.
The conditions of this Purchase and Sale Agreement are that the buyer and/or
subsidiaries and/or affiliates will use the property for manufacture and
distribution and for other purposes relating to their operation as approved by
"Junta de Planificacion" for a 10 year term commencing on the issuance of the
deed. The property will not be sold, leased, relinquished or transferred to the
Commonwealth of
-12-
<PAGE>
Page 4
Property #4003 of Trujillo Alto
Puerto Rico for a term of 10 years without the approval of the Company. Nor can
it be sold, leased or mortgaged for the quoted term without the Company's
approval.
OBSERVATION: According to the attached "Resolution of ARPE" (Resolucion de
ARPE) the segregation of lots 7 and 8 with superficial capacity of 9385.832
square meters and 9,403.429 square meters is authorized.
NOTE:
The following deeds are also attached.
a) Deed #5 of "Clarifying Deed" (Acta Aclaratoria), executed in San Juan, on
February 27, 1997, before Edgardo L. Martinez Nazario through which the
"Compania de Fomento Industrial de Puerto Rico", clarifies deed #11,
regarding this entry as to the capacity of the principal land which should
read: 48.11 acres equivalent to 189,111.92 square meters.
That once lot #7 is segregated the remnant of the principal land should read:
46.032 acres equivalent to 179,725.360 square meters.
------
b) Deed #20 of "Rectifying Deed" (Acta de Rectifacion), executed in San Juan, on
March 7, 1997, before Manual L. Correa Marquez, through which mortgage deed
#6 is clarified (see entry 320 volume 84) as to the capacity of the principal
land from which the lot to be mortgaged was segregated, and should read 48.11
-----
acres equivalent to 189,111.192 square meters.
Attached is the acquired "Corporation's Corporative Resolution" (Resolucion
Corporativa de la Corporacion) authorizing the execution of the "Rectifying
Deed"
ENTRY 320 BOOK OF REGISTRY 84, of August 10, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #6, executed in San Juan, on August 5, 1994, before Noel
- ----------
Gonzalez Miranda, by which Inter-American Industrial Development Inc., as owner
to lot #7 of "Parque Industrial Las Cuevas" segregated from grouped lands
#11778, #6436 and #4003, establishes mortgage over said lot for the sum of
$1,830,000.00, with 1% annual interest over the prevailing preferential interest
at Citibank, N.A. of New York, as a guarantee of the promissory note to the
bearer, which is due at Presentation.
NOTE I: The Corporate Resolution of said corporation authorizing the
sell/purchase and Mortgage of the lot is attached.
NOTE II: Please refer to "Clarifying Deed" (Acta Aclaratoria) which is attached
to document regarding the above entry.
-13-
<PAGE>
Page 5
Property #4003 of Trujillo Alto
OBSERVATION: The above does not include an assessment of these documents nor
does it presuppose that these will be registered.
REVISED: Contribution Embargos, Federal Embargos, Judgment and Logbooks up to
entry 42 of Journal 149.
San Juan, Puerto Rico, September 4, 1997.
JUSTO GARCIA INIGUEZ, INC.
JGI/mcd
Collated by 4003.S4T
-14-
<PAGE>
TITLE SEARCH
UPDATE
CASE: COMPANIA DE FOMENTO INDUSTRIAL DE PUERTO RICO
RE: #1222.6270/Simmons Caribbean Bedding Inc. - Parcel of lot of 48.42 acres
PROPERTY #11778, recorded in registry at entry 78, volume 238 of Trujillo Alto,
1st recording Section IV of San Juan
DESCRIPTION:
RURAL: Portion of land located in the "Barrio Las Cuevas de Terminu Municipal"
of Trujillo Alto, of 8.08 acres, equivalent to 31,757.5445 square meters,
adjoining through the North with land, property of Antonio R. Diaz. Through the
South with Rio Grande de Loiza. Through the East, with land, property of
Metropol Development Corp. and Antonio R. Diaz. Through the West, with land,
property of Diazlite Inc.
ORIGIN: It is segregated from property #46, recorded in registry at entry 154,
volume 50 of Trujillo Alto.
REGISTERED OWNER: "COMPANIA DE FOMENTO INDUSTRIAL DE PUERTO RICO," who acquired
it by transfer from Antonio R. Diaz, of legal age, single, and in payment of
debt. The property has been valued at $1,121,000.00. According to deed #4,
executed in San Juan, on March 26, 1975, before Gilberto Alfaro Berrios,
recorded in registry at entry 78 Volume 238 of Trujillo Alto, 1st and only
recording.
LIENS AND ENCUMBRANCES:
BY ITS ORIGIN: Free
BY ITSELF: Free
LOGBOOK:
- -------
ENTRY 87 BOOK OF ENTRY 96, of May 8, 1995: Presented and Pending Resolution:
- ----------------------------------------------------------------------------
Deed #20 of Grouping, executed in San Juan, on December 4, 1992, before Edgardo
L. Martinez Rosario, through which the "Compania de Fomento Industrial de Puerto
Rico" as owner of properties #11778, #6436 and #4003 of Trujillo Alto, group
these with a value of $1,600,000.00, and describes this grouped land as follows:
RURAL: Property located in "Barrio Las Cuevas" of Trujillo Alto, Puerto Rico,
with a superficial area of (forty eight point forty three (48.42) acres
----- -----
equivalent to 190,349.059 square meters. It adjoins through the North, with
municipal road previously State Road #8860 now with land, property of Hipolito
O'Farril and with land property of Antonio R. Diaz, through the South, with
land,
-15-
<PAGE>
Page 2
Property #11778 of Trujillo Alto
property of Faustino Betancourt Pomales and with Rio Grande de Loiza, through
the East, with land, property of Metropol Development Corporation and land,
property of Antonio R. Diaz and through the West, with municipal road,
previously State Road #8860.
NOTE: Attached is "Clarifying Deed" (Acta Aclaratoria) #6, executed in San
- ----
Juan, on February 27, 1997, before Edgardo L. Martinez through which the
"Compania de Fomento Industrial de Puerto Rico," exposes and clarifies that the
correct capacity is 48.11 acres, equivalent to 189,111.92 square meters and not
what has been expressed in the document aforementioned.
ENTRY 359 BOOK OF REGISTRY 84, of August 11, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #11, of Segregation and Purchase and Sale, executed in San
- ----------
Juan, on August 5, 1994, before Edgardo L. Martinez Nazario, through which
"Compania de Fomento Industrial de Puerto Rico," as owner of the grouped land
with superficial capacity of 48.42 acres, segregates and sells to Inter-American
-----------
Industrial Development Inc. for the price of $309,709.93 the following lot:
RURAL: Parcel of lot located in "Barrio Las Cuevas del Termino Municipal" of
Trujillo Alto with a superficial capacity of 9386.832 square meters, equivalent
to 2.388 acres, adjoining through the North, with lot #3. Through the South,
with Calle N. Este, Calle C. and through the West, with lot #8.
As indicated in the document the segregation was approved through "Resolution of
ARPE" (Resolucion de ARPE) dated July 14, 1992, Project #92-19-A-263 CGT,
attached to the deed.
That after the segregation was completed the principal piece of land was left
with a remnant of 46.032 acres, equivalent to 180,963.227 square meters.
The conditions of this Purchase and Sale Agreement are that the buyer and/or
subsidiaries and/or affiliates will use the property for manufacture and
distribution and for other purposes relating to their operation as approved by
"Junta de Planificacion" for a 10 year term commencing on the issuance of the
deed. The property will not be sold, leased, relinquished or transferred to the
Commonwealth of Puerto Rico for a term of 10 years without the approval of the
Company. Nor can it be sold, leased or mortgaged for the quoted term without
the Company's approval.
OBSERVATION: According to the attached "Resolution of ARPE" (Resolucion de
ARPE) the segregation of lots 7 and 8 with superficial capacity of 9385.832
square meters and 9,403.429 square meters is authorized.
NOTE:
The following deeds are also attached.
-16-
<PAGE>
Page 3
Property #11778 of Trujillo Alto
a) Deed #5 of "Clarifying Deed" (Acta Aclaratoria), executed in San Juan, on
February 27, 1997, before Edgardo L. Martinez Nazario through which the
"Compania de Fomento Industrial de Puerto Rico", clarifies deed #11,
regarding this entry as to the capacity of the principal land which should
read: 48.11 acres equivalent to 189,111.92 square meters.
That once lot #7 is segregated the remnant of the principal land should read:
46.032 acres equivalent to 179,725.360 square meters.
------
b) Deed #20 of "Rectifying Deed" (Acta de Rectifacion), executed in San Juan, on
March 7, 1997, before Manual L. Correa Marquez, through which mortgage deed
#6 is clarified (see entry 320 volume 84) as to the capacity of the principal
land from which the lot to be mortgaged was segregated, and should read 48.11
-----
acres equivalent to 189,111.192 square meters.
Attached is the acquired "Corporation's Corporative Resolution" (Resolucion
Corporativa de la Corporacion) authorizing the execution of the "Rectifying
Deed"
ENTRY 320 BOOK OF REGISTRY 84, of August 10, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #6, executed in San Juan, on August 5, 1994, before Noel
- ----------
Gonzalez Miranda, by which Inter-American Industrial Development Inc., as owner
to lot #7 of "Parque Industrial Las Cuevas" segregated from grouped lands
#11778, #6436 and #4003, establishes mortgage over said lot for the sum of
$1,830,000.00, with 1% annual interest over the prevailing preferential interest
at Citibank, N.A. of New York, as a guarantee of the promissory note to the
bearer, which is due at Presentation.
NOTE I: The Corporate Resolution of said corporation authorizing the
Sell/Purchase and Mortgage of the lot is attached.
NOTE II: Please refer to "Clarifying Deed" (Acta Aclaratoria) which is attached
to document regarding the above entry.
OBSERVATION: The above does not include an assessment of these documents nor
does it presuppose that these will be registered.
REVISED: Contribution Embargos, Federal Embargos, Judgment and Logbooks up to
entry 42 of Journal 149.
San Juan, Puerto Rico, September 4, 1997.
JUSTO GARCIA INIGUEZ, INC.
JGI/mcd
Collated by 4003.S4T
-17-
<PAGE>
Page 4
Property #11778 of Trujillo Alto
-18-
<PAGE>
TITLE SEARCH
UPDATE
CASE: "COMPANIA DE FOMENTO INDUSTRIAL DE PUERTO RICO"
RE: #1222.6270/Simmons Caribbean Bedding Inc. Parcel of lot of 48.42 acres.
PROPERTY #6436, recorded in registry at entry 82, volume 128 of Trujillo Alto,
1st recording Section IV of San Juan.
DESCRIPTION:
RURAL: Portion of land located at "Barrio Las Cuevas del Termino Municipal" of
Trujillo Alto, of 5.00 acres, equivalent to 1 hectar, 96 areas, 51 "centiareas"
and 59 "miliareas", adjoined through the North and West with a neighboring road
which separates the land, property of Diazlite, Inc. Through the South and East,
with the principal land from which it is segregated, and is property of Faustino
Betancourt.
ORIGIN: It is segregated from property #1803, recorded in registries at entries
250 and 181, Volumes 27 and 29 of Trujillo Alto.
REGISTERED OWNER: "COMPANIA DE FOMENTO INDUSTRIAL DE PUERTO RICO," who acquired
it by transfer from Antonio R. Diaz, of legal age, single and in payment of
debt. The property has been valued at $175,000. According to deed #4, executed
in San Juan, on March 26, 1975, before Gilberto Alfaro Berrios, recorded in
registry at entry 82 Volume 128 of Trujillo Alto, 2nd and last recording.
LIENS AND ENCUMBRANCES:
By its origin:
1 - Right of way
2 - Leasing: (over a parcel of an acre) in favor of Manuel Quinones married to
Carmen Rivera and Manual Perez married to Guillermina Rodriguez, for a 7 year
term with a rate of $45.00 per month. The lessees are also given the right to
extract gravel sand on the principal land for the term of the lease. According
to deed #9, executed in San Juan, on January 11, 1955, before Vicente Hita, Jr.,
recorded in the registry at entry 180, Volume 29 of Trujillo Alto, 4th recording
land #1803, from which the property is segregated.
By itself: Free
-19-
<PAGE>
Page 2
Property #6436 of Trujillo Alto
LOGBOOK:
- -------
ENTRY 87 BOOK OF ENTRY 96, of May 8, 1995: Presented and Pending Resolution:
- ----------------------------------------------------------------------------
Deed #20 Grouped, executed in San Juan, on December 4, 1992, before Edgardo L.
Martinez Rosario, through which the "Compania de Fomento Industrial de Puerto
Rico" as owner of properties #1178, #6436 and #4003 of Trujillo Alto, groups
these with a value of $1,600,000.00, describing this grouped property as
follows:
RURAL: Property located in "Barrio Las Cuevas de Trujillo Alto", Puerto Rico,
with a superficial area of (forty eight point forty three (48.42) acres
----- -----
equivalent to 190,349.059 square meters. It adjoins through the North, with
municipal road previously State Road #8860 now with land, property of Hipolito
O'Farril and with land, property of Antonio R. Diaz, through the South, with
land, property of Faustino Betancourt Pomales and with Rio Grande de Loiza,
through the East, with land property of Metropol Development Corporation and
land property of Antonio R. Diaz and through the West, with municipal road,
previously State Road #8860.
NOTE: Attached is "Clarifying Deed" (Acta Aclaratoria) #6, executed in San
- ----
Juan, on February 27, 1997, before Edgardo L. Martinez through which the
"Compania de Fomento Industrial de Puerto Rico," exposes and clarifies that the
correct capacity is 48.11 acres, equivalent to 189,111.92 square meters and not
what has been expressed in the document aforementioned.
ENTRY 359 BOOK OF REGISTRY 84, of August 11, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #11, of Segregation and Purchase and Sale, executed in San
- ----------
Juan, on August 5, 1994, before Edgardo L. Martinez Nazario, through which
"Compania de Fomento Industrial de Puerto Rico," as owner of the grouped land
with superficial capacity of 48.42 acres, segregates and sells to Inter-American
-----------
Industrial Development Inc. for the price of $309,709.93 the following lot:
RURAL: Parcel located in "Barrio Las Cuevas del Termino Municipal" of Trujillo
Alto with a superficial capacity of 9386.832 square meters, equivalent to 2.388
acres, adjoining through the North, with lot #3. Through the South, with Calle
N. Este, Calle C. and through the West, with lot #8.
As indicated in the document the segregation was approved through "Resolution of
ARPE" (Resolucion de ARPE) dated July 14, 1992, Project #92-19-A-263 CGT,
attached to the deed.
That after the segregation was completed the principal piece of land was left
with a remnant of 46.032 acres, equivalent to 180,963.227 square meters.
The conditions of this Purchase and Sale Agreement are that the buyer and/or
subsidiaries and/or affiliates will use the property for manufacture and
distribution and for other purposes relating to their operation as approved by
"Junta de Planificacion" for a 10 year term commencing on the issuance of
-20-
<PAGE>
Page 3
Property $6436 of Trujillo Alto
the deed. The property will not be sold, leased, relinquished or transferred to
the Commonwealth of Puerto Rico for a term of 10 years without the approval of
the Company. Nor can it be sold, leased or mortgaged for the quoted term without
the Company's approval.
OBSERVATION: According to the attached "Resolution of ARPE" (Resolucion de
ARPE) the segregation of lots 7 and 8 with superficial capacity of 9385.832
square meters and 9,403.429 square meters is authorized.
NOTE:
The following deeds are also attached.
a) Deed #5 of "Clarifying Deed" (Acta Aclaratoria), executed in San Juan, on
February 27, 1997, before Edgardo L. Martinez Nazario through which the
"Compania de Fomento Industrial de Puerto Rico", clarifies deed #11,
regarding this entry as to the capacity of the principal land which should
read: 48.11 acres equivalent to 189,111.92 square meters.
That once lot #7 is segregated the remnant of the principal land should read:
46.032 acres equivalent to 179,725.360 square meters.
------
b) Deed #20 of "Rectifying Deed" (Acta de Rectifacion), executed in San Juan, on
March 7, 1997, before Manual L. Correa Marquez, through which mortgage deed
#6 is clarified (see entry 320 volume 84) as to the capacity of the principal
land from which the lot to be mortgaged was segregated, and should read 48.11
-----
acres equivalent to 189,111.192 square meters.
Attached is the acquired "Corporation's Corporative Resolution" (Resolucion
Corporativa de la Corporacion) authorizing the execution of the "Rectifying
Deed"
ENTRY 320 BOOK OF REGISTRY 84, of August 10, 1994: Presented and Pending
- -------------------------------------------------------------------------
Resolution: Deed #6, executed in San Juan, on August 5, 1994, before Noel
- ----------
Gonzalez Miranda, by which Inter-American Industrial Development Inc., as owner
to lot #7 of "Parque Industrial Las Cuevas" segregated from grouped lands
#11778, #6436 and #4003, establishes mortgage over said lot for the sum of
$1,830,000.00, with 1% annual interest over the prevailing preferential interest
at Citibank, N.A. of New York, as a guarantee of the promissory note to the
bearer, which is due at Presentation.
NOTE I: The Corporate Resolution of said corporation authorizing the
sell/purchase and Mortgage of the lot is attached.
NOTE II: Please refer to "Clarifying Deed" (Acta Aclaratoria) which is attached
to document regarding the above entry.
-21-
<PAGE>
Page 4
Property #6436 of Trujillo Alto
OBSERVATION: The above does not include an assessment of these documents nor
does it presuppose that these will be registered.
REVISED: Contribution Embargos, Federal Embargos, Judgment and Logbooks up to
entry 42 of Journal 149.
San Juan, Puerto Rico, September 4, 1997.
JUSTO GARCIA INIGUEZ, INC.
JGI/mcd
Collated by 4003.S4T
-22-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(Registration No. 333-76723) of our report dated February 24, 1999, on our
audits of the financial statements and financial statement schedules of Simmons
Company. We also consent to the reference to our firm under the caption
"Experts."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Atlanta, Georgia
July 1, 1999
