Annual Report — Form 10-K Filing Table of Contents
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(Exact
name of registrant as specified in its charter)
Delaware
20-0646221
(State
or other jurisdiction of
(I.R.S.
Employer Identification No.)
incorporation
or organization)
One
Concourse Parkway, Suite 800, Atlanta Georgia
30328
(Address
of Principal Executive Offices)
(Zip
Code)
Registrant’s
telephone number, including area code: (770)
512-7700
Securities
registered pursuant to Section 12(b) of the Act: None
Name
of each exchange
Title
of each class
on
which registered
Not
applicable
Not
applicable
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act.
Yes:
[ ] No:
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes:
[X] No:
[ ]
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes:
[X] No:
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act).
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes:
[ ] No:
[X]
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter, July 1, 2006: Not applicable
As
used
within this report, the term “Holdings” refers only to Simmons Company, a
Delaware corporation, the terms “Company,”“Simmons,”“we,”“our,” and “us”
refer to Simmons Company and its subsidiaries, and the term “Simmons Bedding”
refers to Simmons Bedding Company, a Delaware corporation, and its subsidiaries.
We refer to our parent company, Simmons Holdco, Inc., as "Simmons Holdco."
We principally sell adult-sized bedding products which we refer to as
“conventional bedding products” throughout this report. We are a voluntary filer
with the Securities and Exchange Commission (“SEC”). Copies of our quarterly
reports on Form 10-Q and annual reports on Form 10-K along with other
information filed with the SEC can be read and copied at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330. Our information may also be obtained electronically by accessing
the SEC’s web site at http://www.sec.gov.
PART
I
ITEM
1. BUSINESS.
OVERVIEW
Holdings
is a holding company with no material assets other than its ownership of the
common stock of its wholly-owned subsidiary, THL-SC Bedding Company, which
is
also a holding company with no material assets other than its ownership of
the
common stock of its wholly-owned subsidiary, Simmons Bedding. All of Holdings’
business operations are conducted by Simmons Bedding. Holdings was incorporated
in 2003.
Founded
in 1870, Simmons is one of the world’s largest mattress manufacturers,
manufacturing and marketing a broad range of products under our well-recognized
brand names, including Beautyrest®,
Beautyrest Black™,
BackCare®,
Natural
Care™
Latex,
BackCare Kids®,
and
Deep Sleep®.
We
manufacture, sell and distribute our premium branded bedding products to retail
customers and institutional users, such as the hospitality industry, throughout
the U.S. and Canada and license our intellectual property to international
companies that manufacture and sell our premium branded bedding products
throughout the world. Additionally, we license our intellectual property to
U.S.
and Canadian manufacturers and distributors of bedding accessories, furniture,
water beds, airbeds and other products. Our domestic operations sell products
through a diverse nationwide base of approximately 2,900 retailers, representing
over 11,700 outlets, including furniture stores, specialty sleep shops,
department stores, furniture rental stores, mass merchandisers and juvenile
specialty stores.
In
November 2006, we purchased Simmons Canada Inc. (“Simmons Canada”), a former
licensee of Simmons and one of the largest bedding manufacturers in Canada.
In
August 2006, we sold our specialty sleep retail stores, Sleep Country USA,
LLC
(“SCUSA”) and now operate only as a manufacturer and distributor of bedding
products to retailers or institutional users.
We
also
distribute branded products on a contract sales basis, with an emphasis on
premium products, directly to the hospitality industry and government agencies.
For example, Starwood Hotels has selected our Beautyrest®
mattress
as a product for its Heavenly Bed® program, which is included in the guest rooms
of their Westin properties.
The
majority of our products are conventional innerspring mattresses and foundations
sold in the U.S. at queen retail price points between $299 and $5,499. For
2005,
innerspring mattress shipments represented approximately 91% of all U.S.
wholesale mattress units shipped and approximately 78% of total U.S. wholesale
conventional mattress sales dollars, according to the International Sleep
Products Association (“ISPA”). We have placed particular emphasis on premium
products targeted to sell at higher-end retail price points of $799 and above
per queen set.
We
believe that we are the industry leader in product innovation which helps drive
unit sales and average unit selling price (“AUSP”) increases. Over our 137-year
history, we have developed numerous innovations, including the first
mass-produced innerspring mattress, the patented Pocketed Coil®
and our
patented Advanced Pocketed Coil™innersprings,
the “Murphy Bed,” the Hide-a-Bed®
sofa and
our patented “no flip” mattress. We have proven research and development
capabilities. We apply extensive research to design, develop, manufacture and
market innovative sleep products to provide consumers with a better night’s
sleep.
1
We
operate 21 conventional bedding manufacturing facilities and two juvenile
bedding manufacturing facilities strategically located throughout the U.S.,
Canada and Puerto Rico. Because we have national in-house manufacturing
capabilities, we have the ability to service multi-state accounts, maintain
more
consistent quality of products and leverage research and development activities.
Our just-in-time manufacturing capability enables us to manufacture and ship
approximately 97% of orders to our retail customers within five business days
of
receiving their order and also minimizes our working capital
requirements.
As
of
December 30, 2006, Thomas H. Lee Equity Fund V, L.P. and its affiliates ("THL"),
Fenway Partners Capital Fund II, L.P. and its affiliates (“Fenway”), and our
management and directors held 72.0%, 8.5% and 19.5%, respectively, of our voting
stock, after giving effect to restricted stock and stock options issued to
management and directors under our equity incentive plan.
Merger
and Distribution to Stockholders
In
February 2007, the Company merged with another entity to become a wholly-owned
subsidiary of Simmons Holdco, a holding company. Simmons Holdco was established
to borrow $300.0 million under a senior unsecured loan (“Toggle Loan”) to fund a
distribution of $278.3 million to the Company’s then existing class A
stockholders (the transactions collectively referred to as the “2007
Distribution”). After the merger, the ownership structure of Simmons Holdco was
identical to our ownership structure prior to the merger.
INDUSTRY
We
compete in the U.S. wholesale bedding industry, which generated sales of
approximately $6.4 billion in 2005, according to ISPA. The domestic bedding
sales of ISPA’s sample of nineteen leading mattress manufacturers increased 5.3%
in 2006. While there are over 500 conventional bedding manufacturers in the
U.S.
according to the U.S. Census Bureau, six companies (including Simmons) accounted
for approximately 64% of the conventional bedding industry’s 2005 wholesale
revenues and the top 15 accounted for approximately 79% of the conventional
bedding industry’s 2005 wholesale revenues, according to Furniture/Today,
a home
furnishings industry publication. The remainder of the domestic conventional
bedding market primarily consists of hundreds of smaller independent local
and
regional manufacturers.
The
U.S.
bedding industry is historically characterized by growing unit demand, rising
AUSP and stability in various economic environments. The compound annual growth
rate of total conventional bedding industry sales has been approximately 6.6%
over the last twenty years. During this period, there has been just one year
in
which industry revenues declined (0.3% in 2001). This stability and resistance
to economic downturns is due largely to replacement purchases, which account
for
approximately 80% of conventional bedding industry sales. In addition, high
shipping costs and the short lead times demanded by mattress retailers limited
imports from China to less than 1% of the U.S. market in 2005 according to
the
International Trade Association.
We
believe that current trends favor increased consumer spending on mattresses.
We
believe these trends are particularly favorable for sales of mattresses at
the
premium end of the market and queen and larger size mattresses, two areas where
we believe we are well-positioned. We believe that the factors contributing
to
growth in these areas include:
·
Growth
in the 45-64 year old segment of the population, one of the largest
and
fastest growing segments of the population according to the 2000
U.S.
Census Bureau, a group that tends to have higher earnings and more
discretionary income and makes a disproportionate share of the purchases
of bedding products relative to the general
population;
·
Growth
in the size of single family homes, which increased for new houses
completed from an average of 1,785 square feet in 1985 to 2,434 square
feet in 2005; and 39% of all new homes had 4 or more bedrooms in
2005
compared to 18% in 1985, according to the U.S. Census
Bureau;
2
·
Strong
historical and projected growth in the number of people purchasing
second
homes, which grew approximately 17% from 1990-2000 according to the
U.S.
Census Bureau;
·
Increasing
consumer awareness of the health benefits of better sleep, as evidenced
by
a study conducted by the Better Sleep Council in March 2004, in which
90%
of all respondents reported that a good mattress was essential to
health
and well being; and
·
Greater
relative profitability that the bedding category provides to retailers,
particularly in higher-end
products.
CONVENTIONAL
BEDDING PRODUCTS
We
provide our retail customers with a full range of conventional mattress products
that are targeted to cover a breadth of marketplace price points (currently
$299
to $5,499 per queen set) and offer consumers a wide range of mattress
constructions with varying styles, firmnesses and features which enables us
to
serve the majority of traditional consumer sleep needs.
Our
mattress products are generally built from one or a combination of the following
construction techniques: Pocketed Coil®
(Marshall coil) springs, Advanced Pocketed Coil™
springs,
open coil springs, latex and/or foam. One of these constructions, the patented
Pocketed Coil®
spring
technology, was originally developed by us in 1925 and involves springs with
rows joined in such a way so as to allow each coil to depress independently
of
the adjacent coils, resulting in better conformability to the sleeping body
and
the reduction of motion transferred across the bed from one partner to the
other. This technology was upgraded with our patented Advanced Pocketed
Coil™
technology, which was introduced in October 2003 and utilizes stranded wire
for
each coil to provide significantly more durability and enhanced motion
separation benefits.
Every
conventional mattress we manufacture features our innovative “no flip” design,
which we were the first to distribute nationally in 2000. This patented design
offers enhanced sleep benefits and product durability, along with the consumer
convenience of never having to flip the mattress.
The
Beautyrest®
mattress, our flagship premium product featuring the Pocketed Coil®
springs,
has been our primary brand since we introduced the Pocketed Coil®
in 1925
and we expect it to continue generating the majority of our sales. In January
2007, we introduced our new Beautyrest®
2007
product line, which is designed to be fully compliant with the new federal
mattress flammability standards once it goes into effect the summer of 2007.
It
also offers higher coil densities and improved comfort features. The new product
line began shipping in January 2007.
In
July
2006, we introduced the Beautyrest Black™
line,
which targets the $1,999 - $5,499 queen retail price points, and uses our
exclusive and patented Advanced Pocketed Coil™
spring.
The Beautyrest Black™
line is
targeted to those consumers seeking to indulge themselves with the ultimate
in
luxury with the very latest technologies.
New
designs for BackCare®,
our
second flagship brand, were introduced in July 2006. The BackCare®
product
line features the zoned coil unit with reinforced lumbar support and new zoned
foams that work together to offer support that mirrors the natural s-shape
of
the human spine. The BackCare®
line
also features an Evenloft™
design
and Technogel™
material
at premium price points.
Our
BackCare Kids®
products
are designed specifically for the unique sleep needs of children. BackCare
Kids®
mattresses offer three benefits - our AllerCare™
feature,
which is a fiber that helps reduce allergens in the bed that can cause allergic
reactions, a Moisture Ban®
feature
to help repel spills and accidents, and a patented RiteHeight™
option
for bunk beds, trundle beds and day beds that require a lower height
mattress.
Our
Deep
Sleep®
product
line was redesigned in October 2006. The Deep Sleep®
product
line is targeted at the queen retail price points under $1,000. This product
line offers comfort, durability and value. The 2006 products feature a higher
coil count and softer knit fabrics than the previous product line.
3
In
July
2006, Natural Care™
Latex
products were introduced that feature a latex core that is mold and mildew
resistant and provides pressure point relief.
Domestically,
we also sell Simmons®
branded
crib mattresses, featuring interlocking coil construction for support and
comfort that is durable enough to last through the toddler years, and
Simmons®
branded
juvenile soft good products, including items such as vinyl contour changing
pads
and terry covers, vinyl replacement pads, and other accessory items.
CUSTOMERS
Our
strong brand names 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 for conventional bedding products throughout the U.S. and Canada and across
all major distribution channels, including furniture stores, specialty sleep
shops, department stores and rental furniture stores. Additionally, we
distribute domestically juvenile bedding products through mass merchandisers,
furniture stores and specialtyretailers.
We manufacture and supply bedding to over 11,700 outlets domestically,
representing approximately 2,900 retail customers.
We
also
distribute branded products on a contract sales basis directly to institutional
users of bedding products such as the hospitality industry and certain agencies
of the U.S. government. Major hospitality accounts include Starwood Hotels,
La
Quinta Inns, Inc., and Best Western International, Inc. In 1999, Starwood Hotels
selected our Beautyrest®
mattress
as a product for their Heavenly Bed®
program,
which is included in the guest rooms of their Westin properties.
Our five
largest customers in the U.S. accounted for approximately 25% of our product
shipments for the year ended December 30, 2006. No one customer represented
more
than 10% of product shipments for the year ended December 30, 2006.
SALES,
MARKETING AND ADVERTISING
Our
revenue is principally generated through the wholesale distribution of
conventional mattresses and foundations to retailers. Our sales are dependent
on
our ability to create brand loyalty for our products with the end consumer.
Our
selling infrastructure provides retailers with coordinated marketing campaigns,
as well as local support tailored to the competitive environments of each
individual market. Our sales force is trained extensively in advertising,
merchandising and salesmanship, all of which increase the value of the marketing
support they provide to retailers. We believe that our focus on better sleep,
training of our retail sales associates, and our customers’ retail sales
associates differentiates us from our competitors.
We
develop advertising and retail sales incentive programs specifically for
individual retailers. Point-of-sale materials, including mattresses and
foundation displays that we design and supply highlight the differentiating
features and benefits of our products. We believe that our sales training and
consumer education programs are the most effective in the industry. We have
designed these programs to teach retail sales associates product knowledge
and
sales skills.
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 foam, wire, spring components, lumber, insulator
pads, innersprings, foundation constructions, and fabrics and other roll goods
consisting of fiber and non-wovens. We obtain a large percentage of our required
raw materials from a small number of suppliers. For the year ended December30,2006, we bought approximately 77% of our raw material needs from ten suppliers.
We believe that supplier concentration is common in the bedding
industry.
We
have
supply agreements with Leggett & Platt, Incorporated (“L&P”) and
National Standard Company. With the exception of L&P and National Standard
Company, we believe that we can readily replace our suppliers, if or when the
need arises, within 90 days as we have already identified and use alternative
resources.
4
L&P
supplies the majority of certain bedding components (including certain spring
components, insulator pads, wire, fiber, quilt backing and flange material)
to
the U.S. bedding industry. In 2006, we purchased approximately 30% of our raw
materials from L&P. To ensure a long-term and adequate supply of various
components, we have entered into agreements with L&P, generally expiring in
the year 2010, for the supply of grid tops and open coil innersprings. Among
other things, these agreements generally require us to purchase a majority
of
our requirements of several components from L&P. National Standard Company
is our exclusive supplier for the stranded wire used in our Advanced Pocketed
Coil™
products.
SEASONALITY/OTHER
Our
third
quarter sales are typically higher than our other fiscal quarters. We attribute
this seasonality principally to retailers’ sales promotions related to the 4th
of July and Labor Day holidays.
Most
of
our sales are by short term purchase orders. Because the level of production
is
generally prompted to meet customer demand, we have a negligible backlog of
orders. Most finished goods inventories of bedding products are physically
stored at manufacturing locations until shipped.
MANUFACTURING
AND FACILITIES
We
currently operate 23 manufacturing facilities, two of which only manufacture
juvenile bedding, strategically located throughout the U.S., Canada and Puerto
Rico. We manufacture most conventional bedding to order and use “just-in-time”
inventory techniques in our manufacturing processes to more efficiently serve
our customers’ needs and to minimize our inventory carrying costs. We generally
schedule, produce and ship over 97% of our U.S. conventional bedding orders
within five business days of receipt of the order. This rapid delivery
capability allows us to minimize our inventory of finished products and better
satisfy customer demand for prompt shipments.
We
invest
substantially in new product development, enhancement of existing products
and
improved operating processes, which we believe is crucial to maintaining our
strong industry position. Costs associated with the research and development
of
new products amounted to approximately $2.4 million, $2.9 million and $3.7
million for 2006, 2005 and 2004, respectively.
We
keep
abreast of bedding industry developments through sleep research conducted by
industry groups and by our own research performed by our marketing and
engineering departments. We also participate in the Better Sleep Council, an
industry association that promotes awareness of sleep issues, and ISPA. Our
marketing and manufacturing departments work closely with our 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 at Simmons Institute of
Technology and Education (“SITE”), our 38,000 square foot research and education
center in Atlanta, Georgia. We work to ensure that we maintain high quality
products by conducting product and materials testing, designing manufacturing
facilities and equipment and improving process engineering and development.
COMPETITION
While
there are approximately 500 conventional bedding manufacturers in the U.S.
according to the U.S. Census Bureau, six companies (including Simmons) account
for approximately 64% of the industry’s wholesale revenues. We believe that we
principally compete against our top competitors on the basis of brand
recognition, product innovation, product selection, quality and customer service
programs, including co-operative advertising, sales force training and marketing
assistance. We believe we compare favorably to our primary competitors in each
of these areas. In addition, only a few companies (including Simmons) have
national, company-operated manufacturing and distribution capabilities.
According to Furniture/Today,
we are
the second largest bedding manufacturer in the U.S., with an estimated 13.3%
share of the industry’s wholesale revenues for 2005. We believe that our
domestic market share increased in 2006 based upon a comparison of our domestic
net sales increasing 14.2% in 2006 compared to ISPA’s sample of leading mattress
manufacturers’ reporting wholesale conventional bedding sales increasing 6.4%.
5
Other
than the top six manufacturers, the U.S. bedding industry consists of several
smaller national manufacturers, with the remainder being independent local
and
regional manufacturers. These local and regional manufacturers generally focus
on the sale of lower price point products. While we primarily manufacture
differentiated bedding products targeted for mid- to upper-end price points,
we
offer a full line of bedding products to our retailer base.
WARRANTIES
AND PRODUCT RETURNS
Our
conventional bedding products generally offer ten-year limited warranties
against manufacturing defects. Our juvenile bedding products generally offer
five-year to lifetime limited warranties against manufacturing defects. 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 within management’s expectations. 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 dealers and our World of Sleep Outlets, LLC (“World of Sleep”)
stores.
PATENTS
AND TRADEMARKS
We
own
many trademarks, including Simmons®,
Beautyrest®,
Beautyrest Black™,
BackCare®,
BackCareKids®,
Deep
Sleep®,
Pocketed Coil®
and
Advanced Pocketed Coil™,
most of
which are registered in the U.S. and in many foreign countries. We protect
portions of our manufacturing equipment and processes under both trade secret
and patent law. We possess several patents on the equipment and processes used
to manufacture our Pocketed Coil®
and
Advanced Pocketed Coil™
innersprings.
We do not consider our overall success to be dependent upon any particular
intellectual property rights.
LICENSING
During
the late 1980’s and early 1990’s, we disposed of most of our foreign operations
and secondary domestic lines of business via license arrangements. We now
license internationally our Beautyrest®
and
Simmons®
marks
and many of our other trademarks, processes and patents to third-party
manufacturers which produce and distribute conventional bedding products within
their designated territories. These licensing agreements allow us to reduce
exposure to political and economic risk abroad by minimizing investments in
those markets. We currently have 20 foreign licensees and 8 foreign
sub-licensees that have rights to sell Simmons-branded products in over 100
countries.
As
of
December 30, 2006, we had 10 domestic third-party licensees and one
sub-licensee. Some of these licensees manufacture and distribute juvenile
furniture, healthcare-related furniture, and non-bedding upholstered furniture,
primarily under licenses. Additionally, we have licensed the Simmons®
mark and
other trademarks to manufacturers of air and water beds, occasional use airbeds,
feather and down comforters, pillows, mattress pads, blankets, bed frames,
futons, and other products.
In
2006,
2005 and 2004, our licensing agreements as a whole generated royalties and
technology fees of $8.7 million, $9.1 million and $9.6 million, respectively.
EMPLOYEES
As
of
December 30, 2006, we had approximately 3,300 full time employees. Employees
at
10 of our 23 manufacturing facilities (approximately 31% of our workforce)
are
represented by various labor unions with separate collective bargaining
agreements. Our collective bargaining agreements are typically negotiated for
two- to four-year terms.
We
consider overall relations with our workforce to be satisfactory. We have had
no
domestic labor-related work stoppages in over thirty years. Prior to our
ownership of our Canadian operations, Simmons Canada had a work stoppage in
2001
due to a labor dispute. Due to the ability to shift production from one facility
to another, the work stoppage had no material adverse effect on Simmons Canada’s
operations.
6
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 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, the amount of such liability
could
be material and our financial condition or results of operations could be
materially adversely affected.
As
a
result of our efforts to rectify the environmental contamination at and in
the
vicinity of two former facilities in Jacksonville, Florida and Linden/Elizabeth,
New Jersey, the current levels of contamination have been diminished to levels
allowing for natural attenuation and monitoring as determined by the respective
state environmental agencies. Monitoring of the Jacksonville site is anticipated
to continue for another 12 to 18 months. Monitoring at the Linden/Elizabeth
site
is anticipated to be ongoing. While the current estimate of such liabilities
is
less than $0.2 million, future liability for such matters is difficult to
predict.
We
have
recorded a reserve based upon our best estimate to reflect our potential
liability for environmental matters. Because of the uncertainties associated
with environmental remediation, the costs incurred with respect to the potential
liabilities could exceed our recorded reserves.
Our
bedding and other product lines are subject to various federal, state and
provincial laws and regulations relating to flammability, sanitation and other
standards. We believe that we are in material compliance with all such laws
and
regulations. Additionally, the U.S. Consumer Product Safety Commission (“CPSC”)
adopted new regulations relating to open flame resistance standards for the
mattress industry which go into effect on July 1, 2007. Various state and other
regulatory agencies may consider new laws, rules and regulations relating to
open flame resistance standards. Compliance with these new laws, rules and
regulations may increase our costs, alter our manufacturing processes and impair
the performance of our products. We believe that we will be in material
compliance with the CPSC’s open flame resistance standards by the effective date
of the regulation.
ITEM
1A.RISK
FACTORS.
We
operate in the highly competitive bedding industry, and if we are unable to
compete successfully, we may lose customers and our sales may
decline.
The
bedding industry is highly competitive. There are over 500 bedding manufacturers
in the U.S. The top six manufacturers (including us) accounted for approximately
64% of the conventional bedding industry’s wholesale revenues in 2005 and the
top 15 accounted for 79% of wholesale revenues, according to Furniture/Today,
an
industry publication. While ISPA estimates U.S. wholesale conventional
innerspring mattresses represented approximately 78% of total U.S. wholesale
mattress sales in 2005, sales of non-innerspring mattresses by companies such
as
Tempur Pedic International Inc. (“Tempur Pedic”) and Select Comfort Corporation
(“Select Comfort”) have been gaining momentum in recent years. For 2005, Tempur
Pedic and Select Comfort had an estimated U.S. bedding market share of 6.6%
and
5.1% respectively, versus 5.7% and 4.7%, respectively, in 2004.
In
recent
years, foreign manufacturers have increased their sales in the U.S. From 2001
to
2005, the dollar value of bedding imports has grown 167%, to equal 2.5% of
domestic conventional mattress and foundation sales, according to ISPA.
We
have
recently experienced competition, and could experience increased future
competition, resulting in price reductions, margin reductions and loss of market
share. We may not be able to compete effectively in the future. In addition,
some of our principal competitors may be less highly-leveraged, have greater
access to financial or other resources, have lower cost operations and/or be
better able to withstand changing market conditions.
7
Regulatory
requirements relating to our products may increase our costs, alter our
manufacturing processes and impair our product
performance.
Our
products are and will continue to be subject to regulation in the U.S. and
Canada by various federal, state, provincial and local regulatory authorities.
In addition, other governments and agencies in other jurisdictions regulate
the
sale and distribution of our products. Compliance with these regulations may
negatively impact our business. For example, the State of California has open
flame resistance standards that went into effect on January 1, 2005 and the
CPSC
has approved new regulations relating to open flame resistance standards for
the
mattress industry, which go into effect on July 1, 2007. Our products
manufactured for distribution in California currently meet the California
standards. We are engaged in modifying our products using new materials and
construction methods and are performing product testing to ensure compliance
with the new CPSC standard when it comes into effect on July 1, 2007. In
addition, other regulatory agencies may also consider new laws, rules and
regulations relating to open flame resistance and other standards. Our product
solutions will not necessarily meet all future standards. Compliance with these
new laws, rules and regulations may increase our costs, alter our manufacturing
processes and impair the performance of our products.
Legal
and regulatory requirements may impose costs or charges on us that impair our
business and reduce our profitability
Our
marketing and advertising practices could become the subject of proceedings
before regulatory authorities or the subject of claims by other parties which
could require us to alter or end these practices or adopt new practices that
are
not as effective or are more expensive. In addition, our operations are subject
to federal, state, provincial and local laws and regulations relating to
pollution, environmental protection, occupational health and safety and labor
and employee relations. We may not be in complete compliance with all such
requirements at all times. Under various environmental laws, we may be held
liable for the costs of remediation releases of hazardous substances at any
properties currently or previously owned or operated by us or at any site to
which we sent hazardous substances for disposal. Such liability may be imposed
without fault, and the amount of such liability could by material. We are
subject to investigation under various labor and employment laws and regulations
by both governmental entities and employees and former employees. Should
liability be imposed as a result of such activity, particularly in the context
of class or multi-plaintiff litigation, the resulting liability could reduce
our
profitability.
Our
new product launches may not be successful, which could cause a decline in
our
market share and our level of profitability.
Each
year
we invest significant time and resources in research and development to improve
our product offerings. In addition, we incur increased costs in the near term
associated with the introduction of new product lines, including training of
our
employees in new manufacturing, sales processes, and the production and
placement of new floor samples for our customers. We are subject to a number
of
risks inherent in new product introductions, including development delays,
failure of new products to achieve anticipated levels of market acceptance,
and
costs associated with failed product introductions. For example, sales of our
product lines introduced in 2005 were lower than we experienced with previous
new product introductions. Our wholesale conventional bedding unit volume
decreased 8.3% in 2005 compared to 2004, principally as a result of our 2005
product line, at its original price points, not achieving anticipated levels
of
market acceptance. In 2007, we are rolling out our new Beautyrest® 2007 products
to all of our retailers, which replaces the Beautyrest® 2005 products. In
addition, we have a limited ability to increase prices on existing products,
and
any failure of new product introductions may reduce our ability to sell our
products at appropriate price levels.
We
may experience fluctuations in our operating results due to seasonality, which
could make sequential quarter to quarter comparison an unreliable indication
of
our performance.
We
have
historically experienced and expect to continue to experience seasonal and
quarterly fluctuations in net sales and operating income. Our third quarter
sales are typically higher than our other fiscal quarters. We attribute this
seasonality principally to retailers’ sales promotions related to the
4th
of July
and Labor Day holidays. This seasonality means that a sequential quarter to
quarter comparison may not be a good indication of our performance or how we
will perform in the future.
8
We
rely on a relatively small number of suppliers, and if we experience difficulty
with a major supplier, we may have difficulty finding alternative sources.
This
could disrupt our business.
We
purchase substantially all of our conventional bedding raw materials centrally
to obtain volume discounts and achieve economies of scale. We obtain a large
percentage of our raw materials from a small number of suppliers. For the year
ended December 30, 2006, we bought approximately 77% of our raw materials from
ten suppliers.
We
have
supply agreements with L&P and National Standard Company. With the exception
of L&P and National Standard Company, we believe that we can readily replace
our suppliers, if or when the need arises, within 90 days as we have already
identified and use alternative resources.
L&P
supplies the majority of certain bedding components (including certain spring
components, insulator pads, wire, fiber, quilt backing and flange material)
to
the U.S. bedding industry. In 2006, we purchased approximately 30% of our raw
materials from L&P. To ensure a long-term and adequate supply of various
components, we have entered into agreements with L&P, generally expiring in
the year 2010, for the supply of grid tops and open coil innersprings. Among
other things, these agreements generally require us to purchase a majority
of
our requirements of several components from L&P. National Standard Company
is our exclusive supplier for the stranded wire used in our Advanced Pocketed
Coil™
products.
Because
we may not be able to find alternative sources for some of these components
on
terms as favorable to us as we currently receive, or at all, our business,
financial condition and results of operations could be impaired if we lose
L&P or National Standard Company as a supplier. Further, if we do not reach
committed levels of purchases, various additional payments could be required
to
be paid to L&P or National Standard Company or certain sales volume rebates
could be lost.
Additionally,
our domestic operations primarily utilize two third-party logistics providers
which, in the aggregate, accounted for approximately 78% of our outbound
wholesale shipments for the year ended December 30, 2006. Any instability of,
or
change in our relationship with, these providers could materially disrupt our
business.
We
are subject to fluctuations in the cost and availability of raw materials,
which
could increase our costs or disrupt our production.
The
major
raw materials that we purchase for production are foam, wire, spring components,
lumber, cotton, insulator pads, innersprings, foundation constructions, fabrics
and roll goods consisting of fiber, ticking and non-wovens. The price and
availability of these raw materials, as well as the cost of fuel to transport
our products to market, are subject to market conditions affecting supply and
demand. In particular, the price of many of these raw materials can be impacted
by fluctuations in petrochemical and steel prices. For example, the price of
foam increased significantly in the fourth quarter of 2005 principally due
to a
temporary disruption in the key chemical component TDI (toluene diisocyanate)
which is used in the production of polyurethane foam. The temporary disruption
of TDI resulted primarily from the hurricanes that caused extensive damage
to
the Gulf Coast of the U.S. and surrounding areas in August and September 2005.
Our financial condition and results of operations may be impaired by increases
in raw material costs to the extent we are unable to pass those higher costs
on
to our customers. In addition, if these materials are not available on a timely
basis or at all, we may not be able to produce our products, and our sales
may
decline.
Because
we depend on our significant customers, a decrease or interruption in their
business with us could reduce our sales and profits.
Our
top
five U.S. wholesale customers collectively accounted for approximately 25%
of
our domestic wholesale bedding shipments for the year ended December 30, 2006.
Our largest customer accounted for less than 10% of our wholesale shipments
for
the year ended December 30, 2006. Many of our customer arrangements are by
purchase order or are terminable at will. Several of our customer arrangements
are governed by long-term supply agreements. A substantial decrease or
interruption in business from our significant customers could result in a
reduction in net sales, an increase in bad debt expense or the loss of future
business, any of which could impair our business, financial condition or results
of operations. Additionally, the expiration of a long-term supply agreement
could result in the loss of future business, or the payment of additional
amounts to secure a contract renewal or an increase in required advertising
support, any of which could impair our business, financial condition or results
of operations.
9
Retailers
may, and in the past some of our retailers did, consolidate, undergo
restructurings or reorganizations, or realign their affiliations. These events
may result, and have temporarily resulted, in a decrease in the number of stores
that carry or carried our products, an increase in the ownership concentration
in the retail industry, and/or our being required to record significant bad
debt
expense. Retailers may decide to carry only a limited number of brands of
mattress products, which could affect our ability to sell our products to them
on favorable terms, if at all, and could negatively impact our business,
financial condition or results of operations.
A
change or deterioration in labor relations or the inability to renew our
collective bargaining agreements could disrupt our business operations and
increase our costs, which could negatively impact sales and decrease our
profitability.
At
10 of
our 21 conventional manufacturing facilities our employees are represented
by
unions. Our union contracts are typically for two- to four-year terms. We may
not be able to renew these contracts on a timely basis or on favorable terms.
It
is possible that labor union efforts to organize employees at additional
non-union facilities may be successful. It is also possible that we may
experience labor-related work stoppages in the future. Any of these developments
could disrupt our business operations or increase costs, which could negatively
impact our sales and profitability.
The
loss of the services of any member of our executive leadership team could impair
our ability to execute our business strategy and negatively impact our business,
financial condition and results of operations.
We
depend
on the continued services of our executive leadership team, including Charles
Eitel, our Chief Executive Officer; Gary Matthews, our President; Robert Burch,
our Executive Vice President - Operations; William Creekmuir, our Executive
Vice
President and Chief Financial Officer; Stephen Fendrich, our Executive Vice
President - Sales; Kristen McGuffey, our Executive Vice President and General
Counsel; Timothy Oakhill, our Executive Vice President - Marketing and
Licensing; and Kimberly Samon our Executive Vice President - Human Resources.
The loss of any of our key officers could impair our ability to execute our
business strategy and negatively impact our business, financial condition and
results of operations. We do not carry key man insurance for any of our
management executives.
We
may not realize the expected benefits from the integration of Simmons Canada
into our operations or other profit enhancement
opportunities.
In
2006,
we acquired Simmons Canada and started to integrate their operations into our
U.S. operating system. As we execute our plan to achieve expected synergies
from
the acquisition of Simmons Canada, we may lose key customer relationships and/or
employees in the process, fail to execute the plan, have a flawed strategy,
or
it could cost more to implement the plan than originally anticipated.
Additionally, there could be disruption with our unions, which could
result in inefficiencies in our business. Any of these factors could
result in Simmons not achieving the synergies that we anticipated when we
acquired Simmons Canada. In addition, we continue to examine our overall
business to identify further profit enhancement opportunities. If our
integration of Simmons Canada or our other profit enhancement opportunities
are
not successful and/or improperly implemented, we may find it difficult to offer
our products at a competitive price and have operational difficulties or
inefficiencies in our business. All of which could negatively impact our sales
and profitability.
10
Our
international operations are subject to foreign exchange risks and our ability
to expand in certain international markets is limited by the terms of licenses
we have granted to manufacture and sell Simmons
products.
We
currently conduct significant operations in Canada. Our Canadian operations
are
subject to fluctuations in exchange rates. We have also limited our ability
to
independently expand in certain international markets where we have granted
licenses to manufacture and sell Simmons products.
Our
Canadian pension plans and supplemental executive retirement plans are currently
under funded and we will be required to make cash payments to the plans,
reducing the cash available for our business.
We
have
defined benefit pension plans covering substantially all full-time employees
of
our Canadian operations and unfunded supplemental executive retirement plans
covering current and former executives of ours. We recorded a minimum liability
associated with such retirement plans equal to the excess of the accumulated
benefit obligation over the fair value of plan assets. The minimum liability
at
December 30, 2006 was $1.6 million, and we expect to make estimated minimum
funding contributions totaling approximately $2.0 million in 2007. If the
performance of the assets in the pension plan do not meet our expectations,
or
if other actuarial assumptions are modified, our future cash payments to the
plan could be higher than we expected.
The
actions of our controlling stockholder could conflict with the interests of
the
holders of our debt.
Our
stockholders include affiliates of THL, affiliates of Fenway Partners and
certain members of our management and directors. As of December 30, 2006,
affiliates of THL owned approximately 72% of all voting stock. THL has the
ability to elect all of the members of our board of directors, subject to
certain voting agreements under our stockholders’ agreement, appoint new
management and approve any action requiring the approval of our stockholders.
The directors have the authority to make decisions affecting our capital
structure, including the issuance of additional indebtedness and the declaration
of dividends. In February 2007, Simmons Holdco borrowed $300.0 million to
distribute $278.3 million to certain of our then existing stockholders. In
2004,
the net proceeds of the issuance of the $269.0 million aggregate amount due
at
maturity in 2014 10% Senior Discount Notes (“Discount Notes”) were used to pay a
dividend to stockholders. In addition, transactions may be pursued that could
enhance THL’s equity investment while involving risks to our interests or the
interests of our investors. In particular, these and other actions of our
controlling stockholder could negatively impact the holders of our
debt.
If
we are not able to protect our trade secrets or maintain our trademarks, patents
and other intellectual property, we may not be able to prevent competitors
from
developing similar products or from marketing in a manner that capitalizes
on
our trademarks, patents and other intellectual
property.
Brands
and branded products are very important to our business. We have a large number
of well-known trademarks and service marks registered in the U.S., Canada and
abroad, and we continue to pursue many pending applications to register marks
domestically and internationally. We also have a significant portfolio of
patents and patent applications that have been issued or are being pursued
both
domestically and abroad. In addition, certain marks, trade secrets, know-how
and
other proprietary materials that we use in our business are not registered
or
subject to patent protection. Our intellectual property is important to the
design, manufacture, marketing and distribution of our products and
services.
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:
·
it
may be possible for others to circumvent our trademarks, service
marks,
patents and other rights;
·
our
products and promotional materials, including trademarks, service
marks,
may now or in the future violate the proprietary rights of
others;
·
we
may be prevented from using our own trademarks, service marks, product
designs or manufacturing technology, if
challenged;
·
we
may be unable to afford to enforce or defend our trademarks, service
marks, patents and other rights;
·
our
pending applications regarding trademarks, service marks and patents
may
not result in marks being registered or patents being issued; and
·
we
may be unable to protect our technological advantages when our patents
expire.
11
The
nature and value of our intellectual property may be affected by a change in
law
domestically or abroad. In light of the political and economic circumstances
in
certain foreign jurisdictions, our rights may not be enforced or enforceable
in
foreign countries even if they are validly issued or registered.
While
we
do not believe that our overall success depends upon any particular intellectual
property rights, any inability to maintain the proprietary nature of our
intellectual property could have a material negative effect on our business.
For
example, an action to enforce our rights, or an action brought by a third party
challenging our rights, could impair our financial condition or results of
operations, either as a result of a negative ruling with respect to our use,
the
validity or enforceability of our intellectual property or through the time
consumed and legal costs involved in bringing or defending such an
action.
We
may face exposure to product liability claims, which could reduce our liquidity
and profitability and reduce consumer confidence in our
products.
We
face
an inherent business risk of exposure to product liability claims if the use
of
any of our products results in personal injury or property damage. In the event
that any of our products prove to be defective or if they are determined not
to
meet state or federal legal requirements, we may be required to recall or
redesign those products, which could be costly and impact our profitability.
We
maintain insurance against product liability claims, but such coverage may
not
continue to be available on terms acceptable to us and such coverage may not
be
adequate to cover types of liabilities actually incurred. A successful claim
brought against us if not fully covered by available insurance coverage, or
any
claim or product recall that results in significant adverse publicity against
us, could have a material negative effect on our business and/or result in
consumers purchasing fewer of our products, which could also reduce our
liquidity and profitability.
We
are vulnerable to interest rate risk with respect to our debt, which could
lead
to an increase in interest expense and reduce our cash available for
operations.
We
are
subject to interest rate risk in connection with our variable rate indebtedness.
Interest rate changes could increase the amount of our interest payments
and thus negatively impact our future earnings and cash flows. Our annual
interest expense on our floating rate indebtedness will increase by $0.6 million
for each 1/8th percentage point increase in interest rates. Additionally,
Simmons Holdco’s Toggle Loan is floating rate debt for which Simmons Holdco has
elected to make its first interest payment in cash for $16.6 million in August
2007. Simmons Holdco may elect to pay future interest in cash or add such
interest to the principal amount of the Toggle Loan. The Toggle Loan
matures in February 2012. Although we are not an obligor on or guarantor
of the Toggle Loan, nor are we obligated to make cash distributions to service
principal and interest on the Toggle Loan, Simmons Holdco is dependent on us
to
make cash distributions to it to make the August 2007 cash interest payment
and
other future cash interest payments to the extent it elects to make such
interest payments in cash, and to pay principal on the Toggle Loan when due
at
maturity. Cash distributions from us to Simmons Holdco will reduce our
cash available for operations.
An
increase in our return rates or an inadequacy in our warranty reserves could
reduce our liquidity and profitability.
As
we
increase our sales, our return rates may not remain within our historical
levels. An increase in return rates could significantly impair our liquidity
and
profitability. We also generally provide our customers with a limited ten-year
warranty against manufacturing defects on our conventional bedding products.
Our
juvenile bedding products generally have warranty periods ranging from five
years to a lifetime. The historical costs to us of honoring warranty claims
have
been within management’s expectations. However, as we have released new products
in recent years, many new products are fairly early in their product life
cycles. Because our products have not been in use by our customers for the
full
warranty period, we rely on the combination of historical experience and product
testing for the development of our estimate for warranty claims. However, our
actual level of warranty claims could prove to be greater than the level of
warranty claims we estimated based on our products’ performance during product
testing. We have also experienced non-warranty returns for reasons generally
related to order entry errors, shipping damage, and to accommodate customers.
If
our warranty and non-warranty reserves are not adequate to cover future claims,
their inadequacy could reduce our liquidity and profitability.
12
Our
substantial indebtedness could adversely affect our financial health and reduce
the cash available to support our business and
operations.
On
a
consolidated basis, we are highly leveraged. As of December 30, 2006, we
had $896.8 million of total indebtedness outstanding and $65.2 million
available on our revolving loan under our senior credit facility. Our
substantial indebtedness could have important consequences. For example, it
could:
•
make
it more difficult for Simmons to satisfy its obligations with respect
to
our outstanding debt, and a failure to comply with any financial
and other
restrictive covenants could result in an event of default under our
debt
instruments and agreements;
•
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, thereby reducing the availability of
our
cash flow to fund working capital, capital expenditures, acquisitions
and
investments and other general corporate purposes;
•
limit
our flexibility in planning for, or reacting to, changes in our business
and the markets in which we operate;
•
increase
our vulnerability to interest rate increases, as borrowings under
the
senior credit facility and certain other debt are at variable
rates;
•
place
us at a competitive disadvantage compared to our competitors that
have
less debt; and
•
limit,
among other things, our ability to borrow additional
funds.
In
addition, we may be able to incur substantial additional indebtedness in the
future. The terms of the indenture governing the senior credit facility and
the
indentures governing our notes would allow us to issue and incur additional
debt
upon satisfaction
of certain conditions. If new debt is added to current debt levels, the related
risks described above could intensify.
Holdings
is a holding company with no operations. It may not have access to
the
cash flow and other assets of its subsidiaries that may be needed
to make
payments on Holdings’ obligations.
Holdings
is a holding company that conducts no operations. Its primary assets are
deferred financing fees and the capital stock of THL-SC Bedding Company, which
in turn is a holding company that conducts no operations and the only assets
of
which are the capital stock of Simmons Bedding. Operations are conducted through
Simmons Bedding and its subsidiaries, and Holdings’ ability to make payments on
the senior unsecured discount notes is dependent on the earnings and
distribution of funds from Simmons Bedding and its subsidiaries through loans,
dividends or otherwise. However, none of Holdings’ subsidiaries is obligated to
make funds available to it for payment on the senior unsecured discount notes.
The terms of the senior credit facility significantly restrict Simmons Bedding
from paying dividends and otherwise transferring assets to Holdings, except
for
administrative, legal and accounting services. Further, the 7.875% senior
subordinated notes significantly restrict Simmons Bedding and its subsidiaries
from paying dividends to Holdings and otherwise transferring assets to Holdings.
Given the restrictions in Simmons Bedding’s existing debt instruments, we
currently anticipate that, in order to pay the principal amount at maturity
of
the senior unsubordinated discount notes, we will be required to adopt one
or
more alternatives, such as refinancing all of our indebtedness, selling our
equity securities or the equity securities or assets of Simmons Bedding, or
seeking capital contributions or loans from our affiliates. None of our
affiliates is required to make any capital contributions, loans or other
payments to us with respect to our obligations on the senior discount notes.
There can be no assurance that any of the foregoing actions could be effected
on
satisfactory terms, if at all, or that any of the foregoing actions would enable
us to refinance our indebtedness or pay the principal amount of the notes,
or
that any of such actions would be permitted by the terms of any other debt
instruments of ours or our subsidiaries then in effect.
13
We
may not be able to generate sufficient cash to service all of our
indebtedness and may be forced to take other actions to satisfy our
obligations under such indebtedness which may not be
successful.
We
cannot
assure you that we will maintain a level of cash flows from operating activities
sufficient to permit them to pay the principal, premium, if any, and interest
on
our indebtedness. If our cash flows and capital resources are insufficient
to
fund our debt service obligations, we may be forced to reduce or delay capital
expenditures, sell assets, seek additional capital or restructure or refinance
our indebtedness. These alternative measures may not be successful and may
not
permit our subsidiaries to meet their scheduled debt service obligations. In
the
absence of generating cash flow from operating activities to service our
indebtedness, we could face substantial liquidity problems and might be required
to dispose of material assets or operations to meet our debt service and other
obligations. Our senior credit facility and the indentures governing our debt
instruments restrict our ability to dispose of assets and use the proceeds
from
the disposition. We may not be able to consummate those dispositions or to
obtain the proceeds which could be realized from them and such proceeds may
not
be adequate to meet any debt service obligations then due. Even if we could
consummate those dispositions, there is no assurance the loss of the disposed
assets would not materially affect operating results. Our ability to make
scheduled payments on or to refinance our debt obligations depends on our
financial condition and operating performance, which is subject to prevailing
economic and competitive conditions and to certain financial, business and
other
factors beyond our control.
The
senior credit facility and the indentures related to our debt instruments
contain various covenants which limit our management’s discretion in the
operation of our
business.
The
senior credit facility and the indentures related to our 7.875% senior
subordinated notes and 10.0% senior discount notes contain various provisions
which limit our management’s discretion in managing our business by, among other
things, restricting our ability to:
•
borrow
money;
•
pay
dividends on stock or repurchase stock;
•
make
certain types of investments and other restricted
payments;
•
create
liens;
•
sell
certain assets or merge with or into other companies;
restrict
dividends or other payments from our
subsidiaries.
In
addition, the senior credit facility requires Simmons Bedding to meet certain
financial ratios. Covenants in the senior credit facility require Simmons
Bedding to use a portion of the proceeds it receives in specified debt or equity
issuances to repay outstanding borrowings under its senior credit
facility.
Any failure to comply with the restrictions of the senior credit facility and
indentures governing our debt instruments, or any other subsequent financing
agreements may result in an event of default. Such default may allow the
creditors, if the agreements so provide, to accelerate the related debt and
may
result in the acceleration of any other debt to which a cross-acceleration
or
cross-default provision applies. In addition, the lenders may be able to
terminate any commitments they had made to provide us with further funds.
14
We
are in the process of upgrading our current management information system.
If we
fail to properly implement the upgrade, this could result in disruptions to
our
business, reduce our cash available for operations, and/or negatively impact
our
results of operations and financial condition. If the upgrade takes longer
than
we anticipate, we may require more resources, which could be a distraction
to
key personnel and result in more cash outlay to implement the upgrade.
We
depend
on our management information system to run our business, and we are in the
process of upgrading our current system. We currently expect this project
to be completed by the first quarter of 2008 and we expect to incur significant
increases in expenses and capital expenditures in 2007 and the remainder of
the
implementation phase to complete this project. If we fail to properly implement
the upgrade or our system is disrupted in the process, and we fail to take
proper measures to prepare for such contingency, our business could be
materially and adversely affected. Additionally, if the upgrade takes
longer to implement than anticipated, we may require more resources which could
be a distraction to key personnel of Simmons and result in more cash outlay
to
implement the upgrade, all of which could negatively impact our results of
operations and financial condition.
Additional
terrorist attacks in the U.S. or against U.S. targets or actual or threats
of
war or the escalation of current hostilities involving the U.S. or its allies
could negatively impact our business, financial condition or results of
operations.
Additional
terrorist attacks in the U.S. or against U.S. targets, or threats of war or
the
escalation of current hostilities involving the U.S. or its allies, or military
or trade disruptions impacting our domestic or foreign suppliers of components
of our products, may impact our operations, including, but not limited to,
causing supply chain disruptions and decreased sales of our products. These
events could also cause an increase in oil or other commodity prices, which
could adversely affect our raw materials or transportation costs. More
generally, any of these events could cause consumer confidence and spending
to
decrease. These events also could cause an economic recession in the U.S. or
abroad. Any of these occurrences could have a significant impact on our
business, financial condition or results of operations.
An
outbreak of avian flu or a pandemic, or the threat of a pandemic, may adversely
impact our ability to produce and deliver our products or may adversely impact
consumer demand.
A
significant outbreak of avian flu, or a similar pandemic, or even a perceived
threat of such an outbreak, could cause significant disruptions to our supply
chain, manufacturing capability and distribution system that could adversely
impact our ability to produce and deliver products. Similarly, such events
could
cause significant adverse impacts on consumer confidence and consumer demand
generally. Any of these occurrences could have a significant impact on our
business, financial condition or results of operations.
ITEM
1B. UNRESOLVED
STAFF COMMENTS.
None.
15
ITEM
2. PROPERTIES
Our
corporate offices are located at One Concourse Parkway, Atlanta, Georgia30328.
We also maintain corporate offices in Ontario, Canada for our Canadian
operations and a research and development facility in Atlanta, Georgia. The
following table sets forth selected information regarding our manufacturing
facilities as of December 30, 2006 (square footage in thousands):
SQUARE
LOCATIONS
FOOTAGE
Title
United
States
Agawam,
Massachusetts (Springfield)
125.0
Leased
Aurora,
Colorado (Denver)
129.0
Leased
Charlotte,
North Carolina
175.0
Leased
Compton,
California (Los Angeles)
222.0
Leased
Coppell,
Texas (Dallas)
141.0
Leased
Fredericksburg,
Virginia
128.5
Leased
Hazleton,
Pennsylvania
214.8
Leased
Honolulu,
Hawaii
63.3
Leased
Janesville,
Wisconsin
290.2
Owned
Mableton,
Georgia (Atlanta)
148.3
Leased
Neenah,
Wisconsin (1)
40.0
Leased
Salt
Lake City, Utah
77.5
Leased
San
Leandro, California
246.5
Leased
Shawnee
Mission, Kansas (Kansas City)
140.0
Owned
Sumner,
Washington (Seattle)
150.0
Leased
Tolleson,
Arizona (Phoenix)
103.4
Leased
Waycross,
Georgia
217.5
Owned
York,
Pennsylvania (1)
29.0
Leased
Canada
Kirkland,
Quebec
157.4
Leased
Bramalea,
Ontario
227.1
Leased
Calgary,
Alberta
130.0
Owned
Delta,
British Columbia
76.2
Leased
Puerto
Rico
Trujillo
Alto, Puerto Rico
50.0
Owned
3,281.7
(1)
These
facilities only manufacture juvenile products.
Management
believes that our facilities, taken as a whole, have adequate productive
capacity and sufficient manufacturing equipment to conduct business at levels
exceeding current demand.
In
addition, as of December 30, 2006, we operated 16 retail outlet stores through
our World of Sleep subsidiary.
16
ITEM
3. LEGAL PROCEEDINGS.
From
time
to time, we have been involved in various legal proceedings. We believe that
all
current litigation is routine in nature, incidental to the conduct of our
business and not material.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By
written consent of our stockholders on November 30, 2006, the stockholders
elected members of the board of directors until the next annual meeting of
stockholders or until their respective successors are duly elected and
qualified. The results of the stockholder vote were as follows:
Name
of Director
Votes
For
Votes
Against
Abstentions
Charles
R. Eitel
3,769,365.23
0
113,136.96
Todd
M. Abbrecht
3,769,365.23
0
113,136.96
Scott
A. Schoen
3,769,365.23
0
113,136.96
George
R. Taylor
3,769,365.23
0
113,136.96
Robin
Burns-McNeill
3,769,365.23
0
113,136.96
William
P. Carmichael
3,769,365.23
0
113,136.96
David
A. Jones
3,769,365.23
0
113,136.96
B.
Joseph Messner
3,769,365.23
0
113,136.96
All
of
our Directors’ terms continued after the stockholder vote. On February 25, 2007,
Ms. Burns-McNeill resigned from the board of directors citing personal
reasons.
17
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There
is
no established public trading market for any class of our common equity. As
of
December 30, 2006, there were 36 holders of record of our class A common stock
and 123 holders of record of our class B common stock. Following the 2007
Distribution, Holdings is a now wholly-owned subsidiary of Simmons Holdco and
our stockholders transferred their ownership in us to become stockholders in
Simmons Holdco.
We
paid
no dividends on any class of common stock in 2006. In connection with the 2007
Distribution, Simmons Holdco paid $278.3 million of merger consideration to
then
existing class A stockholders. Any payment of future dividends or distributions
and the amounts thereof will be dependent upon our earnings, fiscal requirements
and other factors deemed relevant by our board of directors. Our ability to
pay
dividends is restricted by the terms of the senior discount notes, senior credit
facility, and senior subordinated notes.
ITEM
6. SELECTED FINANCIAL DATA.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
Set
forth
below is our selected historical consolidated financial and other operating
data. We derived our historical Statement of Operations and Balance Sheet data
for 2002, 2003, 2004, 2005 and 2006 from our audited consolidated financial
statements. Our capital structure changed significantly as a result of our
predecessor company (the “Predecessor Company”) being acquired by THL in
December 2003 (the “THL Acquisition”) and the related financing. Due to required
purchase accounting adjustments relating to the THL Acquisition, the
consolidated financial and other data for the period subsequent to the
acquisition (the “Successor” period) is not comparable to such data for the
periods prior to the acquisition (the “Predecessor” periods).
18
The
accompanying selected historical consolidated financial and other operating
data
contain all adjustments that, in the opinion of management, are necessary to
present fairly our financial position for the periods presented. All adjustments
in the periods presented herein are normal and recurring in nature unless
otherwise disclosed. The information presented below should be read in
conjunction with our “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our audited consolidated financial
statements and related notes and other financial information appearing elsewhere
herein.
(1) Certain
general & administrative costs were reclassified from selling, general &
administrative expenses to cost of products sold. Selling, general and
administrative expense decreased and cost of products sold increased $5.4
million, $4.8 million, $0 million, $4.4 million, and $3.1 million for 2005,
2004, Successor 2003, Predecessor 2003 and 2002, respectively.
(2) Includes
the following items to the extent applicable for the periods presented: stock
based compensation expense, goodwill impairment charges, plant closure charges,
transaction expense, gain on sale of SCUSA, and licensing revenues.
(3)
In
the first quarter of fiscal 2006, we adopted Statement of Financial Accounting
Standard (“SFAS”) No. 123 (revised 2004), Share-Based Payments (“SFAS 123R”).
Under SFAS 123R, the fair value of our stock-based compensation awards on the
date of grant are recognized as an expense over the vesting period. Prior to
the
adoption of SFAS 123R, we used the intrinsic value method to account for our
stock based awards for our employees and directors in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB
25”), as permitted by SFAS No. 123, Accounting for Stock-Based Compensation.
Under APB 25, compensation cost was measured at the date of grant as the excess
of the fair value of the award over the purchase price and recognized as an
expense over the vesting period. Upon adoption of SFAS 123R, we made a one-time
cumulative adjustment of less than $0.1 million to record an estimate of future
forfeitures on all outstanding restricted stock awards.
19
(4) Includes
tender premium of $10.8 million for the 10.25% Series B senior subordinated
notes which were partially redeemed in connection with the THL Acquisition
and
$8.9 million of unamortized debt issuance costs expensed related to debt repaid
in connection with the THL Acquisition for the Predecessor period of 2003.
(5)
Defined as current assets (excluding cash and assets held for sale), less
current liabilities (excluding current
maturities
of long-term debt and liabilities held for sale).
(6)
Earnings
before interest, taxes, depreciation and amortization (“EBITDA”) is a
non-GAAP financial measure that is defined as net income before interest
expense, income taxes, depreciation and amortization. We use EBITDA,
adjusted for other unusual, non-cash or non-recurring items, as a
supplemental tool to measure our operating performance and, after
applying
various adjustments, as a basis for determining the
following:
·
the
allocation of our resources;
·
the
return on investment of acquisitions and major cash
expenditures;
·
the
compensation of our management;
·
the
vesting of our restricted stock and stock
options;
·
the
valuation of our common stock; and
·
our
compliance with debt covenants.
We
use
EBITDA as a supplemental tool for measuring our operating performance because
we
are and have historically had a highly-leveraged capital structure which results
in significant interest expense and minimal cash tax expense. We believe EBITDA
provides useful information to the holders of our notes and security analysts
by
assisting them in making informed investment decisions as we have historically
been valued and sold based upon multiples of EBITDA. EBITDA differs from
Adjusted EBITDA, which is defined by our senior credit facility (see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources”).
EBITDA
has important limitations as an analytical tool, and should not be considered
in
isolation or as a substitute for analysis of our results as reported under
GAAP.
For example, EBITDA does not reflect:
·
our
cash expenditures, or future requirements, for capital expenditures
or
contractual commitments;
·
changes
in, or cash requirements for, our working capital
needs;
·
the
significant interest expense, or the cash requirements necessary
to
service interest or principal payments, on our debts and Simmons
Holdco
debts;
·
tax
payments that represent a reduction in cash available to us; and
·
any
cash requirements for the assets being depreciated and amortized
that may
have to be replaced in the future.
Because
of these and other limitations, we primarily use our results under GAAP and
use
EBITDA only supplementally. The following table presents for the periods set
forth below a reconciliation of our net income (loss) to EBITDA (amounts in
millions):
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
We
are
one of the world’s largest mattress manufacturers, manufacturing and marketing a
broad range of products under our well-recognized brand names including,
Beautyrest®, Beautyrest BlackTM,
BackCare®, Natural CareTM
Latex,
and BackCare Kids®, and Deep Sleep®. We manufacture, sell and distribute our
premium branded bedding products to retail customers and institutional users,
such as the hospitality industry, throughout the U.S. and Canada and we license
our intellectual property to international companies that manufacture and sell
the Company’s premium branded bedding products throughout the world.
Additionally, we license our intellectual property to U.S. and Canadian
manufacturers and distributors of bedding accessories, furniture, water beds,
airbeds and other products. Our domestic operations sell products through a
diverse nationwide base of approximately 2,900 retailers, representing over
11,700 outlets, including furniture stores, specialty sleep shops, department
stores, furniture rental stores, mass merchandisers and juvenile specialty
stores.
During
2006, we completed a strategic business acquisition and disposition that will
allow us to focus on our core manufacturing operations. On August 29, 2006,
we
sold our subsidiary SCUSA, which operated specialty sleep stores, to our retail
customer The Sleep Train, Inc. (“Sleep Train”) for $52.4 million (the “SCUSA
Disposition”). As a result of the SCUSA Disposition, we no longer sell
mattresses directly to retail consumers except through our World of Sleep outlet
stores that sell product returns, off-quality product and excess inventory
from
our manufacturing operations. Following the SCUSA Disposition, we entered into
a
long-term supply agreement with Sleep Train that we anticipate will generate
over $300 million in sales for us over the next four years.
On
November 15, 2006 we acquired Simmons Canada, a former licensee of ours that
is
one of the leading manufacturers of mattresses in Canada, for $113.1 million
in
cash (“Canada Acquisition”). The Canada Acquisition provides us with direct
access to the conventional mattress and foundations market in Canada. Simmons
Canada is a natural fit with our U.S. manufacturing operations and we believe
significant synergies will result from the combination of the two
operations.
During
fiscal year 2006 (52-weeks), our U.S. wholesale conventional bedding net sales
increased $111.9 million, or 14.2%, compared to fiscal year 2005 (53-weeks).
We
believe our sales growth exceeded the industry growth rate for the year since
ISPA’s survey of the 19 leading U.S. mattress producers (representing
approximately 61.0% of the industry wholesale dollar sales in 2005) reported
sales growth of 5.3% in 2006. We attribute our growth to the success of our
sales force reorganization in December 2005 which improved the effectiveness
of
our sales efforts combined with the product modifications made to our 2005
product line following the unsuccessful initial rollout of the products in
the
first quarter of 2005.
Also
during fiscal year 2006, we introduced several new products including Beautyrest
BlackTM
and
Natural CareTM
Latex
products. The Beautyrest BlackTM
product
is an ultra-premium priced bedding product that uses our exclusive and patented
Advanced Pocketed Coil™
spring.
The Advanced Pocketed Coil™
spring
uses three strands of wire to form a single coil that provides superior motion
separation and conformability. The Beautyrest BlackTM
product
line is targeted to those consumers seeking to indulge themselves with the
ultimate in luxury with the very latest technologies. Our Natural
CareTM
Latex is
an ultra-premium priced product line which features a latex core that is mold
and mildew resistant and provides pressure point relief. We believe both of
these new product lines will improve our market share in the growing luxury
priced bedding category.
In
January 2007, we introduced our new 2007 Beautyrest® product line, our flagship
branded product line that was first introduced in 1925. The new 2007 Beautyrest®
product line offers higher coil densities and improved comfort features and
is
designed to comply with new federal mattress flammability standards which go
into effect in July 2007. The new product line began shipping in January 2007
and we anticipate it being fully rolled out by the end of our second quarter
of
2007.
Our
material costs continued to be impacted from the higher prices for steel and
petroleum based products. We anticipate such costs to remain at elevated levels
throughout 2007. To help offset rising material costs, we have successfully
implemented and will continue to look for cost savings initiatives to reduce
our
overall cost structure.
21
On
February 9, 2007, we merged with another entity to become a wholly-owned
subsidiary of Simmons Holdco, a holding company established to borrow $300.0
million under a Toggle Loan to fund a distribution of $278.3 million to our
then
existing class A stockholders. We do not guarantee nor have any of our assets
pledged as collateral under the Toggle Loan. The Toggle Loan is structurally
subordinated in right of payment to any of our existing and future liabilities.
Although we are not obligated to make cash distributions to service principal
and interest on the Toggle Loan, Simmons Holdco is dependent on our cash flow
to
meet its interest and principal payments under the Toggle Loan.
CRITICAL
ACCOUNTING POLICIES
In
preparing our consolidated financial statements in conformity with GAAP, our
management must make decisions that impact the reported amounts and the related
disclosures. Those decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to the
allowance for doubtful accounts, impairment of long-lived assets, impairment
of
goodwill, warranties, co-operative advertising and rebate programs, non-cash
stock compensation expense, income taxes, self-insurance reserves, and
litigation and contingencies. We base our estimates on historical experience
and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Our management believes the critical accounting
policies described below are the most important to the fair presentation of
our
financial condition and results. The following policies require management’s
more significant judgments and estimates in the preparation of our consolidated
financial statements.
Allowance
for doubtful accounts.
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of
their ability to make payments, additional allowances may be required. We
evaluate the adequacy of the allowance on a periodic basis. The evaluation
includes consideration of a review of historical loss experience, the aging
of
the receivable balances, adverse situations that may affect the customer’s
ability to pay the receivable, and prevailing economic conditions. If the result
of the evaluation of the reserve requirements differs from the actual aggregate
allowance, adjustments are made to the allowance. This evaluation is inherently
subjective, as it requires estimates that are susceptible to revision as more
information becomes available. Our accounts receivable balance was $92.0 million
and $74.7 million, net of the allowances for doubtful accounts, discounts and
returns of $4.3 million and $4.0 million, respectively, as of December 30,2006
and December31, 2005, respectively. Our allowance for doubtful accounts was $2.0 million
and
$1.6 million as of December 30, 2006 and December 31, 2005, respectively.
Impairment
of long-lived assets.
We
assess all of our long-lived assets for impairment whenever events or
circumstances indicate that their carrying value may not be recoverable.
Management assesses whether there has been impairment by comparing anticipated
undiscounted future cash flows from operating activities with the carrying
value
of the 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 impairment is deemed to
exist, management records an impairment charge equal to the excess of the
carrying value over the fair value of the impaired assets. This could result
in
a material non-cash charge to earnings.
Intangible
assets.
Definite-lived intangible assets are amortized using the straight-line method,
which we believe is most appropriate, over their estimated period of benefit,
ranging from three to twenty-five years. Indefinite-lived intangible assets,
such as trademarks, are not amortized. We evaluate indefinite-lived intangible
assets for impairment at least annually or whenever events or circumstances
indicate their carrying value might be impaired. In performing this assessment,
management considers operating results, trends and prospects, as well as the
effects of obsolescence, demand, competition and other economic factors. The
carrying value of an indefinite-lived intangible asset is considered impaired
when its carrying value exceeds its fair market value. In such an event, an
impairment loss is recognized equal to the amount of that excess. Fair value
is
determined primarily by using either the projected cash flows discounted at
a
rate commensurate with the risk involved or an appraisal. The determination
of
fair value involves numerous assumptions by management, including expectations
on possible variations in the amounts of timing of cash flows, the risk-free
interest rate, and other factors considered in managements projected future
operating results. We review the useful lives of definite-lived and
indefinite-lived intangible assets every reporting period.
22
We
test
goodwill for impairment on an annual basis in the fourth quarter by comparing
the fair value of our reporting units to their carrying values. Additionally,
goodwill is tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value
of an
entity below its carrying value. These events or circumstances would include
a
significant change in the business climate, legal factors, operating performance
indicators, competition, sale or disposition of a significant portion of the
business or other factors.
Fair
value is determined by the assessment of future discounted cash flows of the
reporting unit and by comparison to similar entities’ fair values. The
assumptions used in the estimate of fair value are generally consistent with
the
past performance of each reporting unit and are also consistent with the
projections and assumptions that are used in current operating plans. Such
assumptions are subject to change as a result of changing economic and
competitive conditions.
Warranty
accrual.
The
conventional bedding products that we currently manufacture generally include
a
ten year non-prorated warranty. Our juvenile bedding products have warranty
periods ranging from five years to a lifetime. We record the estimated cost
of
warranty claims when products are sold. We estimate the cost of warranty claims
based on historical sales and warranty returns and the current average costs
to
settle a warranty claim. We include the estimated impact of recoverable salvage
value in the calculation of the current average costs to settle a warranty
claim.
The
following table presents a reconciliation of our warranty accrual for fiscal
years 2006, 2005 and 2004 (in thousands):
Accruals
related to pre-existing warranties (including
change
in estimate and warranties assumed in acquisition)
98
84
(418
)
Warranty
settlements
(1,066
)
(1,890
)
(1,861
)
Balance
at end of year
$
3,668
$
3,009
$
2,715
Co-operative
advertising and rebate programs.
We
enter into agreements with many of our customers to provide funds for
advertising and promotion of our products. We also enter into volume and other
rebate programs with certain customers whereby funds may be rebated to the
customer based on meeting certain sales or other metrics. When sales are made
to
these customers, we record accrued liabilities pursuant to these agreements.
Based on achievement of sales levels, management regularly assesses these
liabilities based on forecasted and actual sales and claims. In assessing the
liabilities, management makes judgment decisions based on its knowledge of
customer purchasing habits to determine whether all the co-operative advertising
earned will be used by the customer and whether the customer will meet the
requirements to receive rebates. Additionally, management must determine whether
the co-operative advertising costs meet the requirement for classification
as
selling, general and administrative expense versus a reduction of sales. Costs
of these programs totaled $126.5 million, $110.9 and $113.3 million for 2006,
2005 and 2004, respectively.
Stock
compensation expense.
The
Amended and Restated Simmons Company Equity Incentive Plan (the “Equity Plan”)
provides stock based awards to our employees, directors and consultants. We
are
authorized to issue up to 781,775 shares of Class B common stock pursuant to
awards under the Equity Plan. Awards are made pursuant to agreements and are
subject to vesting and other restrictions as determined by the board of
directors. Among other things, the agreements may provide, under certain
conditions, for potential acceleration in vesting of the stock upon a change
in
control. Upon issuance of awards, compensation cost is measured as the excess
of
the fair value of the award over the purchase price. Fair value of the
underlying stock is determined by our board of directors based upon a quarterly
valuation of the Company performed by a third-party valuation firm. Fair value
of restricted stock awards is measured on the date of grant as the difference
between the price paid for the common stock and the fair value of the common
stock. Fair value of stock options is determined on the date of grant using
the
Black Scholes Merton option pricing model. As of December 30, 2006, we had
not
issued a significant amount of stock options under the Equity Plan. The
compensation cost associated with stock based compensation is amortized by
a
charge to compensation expense over the period from the date the shares are
awarded to the date restrictions are expected to lapse. We recorded stock
compensation expense associated with awards under the Equity Plan of $0.8
million for fiscal year 2006 and less than $0.1 million for each of fiscal
years
2005 and 2004.
23
Income
taxes.
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and for the future
utilization of operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized as income or expense in the period that
includes the effective date of enactment.
Based
on
management’s estimates regarding the future realization of the tax benefits of
deferred tax assets, a valuation allowance is established, when necessary,
to
reduce deferred tax assets to the amounts expected to be realized. As of
December 30, 2006 and December 31, 2005, we had recorded valuation allowances
of
$8.6 million and $6.3 million, respectively, against the deferred tax assets
related to certain tax loss and tax credit carryforwards. As of December 30,2006 and December 31, 2005, we had recorded a benefit for federal and state
net
operating loss carryforwards and tax credit carryforwards, net of valuation
allowances, of $33.0 million and $51.1 million, respectively.
Self-Insurance
liabilities.
We
retain a portion of the risks related to our general liability, product
liability, automobile, worker’s compensation and health insurance programs. The
exposure for unpaid claims and associated expenses, including incurred but
not
reported losses, generally is estimated with the assistance of external
actuaries and by considering pending claims and historical trends and data.
The
estimated accruals for these liabilities could be affected if future occurrences
or loss developments significantly differ from utilized assumptions. The
estimated liability associated with settling unpaid claims is included in
accrued liabilities. As of December 30, 2006 and December 31, 2005, we recorded
$4.1 million and $3.9 million of liabilities for exposures to unpaid
self-insured claims.
Litigation
and contingent liabilities.
From
time to time, we are parties to or targets of lawsuits, claims, investigations
and proceedings, including product liability, personal injury, patent and
intellectual property, commercial, contract, environmental, health and safety,
and employment matters, which are handled and defended in the ordinary course
of
business. We accrue a liability for such matters when it is probable that a
liability has been incurred and the amount can be reasonably estimated. We
believe the amounts reserved are adequate for such pending matters; however,
results of operations could be negatively affected by significant litigation
adverse to us.
24
RESULTS
OF OPERATIONS
The
following table sets forth historical consolidated financial information as
a
percent of net sales:
Net
Sales.
Our net
sales increased $106.3 million, or 12.4%, to $961.6 million for fiscal year
2006
compared to $855.3 million for fiscal year 2005. Our net sales for fiscal years
2006 and 2005 included $49.0 million and $67.2 million, respectively, of net
sales associated with our retail operations (net of eliminations between our
wholesale and retail operations), which were disposed of in 2006. Exclusive
of
the net sales associated with our retail operations, our net sales increased
$124.6 million, or 15.8%, to $912.7 million in fiscal year 2006 compared to
$788.1 million in fiscal year 2005. We estimated the additional week in fiscal
year 2005 added approximately $12.4 million of sales in fiscal year 2005. For
fiscal year 2006, our sales increase occurred principally due to an increase
in
our domestic conventional bedding unit volume and AUSP of 10.8% and 2.6%,
respectively, compared to fiscal year 2005. Our domestic unit volume increased
principally due to improved product offerings combined with a more effective
sales approach following the reorganization of our sales force in December
2005.
Our improvement in domestic AUSP was primarily attributable to the price
increase implemented during the fourth quarter of 2005 to help minimize the
impact of rising raw material costs, partially offset by a change in our sales
mix.
For
fiscal years 2006 and 2005, our net sales reflect a reduction of $87.7 million
and $85.4 million, respectively, for cash consideration paid to our customers
for certain promotional programs, allowances and volume rebates. As a percentage
of our sales, our aggregate co-op advertising expenditures, regardless of
whether reported as a selling expense or a sales reduction, for fiscal year
2006, were 0.1 percentage points higher than the aggregate co-op advertising
expenditures for fiscal year 2005.
Gross
Margin.
Our
consolidated gross margin increased 0.5 percentage points to 43.4% for fiscal
year 2006 compared to 42.9% for fiscal year 2005. Our gross margin improved
principally due to our domestic conventional bedding labor and overhead cost
per
unit decreasing 9.8% in 2006 compared to 2005 as a result of favorable
manufacturing efficiencies driven by our increased unit volume. Partially
offsetting the improvement in labor and overhead cost per unit, our gross margin
was negatively impacted by (i) a 6.4% increase in our domestic conventional
bedding material cost per unit due to inflation primarily in polyurethane foam
costs in the fourth quarter of 2005 and (ii) less sales at retail due to the
sale of SCUSA in August 2006. Exclusive of retail sales, our gross margin
increased 1.2 percentage points to 42.1% for fiscal years 2006 compared to
40.9%
for fiscal year 2005.
Selling,
General and Administrative Expenses (“SG&A”).
Our
SG&A as a percentage of net sales decreased 2.0 percentage points to 32.4%
for fiscal year 2006 compared to 34.4% for fiscal year 2005. Our SG&A as a
percent of net sales decreased due primarily to (i) fixed general and
administrative expenses being allocated over a larger sales base; and (ii)
an
$11.3 million, or 2.3 percentage points, reduction in selling expenses. The
lower selling expenses are principally the result of our sales force
reorganization in December 2005 and the timing of new product introductions.
25
Amortization
of Intangibles.
For
fiscal year 2006, amortization of intangibles of $5.7 million remained
consistent with 2005.
Licensing
Fees.
For
fiscal year 2006, licensing fees decreased $0.4 million, or 4.8%, to $8.7
million from $9.1 million for fiscal year 2005. Our licensing fees decreased
principally due to a decline in sales at a significant licensee due to their
loss of a major customer
Interest
Expense, Net.
For
fiscal year 2006, interest expense increased $9.6 million, or 13.6%, to $79.9
million from $70.4 million for fiscal year 2005. Interest expense increased
principally due to the expensing of $5.0 million of deferred financing fees
associated with the refinancing of our $140.0 million senior unsecured term
loan
in connection with the execution of the amended and restated senior credit
and
guaranty agreement on May 25, 2006 (this exchange of debt instruments is
collectively referred to as the “Refinancing”). Additionally, in connection with
the Refinancing, we incurred $1.0 million of refinancing costs that were
expensed as incurred. Excluding the expenses related to the Refinancing,
interest expense for the fiscal year 2006 compared to the fiscal year 2005
increased $3.6 million due primarily to (i) higher LIBOR base rates on our
senior credit facility, partially offset by lower average outstanding borrowings
and reduced interest rate margins as a result of the Refinancing; and (ii)
increased non-cash interest on our 10% senior discount notes (“Discount Notes”).
Our non-cash interest expense, which includes accretion of our senior discount
notes, the amortization of deferred financing fees, and the expensing of fees
associated with the Refinancing, was $26.3 million and $19.7 million for fiscal
years 2006 and 2005, respectively.
Income
Taxes. The
combined federal, state, and foreign effective income tax rate of 33.9% for
the
year ended December 30, 2006 differs from the federal statutory rate of 35.0%
primarily due to a larger book versus tax gain on the sale of SCUSA, partially
offset by an increase in tax reserves and the effect of state income taxes.
The
combined federal, state, and foreign effective income tax rate of 44.2% for
the
year ended December 31, 2005 differs from the federal statutory rate of 35.0%
primarily due to the expiration of unused state net operating loss
benefits.
YEAR
ENDED DECEMBER 31,
2005 (53-WEEKS) COMPARED TO YEAR ENDED DECEMBER 25, 2004
(52-WEEKS)
Net
Sales. Our
net
sales decreased $14.6 million or 1.7%, to $855.3 million for the fiscal year
2005 compared to fiscal year 2004. Our net sales for 2005 and 2004 included
$67.2 million and $61.5 million of net sales associated with our retail
operations (net of eliminations of between our wholesale and retail
operations), which were disposed of in 2006. Exclusive of the net sales
associated with our retail operations, our net sales decreased $20.3 million,
or
2.5%, to $788.1 million in fiscal year 2005 compared to fiscal year 2004. We
estimated the additional week in fiscal year 2005 added approximately $12.4
million of sales in fiscal year 2005 compared to fiscal year 2004. For fiscal
year 2005, our sales decline occurred principally due to a decrease in
conventional bedding unit volume of 8.3%, partially offset by an increase in
conventional bedding AUSP of 6.3% compared to fiscal year 2004. Our unit volume
declined principally due to (i) less sales volume at lower retail price points
since our 2005 product lines focused on higher retail price points; and (ii)
the
roll-out of new premium-priced products in the first quarter of 2005 which
were
not as successful as our previous product lines. Our AUSP for fiscal year 2005
increased compared to fiscal year 2004 due primarily to the shipment of our
new
product lines in 2005 which, on average, sold at higher prices than our 2004
product lines coupled with price increases implemented in October 2004 and
November 2005 on all products to help minimize the impact of rising raw material
costs. Net sales in fiscal year 2005 also benefited by $15.8 million from
selling more juvenile bedding products as a result of our acquisition of certain
assets and liabilities of Simmons Juvenile Products Company, Inc. (the “Juvenile
Acquisition”) in August 2004.
For
fiscal years 2005 and 2004, our net sales reflect a reduction of $85.4 million
and $66.6 million, respectively, for cash consideration paid to our customers
for certain promotional programs, allowances and volume rebates. Our sales
reductions increased for fiscal year 2005 compared to fiscal year 2004
principally due to our customers providing less proof of advertising for the
subsidies they receive from us, which resulted in more co-op advertising
expenditures being recorded as a sales reduction versus a selling expense.
As a
percentage of our sales, our aggregate co-op advertising expenditures,
regardless of whether reported as a selling expense or a sales reduction, for
fiscal year 2005, were 0.1 percentage points lower than the aggregate co-op
advertising expenditures for fiscal year 2004.
26
Gross
Margin.
Our
gross margin for fiscal year 2005 declined 2.3 percentage points to 42.9%
compared to 45.2% for fiscal year 2004. Our gross margin declined principally
due to (i) a 10.3% increase in our conventional bedding material cost per unit
due to inflation in raw material costs and the added costs to make our products
manufactured for sale in the State of California meet California’s open flame
resistance standards which became effective January 1, 2005; (ii) a 5.8%
increase in our conventional bedding labor and overhead cost per unit due to
a
decline in sales volume resulting in lower utilization of our manufacturing
facilities; (iii) an increase in juvenile products sold, which sell at lower
margins, as a result of the Juvenile Acquisition; and (iv) an increase in our
co-op advertising expenditures classified as a reduction of sales in fiscal
year
2005 (see above “Net Sales” discussion).
Our
fiscal year 2004 gross margin included (i) $5.0 million of non-recurring
start-up costs related to the opening of our Hazleton, Pennsylvania and
Waycross, Georgia manufacturing facilities; and (ii) $2.6 million of
non-recurring costs resulting from the selling of inventory recorded at fair
market value in connection with the purchase accounting associated with the
THL
Acquisition.
Selling,
General and Administrative Expenses.
Our
consolidated SG&A as a percent of net sales decreased 2.2 percentage points
to 34.4% compared to 36.6% for fiscal year 2004. Our SG&A decreased
primarily due to more co-op advertising expenditures being recorded as a
reduction of sales instead of as a selling expense as discussed above under
“Net
Sales” which resulted in a 1.5 percentage point decrease in SG&A as a
percent of net sales in fiscal year 2005 compared to fiscal year 2004.
Additionally, SG&A for fiscal year 2005 includes $6.8 million of
non-recurring severance, consulting and other expenses associated with the
implementation of our 2005 cost cutting initiatives. SG&A for fiscal year
2004 included non-recurring charges of (i) $11.7 million associated with the
opening of our Hazleton, Pennsylvania and Waycross, Georgia manufacturing
facilities and the closing of our Columbus, Ohio and Piscataway, New Jersey
manufacturing facilities during the year and (ii) $2.0 million of transaction
expenses, in the aggregate, related to the THL Acquisition, the Juvenile
Acquisition, the sale of Mattress Gallery, and the filing of a registration
statement with the SEC for an initial public offering (“IPO”) of our common
stock that was not completed.
Amortization
of Intangibles.
For
fiscal year 2005, amortization of intangibles increased $0.8 million, or 15.4%,
to $5.7 million from $4.9 million for fiscal year 2004. The increase in
amortization expense was attributable to the recording of non-contractual
customer agreements in connection with the purchase price allocation for the
Juvenile Acquisition. The non-contractual agreements have a weighted average
life of eleven years.
Licensing
Fees.
For
fiscal year 2005, licensing fees decreased $0.5 million, or 5.1%, to $9.1
million from $9.6 million for fiscal year 2004. Our licensing fees decreased
principally due to (i) declining sales at a significant licensee due to their
loss of a major customer; and (ii) the loss of a licensee in 2004 as a result
of
their filing for bankruptcy.
Interest
Expense, Net.
For
fiscal year 2005, interest expense increased $26.1 million, or 59.1%, to $70.4
million from $44.2 million for fiscal year 2004. Interest expense increased
$16.8 million as a result of the issuance of $269.0 million of Discount Notes
in
December 2004. Interest expense also increased $8.8 million due to higher LIBOR
base rates on our senior credit facility and senior unsecured term loan for
fiscal year 2005 compared to fiscal year 2004. Our non-cash interest expense,
including the accretion of the original issuance discount on our Discount Notes,
was $19.7 million in fiscal year 2005 compared to $2.4 million in fiscal year
2004.
Income
Taxes. The
combined federal, state, and foreign effective income tax rate of 44.2% for
the
year ended December 31, 2005 differs from the federal statutory rate of 35.0%
primarily due to the expiration of unused state net operating loss
benefits.
The
combined federal, state, and foreign effective income tax rate of 32.6% for
fiscal year 2004 differed from the federal statutory rate of 35.0% primarily
due
to a reversal of tax reserves which we believe are no longer needed, partially
offset by the expiration of unused net operating loss benefits and an increase
in state income taxes.
27
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal sources of cash to fund liquidity needs are (i) cash provided by
operating activities and (ii) borrowings available under our senior credit
facility. Restrictive covenants in our debt agreements restrict our ability
to
pay cash dividends and make other distributions. Our primary use of funds
consists of payments of funding for working capital increases, capital
expenditures, customer supply agreements, principal and interest for our debt,
distributions to service Simmons Holdco debt, and acquisitions. Barring any
unexpected significant external or internal developments, we expect current
cash
balances on hand, cash provided by operating activities and borrowings available
under our senior credit facility to be sufficient to meet our short-term and
long-term liquidity needs.
Capital
expenditures totaled $13.6 million for fiscal year 2006. We believe that the
annual capital expenditure limitations in our senior credit facility will not
significantly inhibit us from meeting our ongoing capital expenditure needs.
We
anticipate our capital expenditures to increase in 2007 to approximately $26
million as a result of upgrading our management information systems and our
acquisition of Simmons Canada.
Future
principal debt payments are expected to be paid out of cash flows from
operations, borrowings on our revolving credit facility, and future refinancing
of our debt. Historically we have paid minimal federal income taxes as a result
of net operating loss carryforwards. We expect to pay minimal income taxes
in
2007.
The
following table summarizes our changes in cash (in millions):
Cash
flows from operating activities.
For
fiscal year 2006 compared to fiscal year 2005, our cash flows from operations
increased $62.1 million. Our cash flows from operations increased primarily
due
to our increase in sales and net income combined with our decrease in working
capital of $10.6 million.
Cash
flows used in investing activities.
For
fiscal year 2006 compared to fiscal year 2005, our cash flows used in investing
activities increased $64.5 million. For fiscal year 2006, our cash used in
investing activities included the purchase of Simmons Canada for $113.1 million,
net of cash acquired, and capital expenditures of $13.6 million, which were
partially offset by the proceeds from the sale of SCUSA of $52.4 million. For
fiscal year 2005, our cash used in investing activities included a payment
of
contingent consideration of $3.3 million related to the Juvenile Acquisition
and
capital expenditures of $6.8 million.
Cash
flows used in financing activities.
For
fiscal year 2006 compared to fiscal year 2005, our cash flows used in financing
activities increased by $1.5 million. For fiscal year 2006, we made mandatory
and voluntary payments on our senior credit facility of $29.9 million. For
fiscal year 2005, we made mandatory and voluntary payments on our senior credit
facility of $26.7 million.
Cash
flows from operating activities.
For
fiscal year 2005 compared to fiscal year 2004, our cash flows from operations
decreased $29.4 million. Our cash flows from operations decreased primarily
due
a decline in net income of $20.4 million partially offset by a decrease in
working capital.
Cash
flows used in investing activities.
For
fiscal year 2005 compared to fiscal year 2004, our cash flows used in investing
activities decreased $19.0 million. For fiscal year 2005, our cash used in
investing activities included a payment of contingent consideration of $3.3
million related to the Juvenile Acquisition and capital expenditures of $6.8
million. For fiscal year 2004, our cash used in investing activities included
a
payment of $19.7 million related to the Juvenile Acquisition and capital
expenditures of $18.2 million. In fiscal year 2004, our capital expenditures
were higher primarily due to our opening new manufacturing facilities in
Hazleton, Pennsylvania and Waycross, Georgia. For fiscal year 2004, our cash
flows from investing activities benefited from the sale of Mattress Gallery
for
$6.3 million.
Cash
flows used in financing activities.
For
fiscal year 2005 compared to fiscal year 2004, our cash flows used in financing
activities increased by $9.6 million. For fiscal year 2005, we made mandatory
and voluntary payments on our senior credit facility of $26.7 million. For
fiscal year 2004, we made mandatory and voluntary payments on our senior credit
facility of $11.7 million. During fiscal year 2004, we repaid the remaining
10.25% Series B Senior Subordinated Notes outstanding for $5.3
million.
Debt
Senior
Credit Facility
On
May25, 2006, we executed the second amended and restated senior credit and guaranty
agreement with a syndicate of lenders, which amended and restated our existing
senior credit facility in its entirety. The senior credit facility, as amended,
provides for a $75.0 million revolving credit facility and a $492.0 million
tranche D term loan facility. The proceeds from the senior credit facility
were
used to replace our $350.0 million tranche C term loan and $140.0 million senior
unsecured term loan. Among other things, the senior credit facility, as amended,
reduced the applicable Eurodollar and Base interest rate margins for borrowings
under our term loan and refinanced our unsecured term loan which had an interest
rate margin 175 basis points higher than the margin on the tranche D term loan.
The
senior credit facility, as amended, and following an upgrade of our debt ratings
on September 21, 2006, bears interest at the Company’s choice of the Eurodollar
Rate or Base Rate (both as defined), plus the applicable interest rate margins
as follows:
Eurodollar
Base
Rate
Rate
Revolving
loan
2.25%
1.25
Tranche
D term loan
2.00%
1.00
The
revolving loan applicable interest rate margins for both Eurodollar Rate loans
and Base Rate loans are reduced based upon Simmons Bedding’s leverage ratio. The
weighted average interest rate per annum in effect as of December 30, 2006
for
the tranche D term loan was 7.12%.
Subsequent
to the amendment, we voluntarily prepaid $12.0 million of the tranche D term
loan resulting in our next required principal payment of $0.3 million being
scheduled for September 2008. The tranche D term loan has mandatory quarterly
principal payments of $1.2 million from December 31, 2008 through December31,2010 and mandatory quarterly principal payments of $117.2 million from March31,2011 through maturity on December 19, 2011. Depending on Simmons Bedding’s
leverage ratio, we may be required to prepay a portion of the tranche D term
loan with up to 50% of our excess cash flows (as defined in the senior credit
facility) from each fiscal year. We are not required to prepay a portion of
the
tranche D term loan in fiscal year 2007 as a result of our fiscal year 2006
excess cash flows having been reinvested, as defined in the senior credit
facility.
29
The
senior credit facility requires Simmons Bedding to maintain certain financial
ratios, including cash interest coverage and total leverage ratios. The senior
credit facility also contains other covenants, which among other things, limit
capital expenditures, the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayment of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. The financial
covenants, as amended, are as follows:
As
of
December 30, 2006, Simmons Bedding was in compliance with all of its financial
covenants.
Senior
Subordinated Notes
In
connection with the THL Acquisition, we issued $200.0 million of 7.875% senior
subordinated notes due 2014 (the “Subordinated Notes”). The Subordinated Notes
bear interest at the rate of 7.875% per annum, which is payable semi-annually
in
cash in arrears on January 15 and July 15. The Subordinated Notes are
subordinated in right of payment to all existing and future senior indebtedness
of Simmons Bedding.
The
Subordinated Notes are redeemable at our option beginning January 15, 2009
at
prices decreasing from 103.938% of the principal amount thereof to par on
January 15, 2012 and thereafter. We are not required to make mandatory
redemption or sinking fund payments with respect to the Subordinated
Notes.
The
indenture for the Subordinated Notes requires Simmons Bedding to comply with
certain restrictive covenants, including restrictions on dividends, and
limitations on the occurrence of indebtedness, certain payments and
distributions, and sales of Simmons Bedding’s assets and stock. We were in
compliance with such covenants as of December 30, 2006.
Senior
Discount Notes
Our
senior discount notes (“Discount Notes”), with an aggregate principal amount at
maturity of $269.0 million, bear interest at the rate of 10.0% per annum payable
semi-annually in cash in arrears on June 15 and December 15 of each year
commencing on June 15, 2010. Prior to December 15, 2009, interest will accrue
on
the Discount Notes in the form of an increase in the accreted value of the
Discount Notes. Our ability to make payments on the Discount Notes is dependent
on the earnings and distribution of funds from Simmons Bedding to Holdings.
At
any
time prior to December 15, 2007, we may redeem up to 40% of the aggregate
principal amount of the Discount Notes at a price of 110.0% in connection with
an Equity Offering, as defined. With the exception of an Equity Offering, the
Discount Notes are redeemable at our option beginning December 15, 2009 at
prices decreasing from 105.0% of the principal amount thereof to par on December15, 2012 and thereafter. We are not required to make mandatory redemption or
sinking fund payments with respect to the Discount Notes.
If
any of
the Discount Notes are outstanding on June 15, 2010, we will redeem for cash
a
portion of each Discount Note then outstanding in an amount equal to the
Mandatory Principal Redemption Amount (as defined) plus a premium equal to
5.0%
(one-half of the coupon) of the Mandatory Principal Redemption Amount. No
partial redemption or repurchase of the Discount Notes pursuant to any other
provision of the indenture will alter our obligation to make this redemption
with respect to any Discount Notes then outstanding.
30
Debt
Covenants
Our
long-term obligations contain various financial tests and covenants. We were
in
compliance with such covenants as of December 30, 2006. However, if our
operating results fall below current expectations, we may not be able to meet
such covenants in future periods. If we are not in compliance with such
covenants in future periods, we would be required to obtain a waiver from our
lenders to avoid being in default. We may not be able to obtain such a waiver
on
a timely basis or at all. The most restrictive covenants apply to Simmons
Bedding and relate to ratios of adjusted EBITDA to cash interest expense (cash
interest coverage ratio) and net debt to adjusted EBITDA (leverage ratio),
all
as defined in the senior credit facility. There is also a maximum capital
expenditure limitation in the senior credit facility. The minimum cash interest
coverage ratio and maximum leverage ratio are computed based on Simmons
Bedding’s financial results for the last twelve months ended, adjusted for any
dispositions or acquisitions. The senior credit facility covenants also contain
a maximum capital expenditure limitation of $30.0 million per fiscal year,
with
the ability to roll forward to future years unused amounts from the previous
fiscal year, and also subject to adjustments for certain acquisitions and other
events.
The
following is a calculation of our minimum cash interest coverage and maximum
leverage ratios under our senior credit facility as of December 30, 2006. The
terms and related calculations are defined in the senior credit facility, which
is incorporated by reference as Exhibit 10.26 of this report (in millions,
except ratios):
Calculation
of minimum cash interest coverage ratio:
Twelve
months ended Adjusted EBITDA(1)
$
163.6
Consolidated
cash interest expense(2)
$
54.2
Actual
interest coverage ratio(3)
3.02x
Minimum
permitted interest coverage ratio
1.85x
Calculation
of maximum leverage ratio:
Consolidated
indebtedness
$
695.2
Less:
Cash and cash equivalents
20.8
Net
debt
$
674.4
Adjusted
EBITDA(1)
$
163.6
Actual
leverage ratio(4)
4.12x
Maximum
permitted leverage ratio
5.90x
(1)
Adjusted EBITDA (as defined in the senior credit facility) differs from the
term
“EBITDA” as it is commonly used. In addition to adjusting net income to exclude
interest expense, income taxes, depreciation and amortization, Adjusted EBITDA,
as we have interpreted the definition of Adjusted EBITDA from our senior credit
facility, also adjusts net income by excluding items or expenses not typically
excluded in the calculation of “EBITDA” such as management fees; other non-cash
items reducing consolidated net income (including, without limitation, non-cash
purchase accounting adjustments and debt extinguishment costs); any
extraordinary, unusual or non-recurring gains or losses or charges or credits;
and any reasonable expenses or charges related to any issuance of securities,
investments permitted, permitted acquisitions, recapitalizations, asset sales
permitted or indebtedness permitted to be incurred, less other non-cash items
increasing consolidated net income, all of the foregoing as determined on a
consolidated basis for Simmons Bedding in conformity with GAAP. Adjusted EBITDA
is presented herein because it is a material component of the covenants
contained within the aforementioned credit agreements. Non-compliance with
such
covenants could result in the requirement to immediately repay all amounts
outstanding under such agreements, which could have a material adverse effect
on
our results of operations, financial position and cash flow. While the
determination of “unusual and nonrecurring losses” is subject to interpretation
and requires judgment, we believe the Adjusted EBITDA presented on the following
page is in accordance with the senior credit facility. Adjusted EBITDA does
not
represent net income or cash flow from operations as those terms are defined
by
GAAP and does not necessarily indicate whether cash flows will be sufficient
to
fund cash needs.
31
The
following table sets forth a reconciliation of net income to EBITDA and Adjusted
EBITDA for the year ended December 30, 2006 (in millions):
Reorganization
expenses including management severance
4.7
Management
fees paid to THL
1.7
Transaction
expenses
1.7
Non-cash
stock compensation
0.8
Conversion
costs associated with meeting new flammability standard
0.7
State
taxes in lieu of income taxes
0.7
Other,
including expenses at Holdings
0.6
Simmons
Bedding Adjusted
EBITDA
$
163.6
(a)
This
adjustment removes the EBITDA of SCUSA that is included in our
consolidated EBITDA prior to our disposition of the entity and the
$43.3
million gain recognized on the disposition; and includes the full
year
effect of savings generated from new dealer agreement executed in
connection with the sale of SCUSA.
(b)
This
adjustment includes the EBITDA of Canada, not already reflected in
our
consolidated EBITDA, for the fiscal year 2006 as though we purchased
the
entity as of the beginning of the fiscal year and also includes $5
million
of synergies that management anticipates will be achieved as a result
of
the Canada Acquisition.
(2)
A
calculation of consolidated cash interest expense, as defined in our senior
credit facility, for the year ended December 30, 2006 (in
millions):
Interest
expense, net
$
79.9
Less: Holdings
non-cash interest expense
(19.0
)
Simmons
Bedding interest expense, net
$
60.9
Add:
Simmons Bedding interest income
1.3
Less:
Call premium included in interest expense
(0.7
)
Simmons
Bedding interest expense
61.5
Less:
Simmons Bedding non-cash interest expense
(7.3
)
$
54.2
(3)
Represents
ratio of Adjusted EBITDA to consolidated cash interest
expense.
(4)
Represents
ratio of consolidated indebtedness less cash and cash equivalents
to
Adjusted EBITDA.
32
Contractual
Obligations and Commercial Commitments
The
following table sets forth our contractual obligations and other commercial
commitments as of December 30, 2006 (in millions):
Payment
Due by Year
Contractual
obligations:
Total
2007
2008-2009
2010-2011
Thereafter
Long-term
debt (1)
$
964.4
$
0.8
$
7.5
$
564.5
$
391.6
Interest
payments on long-term debt (2)
374.6
50.9
101.3
117.9
104.5
Operating
leases
61.6
18.7
23.3
13.0
6.6
Component
purchase commitments
23.6
12.2
11.4
-
-
Total
contractual obligations
$
1,424.2
$
82.6
$
143.5
$
695.4
$
502.7
Other
commercial commitments:
Standby
letters of credit
$
9.8
$
9.8
$
-
$
-
$
-
(1)
Includes $67.4 million of original issue discount on the Discount
Notes.
(2)
Anticipated interest payments based on current interest rates and
amounts
outstanding as of December 30,2006.
In
addition, under the terms of the management agreement entered into in connection
with the THL Acquisition, Simmons Bedding is required to pay an affiliate of
THL
an aggregate fee of no less than $1.5 million a year. Under its terms, the
management agreement will be terminated by THL upon the consummation of an
equity offering and Simmons Bedding will be required to pay THL a termination
fee equal to the net present value of the fees payable to THL for a period
of
seven years from the date of termination.
Simmons
Holdco has elected to make its first interest payment of $16.6 million on the
Toggle Loan in cash in August 2007. Simmons Holdco may elect to pay future
interest in cash or add such interest to the principal amount of the Toggle
Loan. The Toggle Loan matures in February 2012. Although we are not
an obligor on or guarantor of the Toggle Loan, nor are we obligated to make
cash
distributions to service principal and interest on the Toggle Loan, Simmons
Holdco is dependent on us to make cash distributions to it to make the August
2007 cash interest payment and other future cash interest and principal payments
to service its debt.
SEASONALITY/OTHER
Our
third
quarter sales are typically higher than our other fiscal quarters. We attribute
this seasonality principally to retailers’ sales promotions related to the 4th
of July and Labor Day holidays.
Most
of
our sales are by short term purchase orders. Because the level of production
is
generally prompted to meet customer demand, we have a negligible backlog of
orders. Most finished goods inventories of bedding products are physically
stored at manufacturing locations until shipped (usually within days of
manufacture).
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company’s financial statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
FIN 48
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
a
company has taken or expects to take on a tax return. Under FIN 48, the
financial statements will reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and
all relevant facts, but without considering time values. FIN 48 requires
companies to accrue interest on the difference between the tax position
recognized on FIN 48 and the amount previously taken or expected to be taken
in
a company’s tax return. FIN 48 will be effective for us at the beginning of
fiscal year 2007. We are currently in the process of evaluating the impact
of
this guidance on its consolidated financial statements and results of
operations.
33
In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, Fair
Value Measurements
(“SFAS
157”). SFAS 157 addresses the measurement of fair value by companies when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS 157 provides a common definition of fair value to be used
throughout GAAP, which is intended to make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS
157
clarifies the principal that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop those
assumptions. SFAS 157 will be effective for us at the beginning of fiscal year
2007. We are currently in the process of evaluating the impact of this guidance
on our consolidated financial statements and results of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - An
Amendment of FASB Statements No. 87, 88, 106, and 132R
(“SFAS
158”).
SFAS
158
requires a Company to: (i) recognize in its statement of financial position
an asset for a plan’s over funded status or a liability for a plan’s under
funded status; (ii) measure a plan’s assets and its obligations that determine
its funded status as of the end of the employer’s fiscal year (with limited
exceptions); and (iii) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes occur. Those
changes will be reported in other comprehensive income. SFAS 158 will be
effective for us at the beginning of fiscal year 2007. We are in the process
of
evaluating the impact of this guidance on our consolidated financial statements
and results of operations.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115 (“SFAS
159”). SFAS 159 permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Upon
adoption, an entity shall report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. Most of the provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
applies
to all entities with available for sale and trading securities. SFAS 159 will
be
effective for us at the beginning of fiscal year 2008. We are in the process
of
evaluating the impact of this guidance on our consolidated financial statements
and results of operations.
FORWARD
LOOKING STATEMENTS
“Safe
Harbor” statement under the Private Securities Litigation Reform Act of
1995.
This
annual report includes forward-looking statements that reflect our current
views
about future events and financial performance. Words such as “estimates,”“expects,”“anticipates,”“projects,”“plans,”“intends,”“believes,”“forecasts” and variations of such words or similar expressions that predict or
indicate future events, results or trends, or that do not relate to historical
matters, identify forward-looking statements. The forward-looking
statements in this Annual Report on Form 10-K speak only as of the filing date
of this Annual Report on Form 10-K. These forward-looking statements are
expressed in good faith and we believe there is a reasonable basis for
them. However, there can be no assurance that the events, results or
trends identified in these forward-looking statements will occur or be
achieved. Investors should not rely on forward-looking statements because
they are subject to a variety of risks, uncertainties, and other factors that
could cause actual results to differ materially from our expectations.
These factors include, but are not limited to: (i) competitive pricing pressures
in the bedding industry; (ii) legal and regulatory requirements; (iii) the
success of our new products; (iv) our relationships with and viability of our
major suppliers; (v) fluctuations in our costs of raw materials; (vi) our
relationship with significant customers and licensees; (vii) our ability to
increase prices on our products and the effect of these price increases on
our
unit sales; (viii) an increase in our return rates and warranty claims; (ix)
our
labor relations; (x) departure of our key personnel; (xi) encroachments on
our
intellectual property; (xii) our product liability claims; (xiii) our level
of
indebtedness; (xiv) interest rate risks; (xv) compliance with covenants in
our
debt agreements; (xvi) our future acquisitions; (xvii) our ability to
successfully integrate Simmons Canada into our operations; (xviii) the loss
of
key personnel at Simmons Canada as a result of our acquisition of Simmons
Canada; (xix) our ability to achieve the expected benefits from any personnel
realignments; and (xx) other risks and factors identified from time to time
in our reports filed with the Securities and Exchange Commission. We undertake
no obligation to update or revise any forward-looking statements, either to
reflect new developments or for any other reason.
34
All
forward-looking statements attributable to us or persons acting on our behalf
apply only as of the date of this Annual Report on Form 10-K and are expressly
qualified in their entirety by the cautionary statements included in this Annual
Report on Form 10-K. Except as may be required by law, we undertake no
obligation to publicly update or revise forward-looking statements which may
be
made to reflect events or circumstances after the date made or to reflect the
occurrence of unanticipated events.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The
following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
See Item 1 “Business — Forward-Looking Statements” for additional
information.
Market
Risk
The
principal market risks to which we are exposed that may adversely affect our
results of operations and financial position include changes in future foreign
currency exchange rates, interest rates and commodity prices. We seek to
minimize or manage these market risks through normal operating and financing
activities and through the use of derivative instruments, where practicable.
We
do not trade or use instruments with the objective of earning financial gains
on
the market fluctuations, nor do we use instruments where there are not
underlying exposures.
Foreign
Currency Exposures
As
a
result of our acquisition of Simmons Canada, our earnings are affected by
fluctuations in the value of Canadian dollar (Simmons Canada’s functional
currency) as compared to the currencies of Simmons Canada’s foreign denominated
purchases (principally the U.S. dollar). Foreign currency forward contracts
are
used as economic hedges against the earnings effects of such fluctuations.
The
potential loss in fair value on forward contracts outstanding as of December30,2006, resulting from a hypothetical 10% adverse change in the Canadian dollar
against the U.S. dollar, is approximately $0.6 million. Such losses would be
largely offset by gains from the revaluation or settlement of the underlying
assets and liabilities that are being protected by the forward contracts. As
of
December 30, 2006, we had forward contracts to sell a total of $5.8 million
Canadian dollars with expiration dates ranging from January 2, 2007 to September24, 2007. As of December 30, 2006, the fair value of our net obligation under
the forward contracts was $0.2 million. We do not apply hedge accounting to
our
forward contracts, therefore the contracts are marked-to-market as of each
reporting date through earnings.
Interest
Rate Risk
We
are
exposed to market risks from changes in interest rates. Our senior credit
facility and certain of our other debt instruments are floating rate debt.
We
currently do not have a hedging program in place to manage fluctuations in
long-term interest rates. We have implemented a policy to utilize extended
Eurodollar contracts under the senior credit facility to minimize the impact
of
near term Eurodollar rate increases.
On
December 30, 2006, we had floating rate debt of $484.9 million. All other
factors remaining unchanged, a hypothetical 10% increase or decrease in interest
rates on our floating rate debt would impact our income before taxes by $3.4
million in 2007.
Commodity
Price Risk
The
major
raw materials that we purchase for production are foam, wire, spring components,
lumber, cotton, insulator pads, innerspring, foundation constructions, fabrics
and roll goods consisting of foam, fiber, ticking and non-wovens. The price
and
availability of these raw materials are subject to market conditions affecting
supply and demand. In particular, the price of many of our goods can be impacted
by fluctuations in petrochemical and steel prices. Additionally, our
distribution costs can be impacted by fluctuations in diesel prices. We
currently do not have a hedging program in place to manage fluctuations in
commodity prices.
35
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of Simmons Company
In
our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, changes in
stockholders’ equity and cash flows present fairly, in all material respects,
the financial position of Simmons Company and its subsidiaries (the “Company”)
as
of
December 30, 2006 and December 31, 2005, and the results of their operations
and
cash flows for the years ended December 30, 2006, December 31, 2005, and
December 25, 2004in
conformity with accounting principles generally accepted in the United States
of
America. In addition, in our opinion, the financial statement schedule on
page 98 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule
are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 our opinion.
Simmons
Company and its subsidiaries (collectively the “Company” or “Simmons”) is one of
the world’s largest mattress manufacturers, manufacturing and marketing a broad
range of products under our well-recognized brand names, including
Beautyrest®,
Beautyrest Black
TM
,
BackCare®,
Natural
CareTM
Latex,
BackCare Kids®,
and
Deep Sleep®.
The
Company manufactures, sells and distributes its premium branded bedding products
to retail customers and institutional users, such as the hospitality industry,
throughout the U.S. and Canada and licenses its intellectual property to
international companies that manufacture and sell the Company’s premium branded
bedding products throughout the world. Additionally, the Company has licensed
its intellectual property to U.S. and Canadian manufactures and distributors
of
bedding accessories, furniture, water beds, air beds and other products. The
Company’s domestic operations sells products through a diverse nationwide base
of approximately 2,900 retailers, representing over 11,700 outlets, including
furniture stores, specialty sleep shops, department stores, furniture rental
stores, mass merchandisers and juvenile specialty stores.
Simmons
Company (“Simmons Company” or “Holdings”) is a holding company with no material
assets other than its ownership of the common stock of its wholly-owned
subsidiary, THL-SC Bedding Company, which is also a holding company with no
material assets other than its ownership of the common stock of its wholly-owned
subsidiary, Simmons Bedding Company. All of Simmons Company’s business
operations are conducted by Simmons Bedding Company and its subsidiaries
(collectively “Simmons Bedding”). Simmons Bedding became a wholly-owned
subsidiary of the Company as a result of the Company’s acquisition of Simmons
Holdings, Inc. on December 19, 2003 (the “THL Acquisition”).
During
2006, the Company sold its subsidiary Sleep Country USA, LLC (“SCUSA”), which
operated specialty sleep stores, and purchased Simmons Canada Inc. (“Simmons
Canada”), a former licensee of Simmons and one of the largest bedding
manufacturers in Canada (see Note C - Acquisitions and Dispositions).
In
February 2007, the Company merged with another entity to become a wholly-owned
subsidiary of Simmons Holdco, Inc., a holding company established to borrow
$300.0 million under a senior unsecured loan to fund a distribution of $278.3
million to the Company’s then existing class A stockholders (see Note S -
Subsequent Events).
NOTE
B — PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Simmons Company and
all of its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE
OF
ESTIMATES
The
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the U.S. (“GAAP”).
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.
RECLASSIFICATIONS
Certain
prior year amounts have been reclassified to conform to the current year’s
presentation. The
significant reclassifications were as follows:
·
Plant
closure charges and transaction expenses were combined with selling,
general and administrative expenses. As a result of the combining
of these
line items, selling, general and administrative expenses increased
$0.6
million and $5.1 million for fiscal years 2005 and 2004,
respectively.
Certain
general & administrative costs were reclassified from selling, general
& administrative expenses to cost of products sold. Selling, general
and administrative expense decreased and cost of products sold increased
$5.4 million and $4.8 million for fiscal years 2005 and 2004,
respectively.
These
reclassifications were considered immaterial and had no effect on previously
reported net income or operating cash flows.
FISCAL
YEAR
The
fiscal year of the Company ends the last Saturday in December. The fiscal years
for the consolidated financial statements presented consist of a 52-week period
for fiscal years 2006 and 2004 and a 53-week period for fiscal year 2005.
CASH
AND
CASH EQUIVALENTS
The
Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable consists of trade receivables and miscellaneous receivables recorded
net of customer credits and allowances for doubtful receivables, discounts
and
returns. The Company issues credits memos to customer accounts for volume
rebates, co-op advertising funds, billing/shipping errors, promotional monies,
customer supply agreements and other miscellaneous credits given to customers
in
the ordinary course of business. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers
to
make required payments. If the financial condition of the Company’s customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company evaluates the
adequacy of the allowance on a periodic basis. The evaluation includes
historical loss experience, the aging of the receivable balances, adverse
situations that may affect the customer’s ability to pay the receivable, and
prevailing economic conditions. If the evaluation of the reserve requirements
differs from the actual aggregate allowance, adjustments are made to the
allowance. This evaluation is inherently subjective, as it requires estimates
that are susceptible to revision as more information becomes available. Our
allowance for doubtful accounts was $2.0 million and $1.6 million as of December30, 2006 and December 31, 2005, respectively.
INVENTORIES
Inventories
are stated at the lower of cost (first-in, first-out method) or net realizable
value. The cost of inventories includes raw materials, direct labor and
manufacturing overhead costs. The Company expenses abnormal amounts of idle
facility costs, freight and handling costs as incurred. The Company allocates
fixed production overheads to conversion costs based on the normal capacity
of
the production facilities. The Company also allocates certain general and
administrative costs to inventory. The Company incurred $18.9 million, $24.7
million and $34.0 million of such general & administrative costs in 2006,
2005 and 2004, respectively. The Company had $0.4 million and $0.7 million
of
general and administrative costs remaining in inventory as of December 30,2006
and December 31, 2005, respectively.
The
Company provides inventory reserves for excess, obsolete or slow-moving
inventory based on changes in customer demand, technology developments and
other
economic factors.
CUSTOMER
SUPPLY AGREEMENTS
The
Company from time to time enters into long-term customer supply agreements
with
its customers. The Company capitalizes any initial cash or credit memos provided
to its customers that are subject to refundability and reduces sales for any
initial cash or credit memos provided to its customers that are not subject
to
refundability. The capitalized costs are included in other assets in the
accompanying Consolidated Balance Sheets and are amortized as a reduction of
sales based on the terms of the supply agreements. The cash or credit memos
used
for long-term supply agreements are included in the net change in “other, net”
in the accompanying Consolidated Statements of Cash Flows. Amortization related
to these contracts was $12.3 million, $10.7 million and $8.2 million in 2006,
2005 and 2004, respectively, and are included in selling, general and
administrative expense in the accompanying Consolidated Statements of Operations
and Comprehensive Income.
Property,
plant and equipment is recorded at cost less accumulated depreciation.
Depreciation expense is determined principally using the straight-line method
over the estimated useful lives for financial reporting and accelerated methods
for income tax purposes. Expenditures that substantially increase asset values
or extend useful lives are capitalized. Expenditures for maintenance and repairs
are expensed as incurred. When property items are retired or otherwise disposed
of, amounts applicable to such items are removed from the related asset and
accumulated depreciation accounts and any resulting gain or loss is credited
or
charged to income. Useful lives are generally as follows:
Buildings
and improvements
10
- 45 years
Leasehold
improvements
2
-
12 years
Machinery
and equipment
2
-
15 years
INTANGIBLE
ASSETS
Definite-lived
intangible assets are amortized using the straight-line method, which the
Company believes is most appropriate, over their estimated period of benefit,
ranging from three to twenty-five years. Indefinite-lived intangible assets,
such as trademarks, are not amortized. The Company evaluates indefinite-lived
intangible assets for impairment at least annually or whenever events or
circumstances indicate their carrying value might be impaired. In performing
this assessment, management considers operating results, trends and prospects,
as well as the effects of obsolescence, demand, competition and other economic
factors. The carrying value of an indefinite-lived intangible asset is
considered impaired when its carrying value exceeds its fair value. In such
an
event, an impairment loss is recognized equal to the amount of that excess.
Fair
value is determined primarily by using either the projected cash flows
discounted at a rate commensurate with the risk involved or an appraisal. The
determination of fair value involves numerous assumptions by management,
including expectations on possible variations in the amounts of timing of cash
flows, the risk-free interest rate, and other factors considered in management’s
projected future operating results. The Company reviews the useful lives of
definite-lived and indefinite-lived intangible assets every reporting
period.
The
Company tests goodwill for impairment on an annual basis in the fourth quarter
by comparing the fair value of the Company’s reporting units to their carrying
values. Additionally, goodwill is tested for impairment between annual tests
if
an event occurs or circumstances change that would more likely than not reduce
the fair value of an entity below its carrying value. These events or
circumstances would include a significant change in the business climate, legal
factors, operating performance indicators, competition, sale or disposition
of a
significant portion of the business or other factors.
Fair
value is determined by the assessment of future discounted cash flows of the
reporting unit and by comparison to similar entities’ fair values. The
assumptions used in the estimate of fair value are generally consistent with
the
past performance of each reporting unit and are also consistent with the
projections and assumptions that are used in current operating plans. Such
assumptions are subject to change as a result of changing economic and
competitive conditions.
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company reviews all of its long-lived assets for impairment whenever events
or
circumstances indicate their carrying value may not be recoverable. Management
reviews whether there has been impairment by comparing anticipated undiscounted
future cash flows from operating activities with the carrying value of the
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 impairment is deemed to exist,
management would record an impairment charge equal to the excess of the carrying
value over the fair value of the impaired assets.
The
Company capitalizes costs associated with the issuance of debt and amortizes
the
cost as additional interest expense over the lives of the debt using the
effective interest rate method. Upon prepayment of the related debt, the Company
recognizes a proportional amount of the related debt issuance costs as
additional interest expense. Amortization of debt issuance costs of $7.6
million, $2.5 million and $2.0 million in 2006, 2005 and 2004, respectively,
is
included as a non-cash component of interest expense in the accompanying
Consolidated Statements of Operations and Comprehensive Income. Included in
the
2006 amortization of debt issuance costs are $5.0 million of costs expensed
in
connection with the Company’s Refinancing (see Note H - Long-Term Debt).
DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES
The
Company recognizes derivative instruments as either an asset or liability
measured at its fair value. The Company only uses short-term derivative
instruments within the normal course of business as economic hedges principally
to manage foreign currency exchange rate risk. The changes in fair value of
the
derivative instrument are recognized through current period income.
TREASURY
STOCK
Common
stock repurchased by the Company is recorded at cost as a reduction of
stockholders’ equity. The Company uses the first-in first-out method of
determining the cost of treasury stock that is subsequently reissued. The
difference between the cost of treasury stock and the reissuance price is added
or deducted from additional paid in capital or retained earnings.
REVENUE
RECOGNITION
The
Company recognizes revenue, net of estimated returns, when title and risk of
ownership passes, which is generally upon delivery of shipments. An
insignificant portion of the Company’s revenue is derived from inventory held on
consignment with certain customers. The Company recognizes revenue on inventory
held on consignment when the title and risk of ownership have transferred to
the
customer, which is when the inventory held on consignment is used. The Company
accrues for estimated costs of warranties, co-op advertising costs, promotional
monies and cash discounts at the time the corresponding sales are recognized.
Sales are presented net of cash discounts, rebates, returns, certain
consideration provided to customers such as co-operative advertising funds,
promotional monies, and amortization of supply agreements. The Company uses
historical trend information regarding returns to reduce sales for estimated
future returns. The Company provides an allowance for bad debts for estimated
uncollectible accounts receivable, which is included in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income.
REBATES
The
Company provides volume rebates to certain customers for the achievement of
various purchase volume levels. The Company recognizes a liability for the
rebate at the point of revenue recognition for the underlying revenue
transactions that result in progress by the customer towards earning the rebate.
Measurement of the liability is based on the estimated number of customers
that
will ultimately earn the rebates. Once the rebate is earned, the Company issues
a credit memo that is netted against the accounts receivable balance. Rebates
were $20.2 million, $16.4 million and $18.9 million in 2006, 2005 and 2004,
respectively, and are included as a reduction of sales in the accompanying
Consolidated Statements of Operations and Comprehensive Income.
PRODUCT
DELIVERY COSTS
The
Company incurred $54.4 million, $50.4 million and $50.8 million in shipping
and
handling costs associated with the delivery of finished mattress products to
its
customers in 2006, 2005 and 2004, respectively. These costs are included in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations and Comprehensive Income.
The
Company adopted the provisions of Statement of Financial Accounting Standard
(“SFAS”) No. 123 (Revised 2004), Share-Based
Payment
(“SFAS
123R”) on January 1, 2006 (the first day of the 2006 first quarter). Prior to
the adoption of SFAS 123R, the Company accounted for stock based awards in
accordance with the Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees
(“APB
25”), as permitted by SFAS No. 123, Accounting
for Stock-Based Compensation
(“SFAS
123”). Under SFAS 123R, the fair value of the Company’s stock based awards on
the date of grant are recognized as an expense over the vesting period. Under
APB 25, compensation cost was measured at the grant date as the excess of the
fair value of the award over the purchase price. The entire amount of the
compensation cost was recorded as deferred compensation and amortized as a
charge to selling, general and administrative expense over the period that
the
restrictions were expected to lapse.
The
Company used the modified prospective application method of transition under
SFAS 123R. Under the modified prospective application method, the Company will
apply SFAS 123R for new awards granted after January 1, 2006 and for unvested
awards as of January 1, 2006. Upon adoption of SFAS 123R, the Company made
a
one-time cumulative adjustment of less than $0.1 million to record an estimate
of the future forfeitures on all outstanding restricted stock awards.
Additionally, the Company netted its deferred compensation related to awards
issued prior to the adoption of SFAS 123R against additional paid in capital.
FOREIGN
CURRENCY
Subsidiaries
located outside of the U.S. use the local currency as the functional currency.
Assets and liabilities are translated at exchange rates in effect at the balance
sheet date and income and expense accounts at average exchange rates during
the
year. Resulting translation adjustments are recorded directly to accumulated
other comprehensive income (loss), a separate component of stockholders’ equity
and are not tax effected since they relate to investments, which are permanent
in nature. Foreign currency transactions gains and losses are recognized in
earnings as incurred.
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 $2.4
million, $2.9 million and $3.7 million in 2006, 2005 and 2004, respectively.
Such costs are included in selling, general and administrative expense in the
accompanying Consolidated Statements of Operations and Comprehensive
Income.
ADVERTISING
COSTS
The
Company records the cost of advertising, including co-operative advertising,
as
an expense or a reduction of net sales when incurred or no later than when
the
advertisement appears or the event is run. Co-operative advertising costs and
promotional monies are recorded as a selling expense when the customer provides
proof of advertising of the Company’s products and the cost of the advertisement
does not exceed the payments made to the customer. Co-operative advertising
costs and promotional monies are recorded as a reduction of sales whenever
the
costs do not meet the criteria for classification as a selling expense.
Advertising costs which were recorded as a reduction of sales in the
accompanying Consolidated Statements of Operations and Comprehensive Income
were
$24.6 million, $33.9 million and $19.6 million in 2006, 2005 and 2004,
respectively. Advertising costs which were recorded as selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income were $89.8 million, $71.5 million and $79.5
million in 2006, 2005 and 2004, respectively.
INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and to operating loss
and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
as
income or expense in the period that includes the effective date of enactment.
Based
on
management’s estimates regarding the future realization of the tax benefits of
deferred tax assets, a valuation allowance is established, when necessary,
to
reduce deferred tax assets to the amounts expected to be realized. As of
December 30, 2006 and December 31, 2005, we had recorded valuation allowances
of
$8.6 million and $6.3 million, respectively, against the deferred tax assets
related to certain tax loss and tax credit carryforwards. As of December 30,2006 and December 31, 2005, we had recorded a benefit for U.S. federal and
state
net operating loss carryforwards and tax credit carryforwards, net of valuation
allowances, of $33.0 million and $51.1 million, respectively.
WARRANTIES
The
conventional bedding products that the Company currently manufactures generally
include a ten year non-prorated warranty. The Company’s juvenile bedding
products have warranty periods ranging from five years to a lifetime. The
Company records the estimated cost of warranty claims when its products are
sold. The Company estimates the cost of warranty claims based on historical
sales and warranty returns and the current average costs to settle a warranty
claim. The Company includes the estimated impact of recoverable salvage value
in
the calculation of the current average costs to settle a warranty claim.
The
following table presents a reconciliation of the Company’s warranty accrual for
2006, 2005 and 2004 (in thousands):
Accruals
related to pre-existing warranties (including change in
estimate)
98
84
(418
)
Warranty
settlements
(1,066
)
(1,890
)
(1,861
)
Balance
at end of year
$
3,668
$
3,009
$
2,715
PENSION
The
Company maintains a registered defined benefit pension plan for eligible
employees of its Canadian operations and retirement compensation arrangements
for certain current and former executives of the Canadian operations.
Additionally, the Company provides life insurance and health care benefits
for
certain employees. The costs and obligations related to these benefits reflect
the Company’s assumptions related to general economic conditions (particularly
interest rates) and expected return on plan assets. The cost of providing plan
benefits also depends on demographic assumptions including retirements,
mortality, turnover, and plan participation.
The
expected return on assets and assumed discount rate used to calculate the
Company’s pension and other post-employment benefit obligations are established
each year end. The expected return on assets is based upon the long-term
expected returns in the markets in which the pension trust invests its funds.
The assumed discount rate is based upon a portfolio of high-grade corporate
bonds, which are used to develop a yield curve. This yield curve is applied
to
the expected durations of the pension and post-employment benefit obligations.
If actual experience differs from these assumptions, the difference is recorded
as an unrecognized actuarial gain (loss) and then amortized into earnings over
a
period of time, which may cause the expense related to providing these benefits
to increase or decrease.
Environmental
expenditures that relate to current operations are expensed or capitalized
when
it is probable that a liability exists and the amount or range of amounts can
be
reasonably estimated. Remediation costs that relate to an existing condition
caused by past operations are accrued when it is probable that the costs will
be
incurred and can be reasonably estimated.
SIGNIFICANT
CONCENTRATIONS OF RISK
Cash
and
cash equivalents are maintained with several major financial institutions in
the
U.S., Canada and Puerto Rico. Deposits held with banks may exceed the amount
of
insurance provided on such deposits. Generally, these deposits may be redeemed
upon demand. Additionally, the Company monitors the financial condition of
such
institutions and considers the risk of loss remote.
The
Company performs periodic credit evaluations of its customers’ financial
condition and generally does not, in most cases, require collateral. Shipments
to the five largest U.S. customers aggregated approximately 25%, 22% and
19% total domestic shipments for each of 2006, 2005 and 2004, respectively,
and
no single customer accounted for over 10% of the net sales in any of those
years.
Purchases
of raw materials from one vendor represented approximately 30%, 21% and 23%
of
the domestic cost of products sold for 2006, 2005 and 2004, respectively. The
Company also primarily utilizes two third-party logistics providers in the
U.S.
which, in the aggregate, accounted for 78%, 82% and 85% of domestic outbound
wholesale shipments in 2006, 2005 and 2004, respectively.
SELF-INSURANCE
The
Company retains a portion of the risks related to its general liability, product
liability, automobile, worker’s compensation and health insurance programs. The
exposure for unpaid claims and associated expenses, including incurred but
not
reported losses, generally is estimated with the assistance of external
actuaries and by factoring in pending claims and historical trends and data.
The
estimated accruals for these liabilities could be affected if future occurrences
or loss developments significantly differ from utilized assumptions. The
estimated liability associated with settling unpaid claims is included in
accrued liabilities. As of December 30, 2006 and December 31, 2005, the Company
recorded $4.1 million and $3.9 million, respectively, of liabilities for
exposures to unpaid self-insured claims.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company’s financial statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
FIN 48
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
a
company has taken or expects to take on a tax return. Under FIN 48, the
financial statements will reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and
all relevant facts, but without considering time values. FIN 48 requires
companies to accrue interest on the difference between the tax position
recognized on FIN 48 and the amount previously taken or expected to be taken
in
a company’s tax return. FIN 48 will be effective for the Company at the
beginning of fiscal year 2007. The Company is currently in the process of
evaluating the impact of this guidance on its consolidated financial statements
and results of operations.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
157”). SFAS 157 addresses the measurement of fair value by companies when they
are required to use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS 157 provides a common definition of fair value to be used
throughout GAAP, which is intended to make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS
157
clarifies the principal that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop those
assumptions. SFAS 157 will be effective for the Company at the beginning of
fiscal year 2007. The Company is currently in the process of evaluating the
impact of this guidance on its consolidated financial statements and results
of
operations.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - An
Amendment of FASB Statements No. 87, 88, 106, and 132R
(“SFAS
158”).
SFAS
158
requires a Company to: (i) recognize in its statement of financial position
an asset for a plan’s over funded status or a liability for a plan’s under
funded status; (ii) measure a plan’s assets and its obligations that determine
its funded status as of the end of the employer’s fiscal year (with limited
exceptions); and (iii) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes occur. Those
changes will be reported in other comprehensive income. SFAS 158 will be
effective for the Company at the beginning of fiscal year 2007. The Company
is
in the process of evaluating the impact of this guidance on its consolidated
financial statements and results of operations.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115 (“SFAS
159”). SFAS 159 permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Upon
adoption, an entity shall report unrealized gains and losses on items for which
the fair value option has been elected in earnings at each subsequent reporting
date. Most of the provisions apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
applies
to all entities with available for sale and trading securities. SFAS 159 will
be
effective for the Company at the beginning of fiscal year 2008. The Company
is
in the process of evaluating the impact of this guidance on its consolidated
financial statements and results of operations.
NOTE
C — ACQUISITIONS AND
DISPOSITIONS
2006
Purchase of Simmons Canada Inc. (“Simmons Canada”)
On
November 15, 2006, the Company acquired Simmons Canada, a former licensee of
the
Company that is one of the leading manufacturers of mattresses in Canada, for
$113.1 million in cash (the “Canada Acquisition”). The Canada Acquisition was
funded from cash on hand and borrowings on the Company’s revolving loan.
Simmons Canada is now a wholly-owned subsidiary of the Company and the results
of operations of Simmons Canada have been included in the Company’s consolidated
financial statements since the November 15, 2006 acquisition date. The Canada
Acquisition provides the Company with direct access to the conventional mattress
and foundations market in Canada where Simmons Canada was already one of the
leading mattress manufacturers by selling Simmons branded products. The Company
recorded the Canada Acquisition using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair values. Fair value of the assets and
liabilities assumed was determined based on, but not limited to, discounted
expected future cash flows for trademarks and non-contractual customer
relationships and current replacement costs for fixed assets. Additional costs
related to the execution of the Company’s initial plans to restructure the
Canadian operations to eliminate duplicate functions have not been reflected
in
this preliminary purchase price allocation as the Company is in the process
of
finalizing decisions as to the organizational structure of the operations.
Once the Company has finalized its plan, the costs related to the execution
of
the plan will be included in the final purchase price allocation.
The
following table summarizes the preliminary allocation of the purchase price
to
the fair values of the assets acquired and liabilities assumed as of the date
of
the acquisition (in thousands):
The
intangible assets acquired include non-contractual customer relationships of
$17.7 million and trademarks of $45.1 million. The non-contractual customer
relationships have a weighted average life of twenty years and will be amortized
using the straight line method, which best reflects the utilization of the
economic benefits of the agreements. The trademarks have an indefinite life.
Goodwill includes a portion of value for assembled workforce which is not
separately classified from goodwill. The purchased intangibles and goodwill
are
not deductible for tax purposes.
Since
the
Canada Acquisition was a purchase of stock, the respective tax bases of the
assets and liabilities were not changed. As a result, a net deferred tax
liability was recorded as of the acquisition date to reflect the difference
between the fair value of the assets and liabilities under purchase accounting
and the historical tax bases of the assets and liabilities. The reversal of
such
differences in the future will be recorded through the tax provision.
2006
Sale of SCUSA
On
August29, 2006, the Company sold its subsidiary, SCUSA, to an affiliate of The Sleep
Train, Inc. (“Sleep Train”) for net cash proceeds of $52.4 million (“SCUSA
Disposition”). The Company recorded a net gain of $43.3 million. This
disposition resulted in the Company selling all of its retail bedding segment
assets.
Concurrent
with the sale of SCUSA, the Company entered into a multi-year supply agreement
with Sleep Train which will result in the Company having a significant ongoing
interest in the cash flows of SCUSA. Since the Company has an ongoing interest
in the cash flows of SCUSA, the Company did not report the gain on disposition
or SCUSA’s results of operations as discontinued operations in the accompanying
Consolidated Statements of Operations and Comprehensive Income.
In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the accompanying Consolidated Balance Sheet as of December31, 2005 has been reclassified to present the assets and liabilities of SCUSA
as
held for sale. The components of the assets and liabilities held for sale as
of
December 31, 2005 are as follows (in thousands):
The
following unaudited pro forma consolidated results of operations assume that
both the Canada Acquisition and the SCUSA Disposition were completed as of
the
beginning of the Company’s 2006 and 2005 fiscal year (in thousands).
2006
2005
Net
Sales
$
1,019,316
$
896,586
Net
Income
18,910
3,724
The
pro
forma data may not be indicative of the results that would have been obtained
had these events actually occurred at the beginning of the periods presented,
nor does it intend to be a projection of future results.
2004
Purchase of Certain Assets and Liabilities of the Crib Mattress and Related
Soft
Goods Business (“Juvenile Division”) of Simmons Juvenile Products Company, Inc.
(“Simmons Juvenile Products”)
On
August27, 2004, the Company acquired the Juvenile Division of Simmons Juvenile
Products, a then-current licensee of the Company, for $23.0 million in cash,
including transaction costs (the “Juvenile Acquisition”). The Juvenile
Acquisition provides the Company direct access to the U.S. infant market to
sell
Simmons branded crib mattresses and related soft goods. The results of
operations of the Juvenile Division have been included in the Company’s
consolidated financial statements since the acquisition date.
2004
Sale of Gallery Corp. (“Mattress Gallery”)
The
Company sold its Mattress Gallery retail operations in a stock transaction
on
May 1, 2004 to Pacific Coast Mattress, Inc. (“PCM”) for cash proceeds of $6.3
million plus the cancellation of all intercompany debts with the exception
of
current trade payables owed by Mattress Gallery to the Company. The cancellation
of intercompany debts was recorded as a capital contribution to Mattress
Gallery. No gain or loss was recorded on the sale since Mattress Gallery was
recorded at fair value in connection with the THL Acquisition. In connection
with the sale, the Company entered into a non-binding five-year supply agreement
with PCM.
Prior
to
the sale of Mattress Gallery, the Company did not reflect Mattress Gallery’s
results of operations as discontinued operations since the Company has an
ongoing interest in the cash flows of PCM through a long-term supply agreement.
For the four months ended May 1, 2004, Mattress Gallery’s net sales and net loss
were $12.9 million and $(3.3) million, respectively.
The
Company recorded $17.7 million of non-contractual customer relationships and
$45.1 million of trademarks in connection with the Canada Acquisition purchase
price allocation (see Note C - Acquisitions and Dispositions).
The
aggregate amortization expense associated with the definite-lived intangible
assets for the year ended December 30, 2006 was $5.7 million. The estimated
amortization expense for definite-lived intangible assets for each of next
five
years is $5.9 million.
During
the fourth quarter of 2006, the Company determined that a liability, related
to
certain tax contingencies recorded in connection with the THL Acquisition,
was
no longer necessary. This change in estimate resulted in the Company decreasing
goodwill by $0.6 million.
10.0%
senior discount notes due 2014, net of discount of $67,378
and
$86,172, respectively
201,622
182,828
Other,
including capital lease obligations
15,157
14,989
896,779
907,750
Less
current portion
(778
)
(1,602
)
$
896,001
$
906,148
On
May25, 2006, the Company executed the second amended and restated senior credit
and
guaranty agreement (“Senior Credit Facility”) with a syndicate of lenders, which
amended and restated its existing senior credit facility in its entirety. The
Senior Credit Facility provides for a $75.0 million revolving credit facility
and a $492.0 million tranche D term loan facility. The proceeds from the Senior
Credit Facility were used to replace the Company’s $350.0 million tranche C term
loan and $140.0 million senior unsecured term loan. This exchange of debt
instruments is referred to as the “Refinancing”. Among other things, the Senior
Credit Facility reduced the applicable Eurodollar and Base interest rate margins
for borrowings under the term loan.
In
connection with the Refinancing, the Company paid approximately $1.9 million
in
call premiums, agency fees and legal fees (collectively, the “Refinancing
Costs”). The Company expensed $1.0 million of the Refinancing Costs that were
associated with loans under the Senior Credit Facility from lenders which were
substantially different than loans with the same lender under the previous
senior credit facility. The Company capitalized the remaining Refinancing Costs
as deferred debt issuance costs.
The
revolving loan under the Senior Credit Facility will expire on the earlier
of
(a) December 19, 2009 or (b) as revolving credit commitments under the facility
terminate. The Company incurs a commitment fee of 0.5% per annum on the unused
portion of its revolving credit facility. As of December 30, 2006, the Company
had availability to borrow $65.2 million under the revolving loan after giving
effect to $9.8 million that was reserved for the Company’s reimbursement
obligations with respect to outstanding letters of credit. The remaining
availability under the revolving loan may be utilized to meet current working
capital requirements, including issuance of stand-by and trade letters of
credit. The Company may also utilize the remaining availability under the
revolving loan to fund distributions, acquisitions and capital
expenditures.
Subsequent
to the Refinancing, the Company voluntarily prepaid $12.0 million of the tranche
D term loan resulting in the next required principal payment of $0.3 million
being scheduled for September 2008. The tranche D term loans have mandatory
quarterly principal payments of $1.2 million from December 31, 2008 through
December 31, 2010 and mandatory quarterly principal payments of $117.2 million
from March 31, 2011 through maturity on December 19, 2011. Depending on Simmons
Bedding’s leverage ratio, it may be required to prepay a portion of the tranche
D term loan with up to 50% of its excess cash flows (as defined in the Senior
Credit Facility) from each fiscal year. The Company is not required to prepay
a
portion of the tranche D term loan in fiscal year 2007 as a result of its fiscal
year 2006 excess cash flows having been reinvested, as defined in the Senior
Credit Facility.
The
Senior Credit Facility bears interest at the Company’s choice of the Eurodollar
Rate or Base Rate (both as defined), plus the applicable interest rate margins
as follows:
Eurodollar
Base
Rate
Rate
Revolving
loan
2.25%
1.25%
Tranche
D term loan
2.00%
1.00%
The
revolving loan applicable interest rate margins for both Eurodollar Rate loans
and Base Rate loans are reduced based upon Simmons Bedding’s leverage ratio. As
a result of an upgrade in the Company’s debt ratings on September 21, 2006, the
tranche D term loan interest rate margin was reduced 25 basis points to 2.00%.
The weighted average interest rate per annum in effect as of December 30, 2006
for the tranche D term loan was 7.12%.
The
Senior Credit Facility requires Simmons Bedding to maintain certain financial
ratios, including cash interest coverage and total leverage ratios. The Senior
Credit Facility also contains other covenants, which among other things, limit
capital expenditures, the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayment of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements. The financial
covenants, as amended, are as follows:
In
connection with the THL Acquisition, the Company issued $200.0 million of 7.875%
senior subordinated notes due 2014 (the “Subordinated Notes”). The Subordinated
Notes bear interest at the rate of 7.875% per annum, which is payable
semi-annually in cash in arrears on January 15 and July 15. The Subordinated
Notes mature on January 15, 2014 and are subordinated in right of payment to
all
existing and future senior indebtedness of Simmons Bedding.
The
Subordinated Notes are redeemable at the option of the Company beginning January15, 2009 at prices decreasing from 103.938% of the principal amount thereof
to
par on January 15, 2012 and thereafter. The Company is not required to make
mandatory redemption or sinking fund payments with respect to the Subordinated
Notes.
The
indenture for the Subordinated Notes require Simmons Bedding to comply with
certain restrictive covenants, including restrictions on dividends, and
limitations on the occurrence of indebtedness, certain payments and
distributions, and sales of Simmons Bedding’s assets and stock. The Company was
in compliance with such covenants as of December 30, 2006.
The
Company’s senior discount notes (“Discount Notes”), with an aggregate principal
amount at maturity of $269.0 million, bear interest at the rate of 10.0% per
annum payable semi-annually in cash in arrears on June 15 and December 15 of
each year commencing on June 15, 2010. Prior to December 15, 2009, interest
will
accrue on the Discount Notes in the form of an increase in the accreted value
of
the Discount Notes. The Company’s ability to make payments on the Discount Notes
is dependent on the earnings and distribution of funds from Simmons Bedding
to
Holdings.
At
any
time prior to December 15, 2007, the Company may redeem up to 40% of the
aggregate principal amount of the Discount Notes at a price of 110.0% in
connection with an Equity Offering, as defined. With the exception of an Equity
Offering, the Discount Notes are redeemable at the Company’s option beginning
December 15, 2009 at prices decreasing from 105.0% of the principal amount
thereof to par on December 15, 2012 and thereafter. The Company is not required
to make mandatory redemption or sinking fund payments with respect to the
Discount Notes.
If
any of
the Discount Notes are outstanding on June 15, 2010, the Company will redeem
for
cash a portion of each Discount Note then outstanding in an amount equal to
the
Mandatory Principal Redemption Amount (as defined) plus a premium equal to
5.0%
(one-half of the coupon) of the Mandatory Principal Redemption Amount. No
partial redemption or repurchase of the Discount Notes pursuant to any other
provision of the indenture will alter the obligation of the Company to make
this
redemption with respect to any Discount Notes then outstanding.
The
indenture for the Discount Notes requires the Company to comply with certain
restrictive covenants, including a restriction on dividends; and limitations
on
the incurrence of indebtedness, certain payments and distributions, and sales
of
the Company’s assets and stock. The Company was in compliance with such
covenants on December 30, 2006.
The
fair
value of the Company’s long-term debt is estimated based on the current rates
offered for debt of similar terms and maturities. All long-term debt
approximates fair value as of December 30, 2006.
Future
maturities of long-term debt, inclusive of the Discount Notes original issue
discount of $67.4 million, as of December 30, 2006 are as follows (in
thousands):
2007
$
782
2008
2,163
2009
5,333
2010
95,488
2011
469,043
Thereafter
391,555
$
964,364
Simmons
Holdco borrowed $300.0 million under a senior unsecured term loan in February
2007 (see Note S - Subsequent Events).
NOTE
I—
LEASES AND OTHER COMMITMENTS
The
Company leases certain manufacturing facilities, retail locations and equipment
under operating leases. The Company’s rent expense was $25.3 million, $27.5
million and $32.1 million for 2006, 2005 and 2004, respectively. The Company’s
rent expense included $5.8 million, $7.6 million and $10.6 million,
respectively, associated with the Company’s retail operations, which were
disposed of in August 2006 (see Note C - Acquisitions and Dispositions).
The
following is a schedule of the future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms
in
excess of one year as of December 30, 2006 (in thousands):
2007
$
18,688
2008
13,638
2009
9,680
2010
7,102
2011
5,882
Thereafter
6,641
$
61,632
The
Company has the option to renew certain manufacturing facility leases, with
the
longest renewal period extending through 2024. Most of the operating leases
provide for increased rent tied to increases in general price
levels.
The
Company has various purchase commitments with certain suppliers in which the
Company is committed to purchase approximately $12.2 million of raw materials
from these vendors in 2007. If the Company does not reach the committed level
of
purchases, various additional payments could be required to be paid to these
suppliers or certain sales volume rebates could be lost.
NOTE
J—
TERMINATION OF DEFERRED COMPENSATION PLAN
In
connection with the THL Acquisition, certain members of management deferred
$19.8 million of their proceeds from the THL Acquisition into a then existing
deferred compensation plan. The deferred proceeds were invested in deemed shares
of the Company’s class A common stock. The deemed shares had a put option that
gave the holder the right for cash settlement under certain circumstances
outside the Company’s control. Accordingly, the deferred compensation plan was
recorded as a liability and marked-to-market based upon a quarterly valuation
of
the fair value of the Company’s common stock. The changes in the market value of
the liability were recorded as non-cash stock compensation expense.
The
Company terminated the deferred compensation plan on June 3, 2004 by issuing
197,998 shares of class A common stock in exchange for deemed shares held by
the
participants in the deferred compensation plan. As a result of the termination,
the Company’s liability related to the deferred compensation plan was
contributed to common stock and additional paid in capital.
NOTE
K
— LICENSING
The
Company licenses internationally the Simmons®
trademark,Beautyrest®
trademark and many of its other trademarks, processes and patents to third-party
manufacturers which produce and distribute conventional bedding products within
their designated territories. These licensing agreements allow the Company
to
reduce exposure to political and economic risks abroad by minimizing investments
in those markets. The
Company has 20 foreign licensees and 8 sub-licensees. These foreign licensees
have rights to sell Simmons-branded products in over 100 countries.
Additionally,
the Company has 10 domestic third-party licensees and one domestic sub-licensee.
Some of these licensees manufacture and distribute juvenile furniture and
healthcare-related furniture, and non-bedding upholstered furniture.
Additionally, the Company has licensed the Simmons®
trademark and other trademarks, generally for limited terms, to manufacturers
of
air and water beds, occasional use airbeds, feather and down comforters,
pillows, mattress pads, blankets, bed frames, futons, and other
products.
Licensing
fees are recorded as earned, based upon the sales of licensed products by the
Company’s licensees. For 2006, 2005 and 2004 the Company’s licensing agreements
as a whole generated royalties and technology fees of approximately $8.7
million, $9.1 million and $9.6 million, respectively.
NOTE
L—
STOCK BASED COMPENSATION
Simmons
Company Equity Incentive Plan (“Equity Plan”)
Under
the
Equity Plan, the Company is authorized to grant up to 781,775 shares of class
B
common stock as options, restricted stock or other stock based awards to the
management, directors and consultants of the Company. Vesting of awards is
subject to the achievement of performance and/or service criteria. Future
vesting is subject to the holders continued full-time employment with the
Company or continuance as a director of the Company. As
of
December 30, 2006, the Company had issued principally restricted stock and
an
insignificant amount of stock option awards under the Equity Plan.
Non-cash
stock compensation expense recorded in connection with awards issued under
the
Equity Plan was $0.8 million for 2006 and less than $0.1 million for each of
2005 and 2004. During 2006, the Company paid less than $0.1 million to settle
stock based awards.
Restricted
Stock Awards
Restricted
stock awards are issued below the fair value of the stock. Restricted stock
awards generally vest ratably over a four-year period based upon the Company
meeting certain annual Adjusted EBITDA targets. Unvested shares accelerate
upon
a change of control of the Company, if the Company has met certain performance
criterias. Holders of the restricted stock have the right to receive dividends,
vote shares and subject to restrictions can assign, transfer, pledge or
otherwise encumber the stock, but could not sell the stock.
Fair
value of the stock is determined by the Company’s board of directors based upon
a quarterly valuation of the Company’s enterprise value as measured by a third
party valuation specialist. The
Company’s enterprise value fluctuates based upon its operating performance,
changes in market multiples for comparable publicly traded companies and changes
in transaction
multiples
paid for companies with similar operations as the Company.
Since
the
board of directors determined vesting of certain restricted stock awards granted
under the Equity Plan was unlikely and the board of directors wanted to keep
management incentivized, 569,136 shares of restricted stock awards were modified
by the Company as approved by the board of directors on April 17, 2006. Among
other things, the modification resulted in the vesting of 18.75% of restricted
stock awards for certain individuals not previously vested; revising of the
vesting schedule through 2008 such that 21.25% of modified shares could vest
in
2006 and 30% could vest in each of 2007 and 2008 based on meeting revised
performance targets; lowering of the Adjusted EBITDA performance targets for
2006 and 2007; and the elimination of cliff vesting. The fair value of the
restricted stock awards post-modification was greater than the fair value of
the
awards prior to modification. The board of directors determined that the Company
met the performance targets for 2006 which resulted in 21.25% of the modified
shares vesting. As a result, an additional $0.8 million of compensation cost
will be recognized as an expense over the remaining vesting period.
The
following table presents a rollforward of the number of nonvested restricted
stock shares for the year ended December 30, 2006 and the weighted-average
grant-date fair value of the shares:
The
weighted average grant date fair value of restricted stock awards for fiscal
years 2005 and 2004 was $3.31 and $3.22, respectively. The fair value of shares
that vested during fiscal years 2006, 2005 and 2004 was $1.0 million, less
than
$0.1 million, and $0.9 million, respectively. As of December 30, 2006, most
of
the shares granted under the Equity Plan were 40% vested and there was $0.7
million of total unrecognized compensation cost related to nonvested awards
granted under the Equity Plan which is expected to be recognized as an expense
over a weighted average period of 2.9 years.
Stock
Option Awards
Stock
option awards are issued with a strike price equal to the grant date fair value
of the underlying class B common stock and have a contractual term of ten years.
As of December 30, 2006, the majority of the awards vested based on four years
of continuous service. The fair value of the stock option awards were calculated
using the Black-Scholes Merton option pricing model. As of December 30, 2006,
the Company had 35,740 nonvested stock option awards outstanding. All of the
option awards were granted during the fourth quarter of 2006 and none of the
awards were forfeited or vested during 2006. These awards are not significant
to
the Company’s consolidated financial statements.
NOTE
M—
INCOME TAXES
The
components of the provision for income taxes are as follows (in
thousands):
The
reconciliation of the statutory federal income tax rate to the effective income
tax rate for 2006, 2005 and 2004 provision for income taxes is as follows (in
thousands):
2006
2005
2004
Income
taxes at U.S. federal statutory rate
$
25,214
$
2,087
$
12,354
State
income taxes, net of U.S. federal benefit
1,092
(686
)
737
Book-tax
difference on sale of SCUSA
(3,186
)
-
-
Valuation
allowances, net of reversals
2,325
5,030
-
Tax
loss and credit benefits not previously recognized
Other
noncurrent accrued liabilities, not currently deductible
234
374
Valuation
allowance
(8,618
)
(6,310
)
Noncurrent
deferred income tax liabilities
(177,692
)
(144,418
)
Net
deferred income tax liability
$
(174,556
)
$
(141,553
)
As
of
December 30, 2006, the Company had net operating loss carryforwards for U.S.
federal income tax purposes of $64.5 million. If not used, these
carryforwards will expire in varying amounts between 2022 and 2026.
Additionally, as of December 30, 2006, the Company had state net operating
loss
carryforwards of $82.9 million. If not used, these carryforwards will expire
in
varying amounts between 2008 and 2026.
As
of
December 30, 2006, the Company had $4.2 million of general business tax
credits, $5.7 million of foreign tax credits, and $1.2 million of minimum
tax credits available to offset future payments of U.S. federal income tax.
If
not used, the general business and foreign tax credits will expire in varying
amounts between 2009 and 2026. The minimum tax credits can be carried forward
indefinitely. The Company also had $2.1 million of state income tax credits,
which will begin to expire in 2007, and $0.2 million of non-U.S. tax credits
available to offset future payments of foreign income tax, which can be carried
forward indefinitely.
A
change
in ownership of the Company could potentially subject the Company’s net
operating losses and tax credit carryforwards to use limitations imposed by
the
Internal Revenue Code. As a result of previous changes in ownership, the
utilization of the Company’s tax benefit carryforwards that existed at the time
of such changes in ownership technically would be subject to limitation.
However, based in part on guidance provided in IRS Notice 2003-65, the Company
believes that the amount of such limitation is high enough that the actual
utilization of the tax benefit carryforwards would not be impaired.
Realization
of the tax benefits of both net operating loss carryforwards and tax credit
carryforwards is dependent upon the ability to generate sufficient future
taxable income in the appropriate taxing jurisdictions and within the applicable
carryforward periods. After giving consideration to current forecasts of future
taxable income and the expiration period of the tax benefit carryforwards,
the
Company has determined that there is some uncertainty regarding the realization
of particular tax benefit carryforwards.
As
of
December 30, 2006, the Company had recorded a valuation allowance of $8.6
million for the deferred tax assets related to the following tax benefit
carryforwards: foreign tax credits ($1.7 million), certain state net operating
losses ($4.7 million), certain state income tax credits ($2.0 million), and
foreign jurisdiction income tax credits ($0.2 million). The Company established
the valuation allowance for its foreign tax credit carryforwards in the fourth
quarter of 2006. As a direct result of the Canada Acquisition and the impact
of
the acquisition on the Company’s calculation of net foreign source income, the
Company no longer believes that it will be able to fully utilize its foreign
tax
credits. With respect to state tax benefit carryforwards, the valuation
allowance that was originally established in 2005 has been adjusted to reflect
additional state tax benefits recognized in 2006 for which the Company does
not
believe it is more likely than not that such benefits will be realized and
for
the reversal of the valuation allowance for the Company’s net operating losses
in a specific state. With respect to the foreign jurisdiction income tax
credits, a full valuation allowance was established in 2003 and has been
maintained due to utilization limits imposed by the foreign jurisdiction.
As
of
December 31, 2005, we had a valuation allowance of $6.3 million for the deferred
tax assets related to the following tax benefit carryforwards: certain state
net
operating loss carryforwards ($4.8 million), certain state income tax credits
($1.3 million), and foreign jurisdiction income tax credits ($0.2 million).
The
Company originally established the valuation allowance for certain state tax
benefit carryforwards in 2005 after giving consideration to the expiration
period of the state tax benefit carryforwards and current forecasts of future
state taxable income.
Cumulative
undistributed earnings of the Company's international subsidiaries totaled
approximately $3.7 million as of December 30, 2006. Since these earnings are
considered to be permanently reinvested, no provision for U.S. deferred income
taxes has been recorded.
In
connection with the Canada Acquisition, the Company assumed Simmons Canada’s
registered combined non-contributory defined benefit and defined contribution
pension plan (“Pension Plan”) for substantially all of the employees of Simmons
Canada. Under the registered defined benefit plan segment, benefits are based
upon an employee’s earnings and years of credited service. The registered
defined benefit plan is funded based on the funding requirements of applicable
government regulations. In addition, the Company assumed Simmons Canada’s
retirement compensation arrangements (“RCA”) for certain senior officials of
Simmons Canada which provide retirement benefits in addition to the registered
defined benefit plan. The following table sets forth the funded status of the
defined benefit segment of the Pension Plan and RCA and the accrued liability
recognized in the 2006 Consolidated Balance Sheet (in thousands).
Net
benefit obligation at date of Canada Acquisition
$
24,937
Service
cost
177
Interest
cost
151
Gross
benefits paid
(197
)
Effect
of currency exchange rates
(605
)
Net
benefit obligation at end of year
24,463
Change
in plan assets
Fair
value of plan assets at date of Canada Acquisition
23,092
Actual
return on plan assets
475
Actual
employer contributions
317
Gross
benefits paid (actual)
(197
)
Effect
of currency exchange rates
(558
)
Fair
value of plan assets at end of year
23,129
Funded
status at end of year
(1,333
)
Unrecognized
net actuarial gain
(299
)
Accrued
benefit cost
$
(1,636
)
The
measurement date of the defined benefit segment of the Pension Plan was as
of
December 31, 2004 and the measurement date of the RCA was as of November 14,2006. The accumulated benefit obligation of the defined benefit segment of
the
Pension Plan was $16.6 million as of December 30, 2006.
The
allocation, by asset category, of the assets of the defined benefit segment
of
the Pension Plan and RCA as of December 30, 2006 was 59% equity securities,
33%
debt securities and 8% cash. The Company’s investment strategy for the defined
benefit segment of the Pension Plan and RCA is to maximize the long-term rate
of
return on plan assets within an acceptable level of risk. The Pension Plan
investment policy establishes a target allocation range for each asset class
and
the fund is managed using these guidelines. The plans use a number of
investment approaches including equity and fixed income funds in which the
underlying securities are marketable in order to achieve this target allocation.
The expected rate of return was determined by modeling the expected long-term
rates of return for each asset class held by the plan based on current economic
conditions.
The
net
periodic cost related to the defined benefit segment of the Pension Plan and
the
RCA included the following components (in thousands):
The
following table sets forth the expected benefit payments related to the defined
benefit segment of the Pension Plan and the RCA to be paid out in the periods
indicated (in thousands):
Year
Amount
2007
$
1,056
2008
1,103
2009
1,145
2010
1,190
2011
1,236
2012
- 2016
7,794
The
Company anticipates making contributions of approximately $2.0 million
in 2007
to the defined benefit segment of the Pension Plan and the RCA. The
contributions principally represent contributions required by funding
regulations.
The
Company also makes contributions to multi-employer pension plans sponsored
by
various unions for the Company’s employees who are members of a union. In 2006,
2005 and 2004, the Company made contributions of $1.9 million, $1.5 million
and
$1.9 million, respectively, in the aggregate to such plans. In addition, the
Company maintains unfunded supplemental executive retirement plans for certain
employees and former employees of the Company. The Company had accrued $3.2
million as of December 30, 2006 and $3.3 million as of December 31,2005.
The
Company provides post retirement health care and life insurance benefits for
a
small group of current and former employees. The Company accrues the cost of
providing postretirement benefits, including medical and life insurance
coverage, during the active service period for certain employees. The assets,
liabilities and expense associated with these plans are not material to the
Company’s consolidated financial statements.
401(K)
PLANS
The
Company has defined contribution 401(k) plans for substantially all of its
employees other than certain union employees that participate in multi-employer
pension plans sponsored by a union. In 2006, 2005 and 2004, the Company made
contributions to the plans of $4.1 million, $4.1 million and $3.8 million,
respectively, in the aggregate.
NOTE
O—
CONTINGENCIES
From
time
to time, the Company has been involved in various legal proceedings. The Company
believes that all litigation is routine in nature and incidental to the conduct
of the Company’s business, and that none of this litigation, if determined
adversely to the Company, would have a material adverse effect on the Company’s
financial condition or results of its operations.
NOTE
P — SEGMENT INFORMATION
As
a
result of the Canada Acquisition and SCUSA Disposition (see Note C -
Acquisitions and Dispositions), the Company has determined that it has two
operating segments, U.S. and Canada, which qualify for aggregation for
quantitative reasons as of December 30, 2006. Accordingly, the Company has
one
reportable segment that manufactures, sells and distributes premium branded
bedding products to retail customers and institutional users of bedding
products, such as the hospitality industry. Sales generated from our Canadian
operations were $12.7 million for 2006. Additionally, long-lived assets
(excluding goodwill and intangible assets) in Canada were $17.9 million as
of
December 30, 2006.
NOTE
Q — SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following is a condensed summary of consolidated quarterly results for 2006,
2005 and 2004.
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
(in
thousands)
2006:
Net
sales
$
235,867
$
241,202
$
259,766
$
224,790
Gross
profit
99,428
109,151
117,204
91,677
Operating
income
29,393
28,113
77,762
16,701
Net
income (loss)
6,433
2,061
41,922
(2,802
)
2005:
Net
sales
$
205,582
$
208,042
$
226,843
$
214,809
Gross
profit
90,159
89,268
96,680
91,041
Operating
income
12,863
18,843
25,030
19,580
Net
income (loss)
(2,195
)
1,061
4,001
458
2004:
Net
sales
$
223,320
$
201,795
$
238,221
$
206,557
Gross
profit
102,372
90,449
109,892
90,127
Operating
income
17,289
20,197
25,441
16,587
Net
income
3,965
5,958
9,411
4,440
Certain
general & administrative costs were reclassified from selling, general &
administrative expenses to cost of products sold. Selling, general and
administrative expense decreased and cost of products sold increased $1.3
million, $1.5 million, $1.2 million, and $1.4 million for the first, second,
third and fourth quarters of 2005, respectively, and increased $1.1 million,
$1.1 million, $1.3 million, and $1.3 million for the first, second, third and
fourth quarters of 2004, respectively.
In
connection with the THL Acquisition, the Company entered into a management
agreement (“THL management agreement”) with THL pursuant to which THL renders
certain advisory and consulting services to the Company. In consideration of
those services, the Company agreed to pay THL management fees equal to the
greater of $1.5 million or an amount equal to 1.0% of the consolidated earnings
before interest, taxes, depreciation and amortization of Simmons Bedding for
such fiscal year, but before deduction of any such fee. The fees are paid
semi-annually. The Company also reimburses THL for all out-of-pocket expenses
incurred by THL in connection with their services provided under the THL
management agreement.
Included
in selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations and Comprehensive Income for 2006, 2005 and 2004 was
$1.7 million, $1.6 million and $1.7 million, respectively, related to the
management fees and expenses for services provided by THL to the
Company.
NOTE
S —
SUBSEQUENT EVENT
On
February 9, 2007, the Company completed a merger with Simmons Merger Company,
a
wholly-owned subsidiary of Simmons Holdco, with the Company being the surviving
entity and a wholly-owned subsidiary of Simmons Holdco (the “Merger”). After the
Merger, the ownership structure of Simmons Holdco was identical to the ownership
structure of the Company prior to the Merger.
In
the
Merger, class A stockholders of the Company also received merger consideration
equal to their remaining invested capital plus a preferred return on their
invested capital and Simmons Holdco assumed the rights and obligations of the
Company’s Incentive Plan and all restricted stock issuances and stock options
granted under the Incentive Plan. In connection with the Merger, Simmons Holdco
borrowed $300.0 million under a senior unsecured loan (“Toggle Loan”) to fund
$278.3 million of merger consideration distributed to the Company’s then
existing class A stockholders.
The
Toggle Loan matures on February 15, 2012, and Simmons Holdco is not required
to
make any principal amortization payments on the Toggle Loans. Interest on the
Toggle Loan will be payable semi-annually in arrears on February 15 and August
15, commencing on August 15, 2007. For any interest period, Simmons Holdco
can
elect to either pay interest on the entire principal amount in cash, pay
interest on the entire principal amount by adding such interest to the principal
amount, or pay interest on 50% of the principal amount in cash and pay interest
on the remaining portion of the principal amount by adding such interest to
such
principal amount. Interest will accrue on the Toggle Loan at LIBOR plus an
interest rate margin of 5.25%. An additional 0.75% will be added to the interest
rate margin if Simmons Holdco elects not to pay the interest in cash. After
February 15, 2008, Simmons Holdco may prepay the Toggle Loan at its option
at a
price of 100.0% in 2008, 102.0% in 2009, 101.0% in 2010, and 100.0% thereafter.
Upon a change of control, Simmons Holdco will be required to make an offer
to
repurchase the Toggle Loan at a price of 101.0%.
The
Company does not guarantee nor have any of its assets pledged as collateral
under the Toggle Loan. The Toggle Loan is structurally subordinated in right
of
payment to any existing and future liabilities of the Company. Although we
are
not obligated to make cash distributions to service principal and interest
on
the Toggle Loan, Simmons Holdco is dependent on the cash flow of the Company
to
meet the interest and principal payments under the Toggle Loan. The Toggle
Loan
is not included in the financial statements of the Company.
NOTE
T —
GUARANTOR
/ NON-GUARANTOR STATEMENTS
Simmons
Bedding’s 7.875% senior subordinated notes due 2014 are fully and
unconditionally guaranteed, on a joint and several basis, and on an unsecured,
senior subordinated basis by Holdings and THL-SC Bedding (the “Parent
Guarantors”) and all of the Company’s active domestic subsidiaries (the
“Subsidiary Guarantors”). All of the Subsidiary Guarantors are 100% owned by
Simmons Bedding. The Supplemental Consolidating Condensed Financial Statements
provide additional guarantor/non-guarantor information.
Net
cash provided by (used in) operating activities
$
(831
)
$
(12,347
)
$
79,910
$
2,897
$
-
$
69,629
Cash
flows from investing activities:
Purchase
of property, plant and equipment, net
-
(2,775
)
(14,350
)
(1,081
)
-
(18,206
)
Proceeds
from sale of Gallery Corp., net
-
6,327
-
-
-
6,327
Purchase
of certain assets of Simmons Juvenile Products, Inc.
-
(19,685
)
-
-
-
(19,685
)
Other,
net
-
2,844
-
-
-
2,844
Net
cash provided by (used in) investing activities
-
(13,289
)
(14,350
)
(1,081
)
-
(28,720
)
Cash
flows from financing activities:
Repayment
of long-term obligations, net
-
(16,962
)
(910
)
(242
)
-
(18,114
)
Receipt
from (distribution to) affiliates
2,528
58,933
(57,984
)
(3,477
)
-
-
Proceeds
from issuance of discount notes
165,143
-
-
-
165,143
Dividend
to shareholders of common stock
(162,665
)
-
-
-
-
(162,665
)
Payment
of financing fees
(3,174
)
(1,027
)
-
-
-
(4,201
)
Repurchase
of common stock, net
(649
)
-
-
-
-
(649
)
Net
cash provided by (used in) financing activities
1,183
40,944
(58,894
)
(3,719
)
-
(20,486
)
Net
effect of exchange rate change
-
-
-
113
-
113
Change
in cash and cash equivalents
352
15,308
6,666
(1,790
)
-
20,536
Cash
and cash equivalents:
Beginning
of period
-
615
667
2,388
-
3,670
End
of period
$
352
$
15,923
$
7,333
$
598
$
-
$
24,206
73
ITEM
9.CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A. CONTROLS AND PROCEDURES.
(a)
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to
our
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including the principal executive officer and the
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
Within
90
days prior to the filing date of this annual report on Form 10-K, we have
carried out an evaluation, under the supervision and the participation of our
management, including the Company’s principal executive officer and our
principal financial officer, of the effectiveness of the design and operation
of
the Company’s disclosure controls and procedures. Based on such evaluation, our
principal executive officer and principal financial officer concluded that
our
disclosure controls and procedures are effective.
(b)
As
required by Exchange Act Rule 13a-15(d), our management, including our principal
executive officer and principal financial officer, also conducted an evaluation
of the our internal controls over financial reporting to determine whether
any
changes occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting. Based on that evaluation, there has been no such
change during the period presented by this report.
(c)
There
have been no significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the date
of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
74
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
AND DIRECTORS
Our
directors and principal officers and their positions and ages as of March 1,2007 are as follows:
Name
Age
Position
Charles
R. Eitel
57
Chairman
of the Board of Directors and Chief Executive Officer
Executive
Vice President, General Counsel and Secretary
Timothy
F. Oakhill
44
Executive
Vice President - Marketing and Licensing
Kimberly
A. Samon
39
Executive
Vice President - Human Resources and Assistant
Secretary
Mark
F. Chambless
49
Vice
President - Corporate Controller and Assistant
Secretary
Todd
M. Abbrecht
38
Director
William
P. Carmichael
63
Director
David
A. Jones
57
Director
B.
Joseph Messner
54
Director
Scott
A. Schoen
48
Director
George
R. Taylor
36
Director
The
present principal occupations and recent employment history of each of our
principal officers and directors listed above is as follows:
Charles
R. Eitel joined us in January 2000 as Chairman of the Board of Directors and
Chief Executive Officer. Prior to joining us, Mr. Eitel served as President
and
Chief Operating Officer of Interface, Inc., a leading global manufacturer and
marketer of floor coverings, interior fabrics and architectural raised floors.
Prior to serving as Chief Operating Officer, he held the positions of Executive
Vice President of Interface, President and Chief Executive Officer of the Floor
Coverings Group, and President of Interface Flooring Systems, Inc. Mr. Eitel
is
also a director of Duke Realty Corporation, American Fidelity Assurance Company
and International Sleep Product Association.
Gary
S.
Matthews joined us in December 2006 as President. Prior to joining us, Mr.
Matthews served as President and Chief Executive Officer of Sleep Innovations,
Inc. from August 2005 to November 2006. From December 2001 to January 2005,
Mr.
Matthews was employed by Bristol-Myers Squibb Company where he most recently
served as President, Worldwide Consumer Medicines and Specialty Pharmaceuticals.
From 1999 to 2001, Mr. Matthews served as President and Chief Executive Officer
of privately-held Derby Cycle Corporation. From 1996 to 1999, Mr. Matthews
was
employed by Diageo (Guinness) plc where he served in various roles including
Managing Director Guinness, United Kingdom; and President and Chief Executive
Officer, The Guinness Import Company, USA. Prior to joining Diageo (Guinness)
plc, he served in various positions at PepsiCo, Inc. and McKinsey & Company.
Mr. Matthews is also a director of Molson Coors Brewing Co. and Van Wagner,
Inc.
Robert
P.
Burch joined us in August 2005 as Executive Vice President - Operations. Prior
to joining us, Mr. Burch worked 26 years with office furniture manufacturer,
Steelcase, Inc. (“Steelcase”), where he most recently held the position of Vice
President of Order Fulfillment of North America. Prior to serving as Vice
President of Order Fulfillment of North America for Steelcase, Mr. Burch held
various positions with Steelcase including Vice President of Manufacturing
Operations and Vice President of Product Development and Launch.
75
William
S. Creekmuir joined us in April 2000 and serves as Executive Vice President,
Chief Financial Officer, Assistant Treasurer and Assistant Secretary. Mr.
Creekmuir served as one of our directors from April 2000 to August 2004. Prior
to joining us, Mr. Creekmuir served as Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of LADD Furniture, Inc. (“LADD”), a publicly
traded furniture manufacturer. Prior to joining LADD in 1992, he worked 15
years
with the international public accounting firm KPMG in their audit practice,
the
last five years of which he was a partner, including partner in charge of their
national furniture manufacturing practice. Mr. Creekmuir is Chairman of the
Statistics Committee of ISPA and is a Certified Public Accountant.
Stephen
G. Fendrich joined us in February 2003 in connection with our acquisition of
SC
Holdings, Inc. (“SC Holdings”) and has served as Executive Vice President -
Sales since August 2005. Prior to assuming his current position, Mr. Fendrich
served as President and CEO of our subsidiaries, SC Holdings and SCUSA, which
Mr. Fendrich joined in September 2002. Prior to joining SC Holdings and SCUSA,
Mr. Fendrich was Executive Vice President of Franchise Stores for The Mattress
Firm from February 2002 to September 2002. From November 2000 to February 2002,
Mr. Fendrich performed consulting work for The Mattress Firm franchises. From
1986 to November 2000, Mr. Fendrich held various positions with The Mattress
Firm including Vice President and Chief Financial Officer and Vice President
of
Finance and Real Estate. Mr. Fendrich was one of the founders of The Mattress
Firm in 1986.
Kristen
K. McGuffey joined us in November 2001 and has served as Executive Vice
President, General Counsel and Secretary since March 2007. Prior to assuming
her
current position, Ms. McGuffey served as Senior Vice President - General Counsel
and Secretary since August 2002 and prior to that served as Vice President
-
General Counsel and Assistant Secretary. Prior to joining us, from March 2000
to
October 2001, Ms. McGuffey was employed by Viewlocity, Inc., with the most
recent position of Executive Vice President and General Counsel. From March
1997
to February 2000, Ms. McGuffey was a partner of and, prior to that, an associate
at Morris, Manning & Martin LLP. Prior to March 1997, Ms. McGuffey was an
associate at Paul, Hastings, Janofsky & Walker, LLP.
Timothy
F. Oakhill joined us in January 1997 and has served as Executive Vice President
- Marketing and Licensing since March 2007. Prior to assuming his current
position, Mr. Oakhill served as Senior Vice President - Marketing and Licensing
since July 2005. Prior July 2005, Mr. Oakhill served as Vice President -
International and Domestic Licensing since January 2004. Prior to January 2004,
Mr. Oakhill managed various Simmons brands, including Beautyrest®
from
August 2003 to January 2004, and BackCare®
and Deep
Sleep®
from
January 1997 to August 2003. Prior to joining us, Mr. Oakhill served as
Marketing Manager for Eastman-Kodak Company and as an account supervisor for
Bates Worldwide.
Kimberly
A. Samon joined us in April 2006 and has served as Executive Vice President
-
Human Resources and Assistant Secretary since March 2007. Prior to assuming
her
current position, Ms. Samon served as Senior Vice President - Human Resources
and Assistant Secretary. Prior to joining us, from April 2004 to April 2006,
Ms.
Samon was a co-founder and partner of the law firm W. Edwin Litton, LLC and
a
co-owner and chief executive officer of Olivia Litton International, a human
resource consulting company. From April 2003 to February 2004, Ms. Samon was
a
Director - Human Resources, East for Fedex Corporation’s office and print center
business unit, formerly Kinko’s Inc. From April 2002 to March 2003, Ms. Samon
was a Human Resource Practice Leader for Lacerte Technologies, Inc. From January
1998 to December 2001, Ms. Samon worked for HQ Global Workplaces, Inc., in
various positions including Senior Vice President and Chief People Office/Labor
and Employment Counsel.
Mark
F.
Chambless joined us in May 1995 and has served as Vice President, Corporate
Controller and Assistant Secretary since December 2005. Prior to this position,
Mr. Chambless served as Vice President and Corporate Controller since February
2000, was the Corporate Controller from November 1995 through February 2000,
and
prior to that served as a Divisional Controller. Mr. Chambless is the Principal
Accounting Officer for our company. Prior to joining us, Mr. Chambless worked
nine years at Sealy Corporation where he held various positions including Plant
Controller, Operations Manager and Divisional Controller.
Todd
M.
Abbrecht has been a director of our company since December 2003, following
the
consummation of the THL Acquisition. Mr. Abbrecht is a Managing Director of
Thomas H. Lee Partners, which he joined in 1992. Prior to joining the firm,
Mr.
Abbrecht was in the mergers and acquisitions department of Credit Suisse First
Boston. Mr. Abbrecht is also a director of Michael Foods, Inc. and Warner
Chilcott Holdings Company, Limited.
76
William
P. Carmichael became a director of our company in May 2004. Mr. Carmichael
co-founded The Succession Fund in 1998. Prior to forming The Succession Fund,
Mr. Carmichael had 26 years of experience in various financial positions with
global consumer product companies, including Senior Vice President with Sara
Lee
Corporation, Senior Vice President and Chief Financial Officer of Beatrice
Foods
Company, and Vice President of Esmark, Inc. Mr. Carmichael is also a director
of
Cobra Electronics Corporation, The Finish Line, Inc., and Spectrum Brands,
Inc.
(“Spectrum Brands”). Mr. Carmichael is also Chairman of the Board of Trustees of
the Columbia Funds Series Trust, Columbia Funds Master Investment Trust,
Columbia Funds Variable Insurance Trust I and Banc of America Funds Trust.
Mr.
Carmichael is a Certified Public Accountant.
David
A.
Jones has been a director of our company since December 2003, following the
consummation of the THL Acquisition. Mr. Jones has served as the Chairman of
the
Board of Directors and Chief Executive Officer of Spectrum Brands since
September 1996. From 1996 to April 1998, he also served as President of Spectrum
Brands. From 1995 to 1996, Mr. Jones was President, Chief Executive Officer
and
Chairman of the Board of Directors of Thermoscan, Inc. Mr. Jones is also a
director of Pentair, Inc.
B.
Joseph
Messner became a director of our company in August 2004. Mr. Messner is Chairman
of the Board of Directors and Chief Executive Officer of Bushnell Performance
Optics, a company that Wind Point Partners, a Chicago based Private Equity
Group, and Mr. Messner acquired in 1999. Mr. Messner was President and CEO
of
First Alert, Inc. from 1996 through 1999. Mr. Messner is a member of Wind Point
Partners Executive Advisor Group.
Scott
A.
Schoen has been a director of our company since December 2003, following the
consummation of the THL Acquisition. Mr. Schoen is co-President of Thomas H.
Lee
Partners, which he joined in 1986. Prior to joining the firm, Mr. Schoen was
in
the Private Finance Department of Goldman, Sachs & Co. Mr. Schoen is also a
director of Spectrum Brands. Mr. Schoen is a member of the Board of Trustees
of
Spaulding Rehabilitation Hospital Network and is also a member of the
President’s Council of the United Way of Massachusetts Bay. He is also a member
of the Advisory Board of the Yale School of Management and the Yale Development
Board. Mr. Schoen served as a director of Syratech Corporation when it declared
bankruptcy on February 16, 2005 and was a director of Refco Group Ltd. when
it
declared bankruptcy on October 17, 2005.
George
R.
Taylor has been a director of our company since December 2003, following the
consummation of the THL Acquisition. Mr. Taylor is a Director at Thomas H.
Lee
Partners, which he joined in 1996. Prior to joining the firm, Mr. Taylor was
at
ABS Capital Partners. Mr. Taylor is also a director of Progressive Moulded
Products, Ltd. Mr. Taylor served as a director of Syratech Corporation when
it
declared bankruptcy on February 16, 2005.
COMPOSITION
OF OUR BOARD OF DIRECTORS
Our
board
of directors currently consists of seven members. Each of our directors will
hold office until his successor has been elected and qualified. Our executive
officers are elected by and serve at the discretion of our Board of Directors.
There are no family relationships between any of our directors or executive
officers. Our independent directors are Messrs. Carmichael, Jones and
Messner.
COMMITTEES
OF OUR BOARD OF DIRECTORS
Our
board
of directors has established an audit committee, a compensation committee and
a
nominating and governance committee.
Audit
Committee:
The
members of the audit committee are Messrs. Carmichael, Jones and Taylor. The
audit committee is
governed by a Board-approved charter stating its responsibilities. The audit
committee oversees
management regarding the conduct and integrity of our financial reporting,
systems of internal accounting and financial and disclosure controls. The audit
committee reviews the qualifications, engagement, compensation, independence
and
performance of our independent auditors, their conduct of the annual audit
and
their engagement for any other services. The audit committee also oversees
management regarding our legal and regulatory compliance and the preparation
of
an annual audit committee report as required by the SEC. The audit committee
has
reviewed and discussed the audited financial statements with
management. In addition, the board of directors has determined
that William P. Carmichael, an independent director, is an “audit committee
financial expert” as defined by the SEC rules.
The
audit committee has discussed with the independent
auditors the matters required to be discussed by the statement on Auditing
Standards No. 61, as amended, as adopted by the Public Company Accounting
Oversight Board ("PCAOB") in Rule 3200T. The audit committee has received
the written disclosures and the letter from the independent accountants required
by Independence Standards Board Standard No. 1, as adopted by the PCAOB in
Rule
3600T, and has discussed with the independent accountant the
independent accountant's independence. Based on such review and
discussions, the audit committee recommended to the board of directors that
the
audited financial statements be included in the Company's annual report on
Form
10-K.
77
Nominating
and Governance Committee:
The
members of the nominating and governance committee are Messrs. Abbrecht, Eitel,
Messner and Schoen. The purpose of the nominating and governance committee
is to
identify, screen and review individuals qualified to serve as directors. The
nominating and governance committee also develops and recommends to the board
approval of, if appropriate, and overseeing implementation of our corporate
governance guidelines and principles including the Simmons Code of Ethics for
Chief Executive and Senior Financial Officers (“Code of Ethics”) and the Simmons
Code of Conduct and Ethics; and reviewing on a regular basis our overall
corporate governance policies and recommending improvements when necessary.
Compensation
Committee: The
members of the compensation committee are Messrs. Abbrecht, Eitel and Schoen.
The compensation committee is responsible for our general compensation policies,
and in particular is responsible for setting and administering the policies
that
govern executive compensation, including determining and approving the
compensation of our CEO and other senior executive officers; reviewing and
approving management incentive compensation policies and programs; reviewing
and
approving equity compensation programs and exercising discretion over the
administration of such programs.
From
time
to time, the board of directors may contemplate establishing other
committees.
Compensation
Committee Interlocks and Insider Participation
None
of
our executive officers serve as a member of the board of directors or
compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee.
CODE
OF ETHICS
We
have a
Code of Ethics within the meaning of 17 CFR Section 229.406 that applies to
our
Chief Executive Officer, Chief Financial Officer and Corporate Controller.
Our
Code of Ethics is available on our website (www.simmons.com).
If we
make an amendment to this Code of Ethics, or grant a waiver from a provision
of
this Code of Ethics then we will make any required disclosure of such amendment
or waiver on our website or in a current report on Form 8-K filed with the
SEC.
ITEM
11. EXECUTIVE COMPENSATION.
Compensation
Discussion and Analysis
The
following discussion and analysis of compensation arrangements of our named
executive officers for 2006 should be read together with the compensation tables
and related disclosures set forth below. This discussion contains forward
looking statements that are based on our current plans, considerations,
expectations and determinations regarding future compensation programs. Actual
compensation programs that we adopt may differ materially from currently planned
programs as summarized in this discussion.
Introduction
We
are
privately owned and controlled by THL, a private equity fund. THL beneficially
owned approximately 72.0% of our issued and outstanding fully-diluted capital
stock as of December 30, 2006, including the period in which the 2006
compensation elements for our executive officers were determined, and
THL held three of eight seats on our board of directors. After the
departure of Ms. Burns-McNeil on February 25, 2007, THL holds three of seven
seats on our board of directors.
Our
compensation strategy, as it relates to named executive officers, has been
designed to support and complement the successful long-term growth of the
Company. Our objective in compensating our executive officers is to increase
the
enterprise value for our shareholders.
78
Our
executive officers are Charles R. Eitel, our Chairman of the Board and Chief
Executive Officer; Gary S. Matthews, President; William S. Creekmuir, Executive
Vice President, Chief Financial Officer, Assistant Treasurer and Assistant
Secretary; Robert P. Burch, Executive Vice President - Operations; Stephen
G.
Fendrich, Executive Vice President - Sales; Kimberly A. Samon, Executive Vice
President - Human Resources and Assistant Secretary; Kristen K. McGuffey,
Executive Vice President, General Counsel and Secretary; and Timothy F. Oakhill,
Executive Vice President - Marketing and Licensing (collectively referred to
as
the “ELT”). Our highly compensated named executive officers, as defined by the
SEC, are Messrs. Eitel, Matthews, Burch, Creekmuir and Fendrich and Ms. Rhonda
Rousch, our former Executive Vice President - Human Resources and Assistant
Secretary.
Corporate
Governance
Compensation
Committee Authority
Executive
officer compensation is administered by the compensation committee of our board
of directors, which is composed of three members. Mr. Schoen has served as
the
compensation committee chairman and Messrs. Abbrecht and Eitel have served
as
members since the THL Acquisition. All three have approved the compensation
arrangements described in this compensation discussion and analysis. Our board
of directors appoints the compensation committee members and delegates to the
compensation committee the direct responsibility for, among other
matters:
· approving,
in advance, the compensation and employment arrangements for our CEO and other
senior executive officers;
· reviewing
and approving management incentive compensation policies and programs;
and
· reviewing
and approving equity compensation programs and exercising discretion over the
administration of such programs.
Our
committee members are not independent under SEC rules and the relevant
securities laws. The compensation committee met five times in 2006.
Role
of Compensation Experts
Pursuant
to its charter, the compensation committee is authorized to obtain at our
expense compensation surveys, reports on the design and implementation of
compensation programs for directors, officers and employees, and other data
and
documentation as the compensation committee considers appropriate. In addition,
the compensation committee has the sole authority to retain and terminate any
outside counsel or other experts or consultants engaged to assist it in the
evaluation of compensation of our directors and executive officers. The
compensation committee did not retain the services of a compensation consultant
to design, review or evaluate our executive compensation arrangements for 2006
nor did it acquire or consult any compensation surveys or reports. Instead,
for
2006, the compensation committee considered the following factors, among other
matters, in determining compensation levels for executive officers:
· the
qualifications, skills and experience level of the respective executive
officer;
· the
position, role and responsibility of the respective executive officer in the
company; and
· the
general business and particular compensation experience and knowledge of the
compensation committee’s members; and
· prior
recommendations from consultants and wage surveys obtained prior to
2006.
79
Role
of Our Executive Officers in the Compensation Process
Mr.
Eitel
was actively involved in providing recommendations to the compensation committee
in its evaluation and design of 2006 compensation programs for our executive
officers, including the recommendation of individual compensation levels for
executive officers other than himself. Mr. Eitel relied on his personal
experience serving in the capacity as our chief executive officer or executive
officer of other companies as well as publicly available information for
comparable compensation guidance. He also consulted information provided by
our
past compensation consultants and by an executive search firm specializing
in
recruiting executive officers for our company and other similar firms. Mr.
Eitel
did not provide this specific information to the compensation committee,
but rather used it as the basis for his own recommendations to the committee.
Mr. Eitel attended all of the compensation committee’s meetings in which minutes
were recorded. Ms. Samon, Executive Vice President of Human Resources, worked
closely with Mr. Eitel to offer market data and to prepare recommendations
to
the compensation committee.
Executive
Officer Compensation Strategy and Philosophy
Our
executive officer compensation strategy has been designed to attract and retain
highly qualified executive officers and to align their interests with those
of
investors by linking significant components of executive officer compensation
with the achievement of specific business and strategic objectives and our
overall financial performance. We seek to employ executive officers who are
financially and ethically driven and accordingly, we offer a compensation
package that places a significant amount of total cash at risk by providing
a
substantial part of compensation in the form of equity incentives. Because
we
are a mid-size company with significant growth targets, we also ensure that
base
salaries for executives are competitive to that of larger
companies.
It
has
been our view that the total compensation for executive officers should consist
of the following components:
· base
salaries;
· annual
cash incentive awards;
· long-term
equity incentive compensation; and
· certain
perquisites and other benefits.
We
consider long-term equity incentive compensation to be the most important
element of our compensation program for executive officers. Since the THL
Acquisition, THL has expected our executive management team to significantly
increase the enterprise value of our company. We believe that meaningful equity
participation by each executive officer is the primary motivating factor that
will result in significant increases in value and growth. This belief is
reflected in the aggregate awards of restricted stock and stock options that
have been made to our executive officers.
It
has
been our philosophy that optimal alignment between stockholders and named
executive officers is best achieved by providing a greater amount of total
compensation in the form of equity rather than cash based salary. Accordingly,
we have designed total compensation programs for our executive officers to
provide base compensation levels, annual cash incentive award opportunities
and
long-term incentive compensation awards that are economically equivalent to
typical programs available for comparable executive officers in similarly sized
companies. The compensation committee determined compensation levels that it
concluded were appropriate based on the general business and particular
compensation experience and knowledge of its members gained from working with
private equity companies and with public companies.
Our
2006
incentive compensation program elements were primarily structured to reward
our
executive officers for achieving certain financial and business objectives,
including the following:
· achieving
company-wide EBITDA targets; and
· achieving
company-wide top line sales targets.
80
We
believe that the attainment of these specific financial objectives assist in
the
fulfillment of certain of our strategic objectives, namely:
· to
conserve and optimally utilize cash resources for the future growth of our
business.
Components
of Compensation
Base
Salaries
The
base
salaries of our named executive officers are reviewed on an annual basis as
well
as at the time of a promotion or other material change in responsibilities.
Adjustments in base salary are based on an evaluation of individual performance,
our company-wide performance and the individual executive’s contribution to our
performance. All executive officers’ compensation is reviewed in December for
compensation adjustments to take place by January 1 of the following calendar
year.
Annual
Cash Incentive Awards
Our
named
executive officers participated in an annual cash incentive award program,
the
2006 Management Bonus Plan. This program is available to certain managers,
senior managers, executive officers and other key employees. The following
table
summarizes, for each highly compensated named executive officer, the target
cash
incentive awards and the amounts actually earned by each such executive officer
under the 2006 Management Bonus Plan:
Name
Bonus
Target
Bonus
Achieved
Charles
R. Eitel
$
624,000
$
856,239
Gary
S. Matthews(1)
33,542
47,809
William
S. Creekmuir
243,000
339,469
Stephen
G. Fendrich
189,000
264,031
Robert
P. Burch
186,000
259,840
Rhonda
C. Rousch(2)
171,000
204,943
(1)
Mr.
Matthews joined Simmons on December 1, 2006. Mr. Matthews' bonus target had
he joined us at the beginning of fiscal year 2006 would have been
$402,500.
(2) Ms.
Rousch retired from Simmons effective April 1, 2006. As part of her
separation agreement, Ms. Rousch received, among other things, the right to
participate in the 2006 Management Bonus Plan as though she remained an employee
of ours for the entire fiscal year of 2006.
2006
Bonus Plan
The
purpose of each executive officer’s 2006 Management Bonus Plan was to create
financial incentives aligned with the overriding objective of increasing
enterprise value. Awards under the 2006 Management Bonus Plan were earned based
on our achievement of defined financial targets.
81
In
March
2006, the compensation committee approved financial targets established for
us.
These targets included the achievement of specified threshold levels of EBITDA,
adjusted for certain non-recurring or non-cash items as allowed under our senior
credit facility (“Adjusted EBITDA”), and revenue, adjusted to exclude certain
payments to customers recorded as reductions of revenue under accounting
principles generally accepted in the U.S. (“Adjusted Revenue”), for our 2006
fiscal year. These financial targets and the associated performance levels
that
were established represented the factors that the compensation committee deemed
most important and which, if achieved, would likely result in an increase in
enterprise value. The specific performance levels were determined with reference
to our 2006 budget, which we used to manage our day-to-day business and was
determined by our board of directors as representing an aggressive level of
growth and financial performance for us in 2006.
Mr.
Eitel’s financial targets were based on our financial performance with an
Adjusted EBITDA target of $142.0 million and an Adjusted Revenue target of
$1,030.1 million. After the sale of SCUSA, our compensation committee approved
a
revision to the financial targets and established a revised Adjusted EBITDA
target of $138.1 million and a revised Adjusted Revenue target of $1,005.5
million. The financial targets for Messrs. Matthews, Creekmuir, Fendrich and
Burch and Ms. Rhonda Rousch consisted of the same targets noted
above.
To
be
eligible to receive a bonus, we must achieve 91% of the Adjusted EBITDA target
and 91% of the Adjusted Revenue. The bonus target is weighted 85% toward
achieving the Adjusted EBITDA target and 15% toward achieving the Adjusted
Revenue target. The portion of the bonus target related to Adjusted EBITDA
is prorated as follows:
%
of EBITDA Achieved
%
of Bonus
91%
10
%
92%
20
%
93%
30
%
94%
40
%
95%
50
%
96%
60
%
97%
70
%
98%
80
%
99%
90
%
100%
100
%
The
portion of the bonus target related to Adjusted Revenue was prorated from 0%
to
100% for Adjusted Revenue between $915.0 million and $1,005.5 million.
Each
executive officer was eligible to receive a “bonus” factor which was applied to
performance achieved beyond reaching the 100% target. For every percent
increase over the financial target, Mr. Eitel’s bonus target increases 5% and
Messrs. Matthews’, Creekmuir’s, Fendrich’s, and Burch’s increase 4% and Ms.
Rousch’s bonus target increases 2%.
Amounts
Earned Under 2006 Management Bonus Plan
The
amounts earned by each of our named executive officers under the 2006 Management
Bonus Plan was determined in March 2007 by the compensation committee after
examining our 2006 financial results. For 2006, the compensation committee
determined that we exceeded our financial performance targets.
Based
on
the achievement of these financial goals, the compensation committee determined
that the amounts earned by each of our named executive officers during fiscal
year 2006 under the 2006 Management Bonus Plan were as noted above under
“Annual
Cash Incentive Awards”.
Employment
Agreement Signing Bonus
Mr.
Matthews received a one-time initial employment bonus of $600,000 upon execution
of his employment agreement, which was entered into effective December 1,2006.
82
Long-Term
Incentive Compensation
Overview
We
administered a long-term incentive compensation awards through an Amended and
Restated Equity Incentive Plan (“Equity Plan”). As a result of the 2007
Distribution, the Equity Plan was assumed by Simmons Holdco. The purpose of
the
Equity Plan is to provide an incentive to management to continue their
employment over a long term, and to align their interests with those of the
Company and its stockholders by providing a stake in our continued growth and
success. The plan permits awards of stock options, stock appreciation
rights, restricted stock awards, stock units and dividend equivalent
rights.
Historically,
we have awarded restricted stock as the primary form of equity compensation.
We
selected this form because of the favorable accounting and tax treatment to
recipients. The compensation committee, in its December 2006 meeting, voted
to
discontinue the issuing of restricted stock and approved the issuances of stock
options moving forward. We have generally considered and made equity awards
under three circumstances:
· upon
hiring new executive officers, vice-presidents and directors;
· as
a
result of promotion; and
· to
existing executive officers, vice-presidents and directors after evaluating
internal equity across the management team.
Restricted
stock and stock option awards that we have granted vest upon attainment of
performance-based and/or time-based measures. Performance-based awards are
forfeitable if specified financial performance targets are not achieved within
a
specified period of time. Time-based awards vest in accordance with vesting
schedules determined by our compensation committee.
Restricted
Stock and Stock Option Practices
We
have
awarded all stock options to purchase our common stock to executive officers
at
the fair value of the common stock on the grant date. We have not back-dated
any
option awards. The fair value of all options granted in 2006 was determined
by
our compensation committee based on a contemporaneous independent valuation
of
our common stock provided to us by a third-party valuation firm that the
compensation committee engaged for such purpose. We have issued restricted
stock
to executive officers at $0.01 per share which, in all cases in 2006 was below
the fair value. For 2006, the executive is required to pay the tax on the
compensation expense which is the difference between the purchase price of
$0.01
per share and the fair value.
In
December 2006, the compensation committee awarded Mr. Matthews 40,000 shares
of
restricted class B stock and 30,000 stock options in connection with his
employment. The restricted stock awards vest ratably over a four year period
based on our achieving certain annual Adjusted EBITDA targets and any unvested
portion of the shares will be repurchased by us pursuant to our Equity
Plan. The stock option awards provide the right to purchase our class B
common stock at $5.91 per share and vest over a four-year period in
three equal annual installments, beginning on the second anniversary
of the grant.
As
a
privately owned company, there has been no market for our common stock.
Accordingly, in 2006, we had no program, plan or practice pertaining to the
time
of stock option grants to executive officers coinciding with the release of
material non-public information.
Perquisites
and Other Personal Benefits
The
Company provides certain perquisites to its executives. These perquisites
provide flexibility to the executives and increase travel efficiencies, allowing
more productive use of executive time, in turn allowing greater focus on
Company-related activities. The
compensation committee reviewed and approved continuing the executive officer
perquisites at the December 2006 meeting of the board of directors. More
detail on the Company’s perquisites may be found in the narrative following the
Summary Compensation Table.
83
This
section summarizes the significant steps we have taken to date with respect
to
establishing compensation elements for 2007.
Compensation
Committee Evaluation of Executive Officer Compensation for
2007
In
the
third and fourth quarters of 2006, the compensation committee evaluated
executive officers' pay and approved the following components of
compensation.
· Base
Salaries:
Ø reevaluated
base salaries on market data, performance, experience and overall contribution
to the organization; and
Ø established
base salaries for 2007 for Messrs. Eitel, Matthews, Creekmuir, Fendrich and
Burch of $815,000; $575,000; $422,000; $330,000; and $330,000,
respectively.
· Annual
Cash Bonuses for 2007:
Ø established
2007 annual cash bonus targets that are calculated as a percentage of the
participant’s base salary, with performance metrics that provide for a range of
payments beginning with no bonus below a threshold performance level and then
a
target level and a maximum level; and
Ø established
performance metrics for achieving an annual cash bonus similar to those
established for 2006, based on Adjusted Revenues and Adjusted EBITDA targets,
which are directly linked to our 2007 operating budget.
· Long-Term
Incentive Compensation for 2007:
Ø established
2007 long-term equity compensation vesting targets for restricted stock awards
and stock options; and
Ø reviewed
stock-based awards across the executive team to ensure the amount of the award
reflected performance and contribution to the Company.
Tax
Implications of Executive Compensation
We
do not
believe that Section 162(m) of the Internal Revenue Code, which limits
deductions for executive compensation paid in excess of $1.0 million, would
be
applicable, and accordingly, our compensation committee did not consider its
impact in determining compensation levels for our highly compensated executive
officers in 2006.
Accounting
Implications of Executive Compensation
Effective
January 1, 2006, we were required to recognize compensation expense of all
stock-based awards pursuant to the principles set forth in SFAS 123R. The
Summary Compensation and Director Compensation Tables below used the principles
set forth in SFAS 123R to recognize expense for new awards granted after January1, 2006 and for unvested awards as of January 1, 2006. The non-cash stock
compensation expense for stock-based awards that we grant is recognized ratably
over the requisite vesting period. We continue to believe that stock options,
restricted stock and other forms of equity compensation are an essential
component of our compensation strategy, and we intend to continue to offer
these
awards in the future.
84
Summary
Compensation Table for Fiscal Year 2006
The
following table sets forth the aggregate compensation awarded to, earned by
or
paid to our highly compensated executive officers for 2006.
Name
& Principal Position
Salary
(1)
Bonus
(2)
Stock
Awards (3)
Option
Awards (3)
All
Other Compensation
Total
Charles
R. Eitel, CEO
$
780,000
$
856,239
$
76,050
$
-
$
243,839
(4)
$
1,956,128
Gary
S. Matthews, President
575,000
647,809
-
-
27,552
(5)
1,250,361
William
S. Creekmuir, CFO
405,000
339,469
47,531
-
39,680
(6)
831,680
Stephen
G. Fendrich, EVP - Sales
315,000
264,031
23,281
-
419,657
(7)
1,021,969
Robert
P. Burch, EVP - Operations
310,000
259,840
52,001
-
73,227
(8)
695,068
Rhonda
C. Rousch(9)
285,000
204,943
5,941
-
-
495,884
(1) Reflects
annual base salary for 2006. Mr. Matthews joined us on December 1, 2006 and
his
salary shown in the table reflects his annual base salary per his employment
agreement. Mr. Matthews’ received $47,917 of his base salary in 2006.
(2) Reflects
management bonus earned in 2006 for achieving financial performance targets.
Mr.
Matthews’ bonus also reflects a $600,000 initial employment bonus.
(3) Reflects
the stock based compensation expense recognized under SFAS 123(R). For a
discussion of assumptions made in the valuation, see “Note L - Stock-Based
Compensation” to our audited financial statements included elsewhere in this
Form 10-K.
(4) Reflects
perquisites that we paid for (i) personal use of corporate jet of $160,299;
(ii)
commuting expenses from Mr. Eitel’s principle residence to our corporate
headquarters of $15,583; (iii) employer contributions to our 401(k) plan of
$13,200; (iv) a car allowance of $12,000; (v) mattress sets of $11,691; (vi)
life-insurance and long-term disability insurance premiums of $13,742; (vii)
club memberships of $7,678; (viii) non-business travel expenses of $2,713;
and
(ix) the assumption of taxes for certain taxable benefits of $6,933.
(5) Reflects
perquisites that we paid for (i) legal expenses related to Mr. Matthews’
employment agreement of $23,604; (ii) mattress sets of $1,975; (iii) relocation
allowance of $1,333; and (iv) the assumption of taxes for certain taxable
benefits of $640.
(6) Reflects
perquisites that we paid for (i) employer contributions to our 401(k) plan
of
$13,200; (ii) a car allowance of $9,000; (iii) life-insurance and long-term
disability insurance premiums of $5,255; (iv) financial consulting expense
of
$5,000; (v) mattress sets of $3,936; (vi) fees paid to serve as a director
of a
subsidiary of $280; and (vii) the assumption of taxes for certain taxable
benefits of $3,009.
(7) Reflects
perquisites that we paid for (i) reimbursement of selling expenses related
to
the sale of Mr. Fendrich’s personal residence of $235,678; (ii) relocation
allowance of $12,803; (iii) a car allowance of $9,000; (iv) employer
contributions to our 401(k) plan of $6,600; (v) financial consulting expense
of
$5,000; (vi) mattress sets of $4,616; (vii) life-insurance and long-term
disability insurance premiums of $1,345; (viii) non-business travel expense
of
$1,143; (ix) personal use of the corporate jet of $760; and (x) the assumption
of taxes for certain taxable benefits of $142,712.
(8) Reflects
perquisites that we paid for (i) relocation allowance of $23,282; (ii) a car
allowance of $9,000; (iii) employer contributions to our 401(k) plan of $6,600;
(iv) financial consulting expense of $5,000; (v) non-business travel expenses
of
$4,958; (vi) annual physical exam of $4,625; (vii) mattress sets of $4,194;
(viii) life-insurance and long-term disability insurance premiums of $2,162;
and
(ix) the assumption of taxes for certain taxable benefits of
$13,406.
(9) Ms.
Rousch retired effective April 1, 2006 and no longer is employed by us. As
part
of her separation agreement, Ms. Rousch received, among other things, her annual
salary and bonus for fiscal year 2006. Ms. Rousch forfeited 43,552.43
shares of class B common stock during 2006.
85
Grants
of Plan-Based Awards in Fiscal Year 2006
The
following table sets forth information about grants made to our highly
compensated executive officers in 2006 pursuant to our 2006 equity and
non-equity incentive plans.
Estimated
Future Payouts Under Equity Incentive Plan Awards
Name
& Principal Position
Grant
Date
Threshold
Target
Maximum
Exercise
or Base Price of Option Awards
Grant
Date Fair Value
Charles
R. Eitel , CEO
4/17/2006
(1)
55,059
149,117
-
$
-
$
1.95
Gary
S. Matthews, President
12/1/2006
(2)
-
40,000
-
-
5.91
12/1/2006
(3)
-
30,000
-
5.91
2.98
William
S. Creekmuir, CFO
4/17/2006
(1)
24,375
93,198
-
-
1.95
Stephen
G. Fendrich, EVP - Sales
3/31/2006
(4)
12,000
30,000
-
-
1.95
Robert
P. Burch, EVP - Operations
4/17/2006
(1)
26,667
66,668
-
-
1.95
(1) Reflects
the modification of unvested restricted stock awards. As a result of us
meeting the 2006 vesting target, 21.25% of the modified awards
vested.
(2) Reflects
the grant of restricted stock awards under our Equity Plan to Mr. Matthews
upon
his employment with us on December 1, 2006. The awards vest ratably over a
four-year period starting with our fiscal year 2007 based upon our achievement
of annual Adjusted EBITDA performance targets. Additionally, vesting of
the shares may be accelerated upon a change in control as defined in the Equity
Plan.
(3) Reflects
the grant of stock option awards under our Equity Plan to Mr. Matthews upon
his
employment with us. The options have a term of 10 years. The options
provide Mr. Matthews the right to purchase our class B common stock at an
exercise price equal to the fair value of the class B common stock as of
the grant date as determined by our board of directors. The options will
vest over a four-year period in three equal annual installments,
beginning on the second anniversary of the Stock Option Agreement.
Vesting will not accelerate upon a change of control.
(4) Reflects
the grant of restricted stock awards under our Equity Plan to Mr.
Fendrich. A portion of the awards (18.75%) vested on the date of grant and
the remaining portion of the award vested over a three year period commencing
with our fiscal year 2006. Based on our Adjusted EBITDA for 2006 exceeding
the performance target, our compensation committee determined that all shares
eligible for vesting in fiscal year 2006 vested (an additional 21.25% of the
award). The remaining unvested shares vest ratably over our next two
fiscal years based upon our achievement of annual Adjusted EBITDA performance
targets. Additionally, vesting of the shares may be accelerated upon a
change in control as defined in the Equity Plan.
Executive
Employment Arrangements
Messrs.
Eitel and Creekmuir entered into executive employment agreements with us in
December 2003. The agreements have two-year terms with evergreen renewal
provisions and contain usual and customary restrictive covenants, including
two-year non-competition provisions, non-disclosure of proprietary information
provisions, provisions relating to non-solicitation/no hire of employees or
customers and non-disparagement provisions. In the event of a termination
without “cause” or departure for “good reason,” the terminated executives are
entitled to severance equal to two years salary plus an amount equal to their
pro-rated bonus for the year of termination. In December 2005, the
employment agreements of Messrs. Eitel and Creekmuir were amended to include,
among other things, restrictive covenants relating to exchange of proprietary
information, return of proprietary information, and non-compete agreements
upon
the termination of employment. As consideration for the execution of the
amendments, each of Messrs Eitel and Creekmuir received $1,000 added to their
base salary effective on the date the amendment was executed.
Mr.
Matthews entered into an executive employment agreement with us in November
2006
in connection with his employment as our president. Under the terms of the
employment agreement, Mr. Matthews will receive an annual salary of $575,000
subject to annual merit increases and will be eligible for an annual bonus
based
on our financial performance. Mr. Matthews was provided with an initial
employment bonus of $600,000 and was required to invest $250,000 in our class
A
common stock. Mr. Matthews’ was also awarded 40,000 shares of class B
common stock and options to purchase 30,000 shares of Class B common stock
pursuant to our Equity Plan. The stock-based awards are subject to vesting
and terms and conditions as provided in a restricted stock agreement and stock
option agreement, respectively. Also under the terms of Mr. Matthews’
agreement, he will receive, among other things, a relocation package and fringe
benefits, such as an annual executive physical, financial planning assistance
and additional long-term disability insurance, from us. Additionally, Mr.
Matthews’ agreement has an eighteen-month term with evergreen renewal provisions
and contains usual and customary restrictive covenants, including eighteen-month
non-competition provisions, non-disclosure of proprietary information
provisions, provisions relating to non-solicitation of employees or customers
and non-disparagement provisions. If Mr. Matthews is terminated without “cause”
or departs for “good reason”, he will be entitled to eighteen months of
severance and a pro-rated bonus. If Mr. Matthews is not appointed chief
executive officer (“CEO”) upon the departure of our current CEO, Charles R.
Eitel, and Mr. Matthews leaves us within 90 days of Mr. Eitel’s departure, Mr.
Matthews will be entitled to one-year severance and relocation expenses.
86
Messrs.
Burch’s and Fendrich’s offers of employment contain usual and customary
restrictive covenants, including a two-year non-compete, a duty of
non-disclosure, and provision relating to non-solicitation/no hire of employees
or customers and non-disparagement. In the event of a termination with
“cause” or departure for “good reason,” Messrs. Burch and Fendrich are entitled
to severance equal to two years salary.
Potential
Post-Employment Payments and Payments on a Change in Control
The
information below describes and quantifies certain compensation that would
become payable under existing arrangements if the named executive’s employment
had terminated on December 31, 2006, given the named executive’s
compensation as of such date and based on the our fair value of the stock price
on that date. These benefits are in addition to benefits available generally
to
salaried employees, such as distributions under our 401(k) savings plan and
accrued vacation pay. Due to the number of factors that affect the nature and
amount of any benefits provided upon the events discussed below, any actual
amounts paid or distributed may be different. Factors that could affect these
amounts include the timing during the year of any such event and our stock
price.
Name
& Principal Position
Benefit
Other
than Cause or Good Reason
Justifiable
Cause(A)
Death
and Incapacity
Charles
R. Eitel, CEO
Severance(1)
$
1,560,000
$
-
$
-
Bonus(2)
392,010
-
392,010
Equity
awards(3)
541,778
-
541,778
Class
A shares(4)
442,800
-
442,800
Health
insurance(5)
24,664
-
-
Gary
S. Matthews, President
Severance(1)
862,500
575,000
-
Bonus(2)
47,809
47,809
47,809
Class
A shares(4)
30,962
30,962
30,962
Relocation(6)
-
(A
)
-
William
S. Creekmuir, CFO
Severance(1)
810,000
-
-
Bonus(2)
154,735
-
154,735
Equity
awards(3)
846,530
-
846,530
Class
A shares(4)
238,985
-
238,985
Health
insurance(5)
20,130
-
-
Stephen
G. Fendrich, EVP - Sales
Severance(1)
630,000
-
-
Bonus(2)
-
-
-
Equity
awards(3)
180,810
-
180,810
Robert
P. Burch, EVP - Operations
Severance(1)
620,000
-
-
Bonus(2)
-
-
-
Equity
awards(3)
196,801
-
196,801
(A)
In
accordance with Mr. Matthews' employment agreement, if Mr. Matthews is not
appointed CEO upon the departure of our current CEO and Mr. Matthews leaves
us
within 90 days of Mr. Eitel’s departure, Mr. Matthews will be entitled to
one-year severance and relocation expenses.
(1)
For
termination with good reason by the executive, Messrs. Eitel, Creekmuir,
Fendrich and Burch would be entitled to twice their annual salary. Mr. Matthews
would be entitled to eighteen months of his annual salary for termination with
good reason. For termination by incapacity, Messrs. Eitel, Matthews and
Creekmuir would be entitled to their salary through the termination date of
their employment agreement.
(2)
Messrs. Eitel, Matthews, Creekmuir, Fendrich and Burch would receive any unpaid
bonus earned in 2006.
(3)
If
one of the named executives were to terminate from Simmons for any
reason, Simmons Holdco would have the right to repurchase such
executive officers vested and unvested shares of class B common stock. The
unvested shares of class B common stock would be repurchased at $0.01 per share
and the vested shares would be repurchased at fair value as determined by our
board of directors.
87
(4)
Messrs. Eitel, Matthews and Creekmuir would have the right to require us to
repurchase their class A common stock at fair value.
(5)
We
shall contribute to Messrs. Eitel’s and Creekmuir’s (including dependents)
coverage under our medical, dental and vision plans for a period of up to two
years following termination for other than cause or good reason. After
termination, Messrs. Eitel and Creekmuir (including spouses) can continue their
coverage under our medical, dental and vision plans at the employee’s COBRA
rates until death.
Outstanding
Equity Awards at 2006 Fiscal Year-End
The
following table reflects all outstanding equity awards held by our highly
compensated executive officers as of December 30, 2006.
Option
Awards
(1)
Stock
Awards
(2)
Name
& Principal Position
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
Option
Exercise Price
Option
Expiration Date
Equity
Incentive Plan Awards: Number of Unearned Shares that have not
Vested
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares
that have
not Vested
Charles
R. Eitel, CEO
-
$
-
-
110,117
$
812,663
Gary
S. Matthews, President
30,000
5.91
12/1/2016
40,000
295,200
William
S. Creekmuir, CFO
-
-
-
68,824
507,921
Stephen
G. Fendrich, EVP - Sales
-
-
-
18,000
132,840
Robert
P. Burch, EVP - Operations
-
-
-
40,001
295,207
(1)
The
options will vest over a four-year period in three equal annual
installments, beginning on the second
anniversary of the Stock Option Agreement. Vesting will not accelerate
upon a change of control.
(2)
All
awards vest based on meeting our annual Adjusted EBITDA targets. Messrs.
Eitel’s, Creekmuir’s, Burch’s
and Fendrich’s unvested stock awards vest 50% annually over the next two years.
Mr. Matthews’ stock
awards vest ratably over the next four years commencing with our fiscal year
2007.
Option
Exercises and Stock Vested in 2006
The
following table reflects the vesting of restricted stock awards by our highly
compensated executive officers during 2006. No options were
exercised in 2006.
Stock
Awards
Name
& Principal Position
Number
of Shares Acquired on Vesting
Value
Realized on Vesting
Charles
R. Eitel, CEO
39,000
$
287,819
William
S. Creekmuir, CFO
24,375
179,888
Stephen
G. Fendrich, EVP - Sales
18,250
97,716
Robert
P. Burch, EVP - Operations
26,667
134,926
Rhonda
C. Rousch
3,047
22,486
88
DIRECTOR
COMPENSATION
In
2006,
directors who also served as employees and directors affiliated with significant
stockholders received no compensation for serving on our board of directors.
Non-employee directors not affiliated with a significant stockholder receive
director fees of $25,000 per year. All members of our board of directors are
reimbursed for their usual and customary expenses incurred in connection with
attending all board and other committee meetings. Upon joining our board of
directors, each of the non-employee directors not affiliated with a significant
stockholder were granted restricted stock awards of 2,500 shares of our Class
B
common stock, which is subject to time and performance-based vesting. In April
2006, our compensation committee modified the restricted stock awards held
by
our directors to, among other things, extend the vesting period through 2008
for
certain restricted stock awards, lower the Adjusted EBITDA performance targets
for 2006 and 2007 for all restricted stock awards, and eliminate cliff
vesting.
The
following table sets forth the aggregate compensation awarded to, earned by
or
paid to our directors during 2006.
Director
Compensation for the 2006 Fiscal Year
Name
Fees
Earned or Paid in Cash
Stock
Awards
(1)
Total
Robin
Burns-McNeill
(2)
$
25,000
$
1,950
$
26,950
William
P. Carmichael
25,000
1,036
26,036
David
A. Jones
25,000
1,036
26,036
B.
Joseph Messner
25,000
1,036
26,036
(1)
Stock-based compensation expense as determined by SFAS 123(R).
(2)
Ms.
Burns-McNeill resigned from our board of directors on February 25, 2007.
Our
board
of directors revised its director compensation program in December 2006 for
all
non-employee directors not affiliated with a significant stockholder. The
revised director compensation program provides non-employee directors not
affiliated with a significant stockholder to receive $5,000 for each special
board or committee meeting that they attend in person and $1,000 for each
special meeting attended telephonically.
COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The
compensation committee is responsible for our general compensation policies,
and
in particular is responsible for setting and administering the policies that
govern executive compensation. The compensation committee evaluates the
performance of our CEO and the other members of the ELT and determines the
compensation levels for the same.
The
objective of the compensation committee is to establish policies and programs
to
attract and retain key executives, and to reward performance by these executives
which benefit us. The primary elements of executive compensation are base
salary, annual cash incentive awards, long-term equity incentive compensation
awards and certain other perquisites and other benefits. The salary is based
on
factors such as the individual executive officer’s level of responsibility, and
a comparison to similar positions in the company and in comparable companies.
The annual cash incentive awards are currently based on our performance measured
against attainment of financial objectives. Certain discretionary bonuses have
been given to attract and retain key executives. Long-term equity incentive
awards generally have vesting schedules tied to the achievement of our certain
financial objectives and are intended to align management’s interests with ours
and our stockholders in promoting our long-term growth. Further information
on
each of these compensation elements follows.
89
SALARIES
With
respect to Mr. Eitel, each member of the board of directors assesses Mr.
Eitel's performance and this information is then summarized for the
compensation committee. The compensation committee then adjusts Mr. Eitel’s base
salary based on this performance assessment and external market equity. Mr.
Eitel’s and Mr. Matthews’ direct reports are reviewed annually by each, and Mr.
Eitel makes a recommendation of a salary adjustment to the compensation
committee based on the performance of the individual and our salary guidelines.
Competitive compensation data is also a major factor in establishing the salary
of Mr. Eitel’s direct reports, but no precise formula is applied in the
consideration of this data. The compensation committee’s review and final
determination of the salaries for the other members of the ELT takes place
annually.
For
the
other executive officers, base salaries are adjusted annually by the ELT,
following a review by the member of the ELT to whom the executive officer
reports. In the course of the review, performance of the individual with respect
to specific objectives is evaluated, as are any increases in responsibility,
and
competitive salaries, internally and externally, for similar positions. The
specific objectives for each executive officer are set by the particular ELT
member to whom the executive officer reports, and will vary annually for each
executive position based on our objectives. The performance review is based
on
individual competencies and contributions and therefore our performance does
not
weigh heavily in the result.
ANNUAL
OR
DISCRETIONARY CASH BONUSES
Certain
of our employees are eligible, pursuant to their offers of employment, to
receive annual cash bonuses based on our performance measured against attainment
of financial objectives. Certain of our employees also received discretionary
cash bonuses as part of their offers of employment.
LONG-TERM
EQUITY INCENTIVE AWARDS
We
adopted the Equity Plan to provide incentives to our management and independent
directors and our affiliates by granting them restricted stock and/or stock
option awards of our Class B common stock. These awards granted to our
management are intended to provide an incentive for management to continue
their
employment over a long term and to align their interests with ours by providing
a stake in the same. The compensation committee recommends grants to the board
which determines whether such grants are appropriate. In making such
recommendations, the compensation committee takes into account the total number
of shares available for grant, prior grants outstanding, and estimated
requirements for future grants. The compensation committee also recommends
modifications to the terms of award to the board. Individual awards take into
account the manager’s contributions to us and our affiliates, scope of
responsibilities, strategies and operational goals, and salary.
OTHER
BENEFITS
Periodically,
the compensation committee assesses the other benefits provided to our executive
officers and other managers.
The
compensation committee continually reviews our compensation programs to ensure
the overall package is competitive, balanced, and that proper incentives and
rewards are provided.
The
compensation committee has reviewed the compensation discussion and analysis
and
discussed that analysis with management. Based on its review and discussions
with management, the committee recommended to our board of directors that the
compensation discussion and analysis be included in the company’s Annual Report
on Form 10-K for 2006.
Compensation
Committee:
Todd
M.
Abbrecht
Charles
R. Eitel
Scott
A.
Schoen
90
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding our beneficial
ownership, by each member of the board of directors, each of our named executive
officers, and each member of our board of directors and our executive officers
as a group. As a result of our merger with an entity to become a wholly-owned
subsidiary of Simmons Holdco on February 9, 2007, our securityholders exchanged
their shares of us for shares of Simmons Holdco that are identical to the type
and number of our shares prior to the merger. Simmons Holdco outstanding
securities consisted of 3,821,099.38 shares of Class A common stock and
684,481.42 shares of Class B common stock as of March 1, 2007. The Class B
common stock was issued pursuant to the restricted stock agreement under the
Equity Plan. See “Certain Relationships and Related Party Transactions — Amended
and Restated Certificate of Incorporation of Simmons Company.” The Class A
common stock and Class B common stock generally have identical voting rights.
To
our knowledge, each such stockholder has sole voting and investment power as
to
the common stock shown unless otherwise noted. Beneficial ownership of the
common stock listed in the table has been determined in accordance with the
applicable rules and regulations promulgated under the Exchange
Act.
Class
A
Percent
of
Class A
Class
B
Percent
of
Class B
Common
Common
Common
Common
Percent
Name
and Address
Stock
Stock
Stock
Stock
of
Total
Principal
Securityholders:
Thomas
H. Lee Partners L.P. and Affiliates (1)
3,270,940.05
85.6
%
-
-
%
72.6
%
Fenway
Partners Capital Fund II, L.P. and Affiliates (2)
387,837.03
10.1
-
-
8.6
Directors
and Executive Officers:
Charles
R. Eitel (3) (6)
60,000.00
1.6
183,529.00
26.8
5.4
Gary
S. Matthews (3) (4) (5)
4,195.33
*
40,000.00
5.8
1.0
Robert
P. Burch (3) (4)
-
-
66,668.00
9.7
1.5
William
S. Creekmuir (3) (4) (6)
32,382.75
*
114,706.00
16.8
3.3
Stephen
G. Fendrich (3) (4) (5)
-
-
42,500.00
6.2
*
Kristen
K. McGuffey (3) (4) (5)
4,069.50
*
15,000.00
2.2
*
Timothy
F. Oakhill (3) (4)
3,250.00
*
15,000.00
2.2
*
Kimberly
A. Samon (3) (4)
-
-
11,000.00
1.6
*
Todd
M. Abbrecht (1)
3,270,940.05
85.6
-
-
72.6
William
P. Carmichael (3)
-
-
2,500.00
*
*
David
A. Jones (3)
2,000.00
*
2,500.00
*
*
B.
Joseph Messner (3)
-
-
2,500.00
*
*
Scott
A. Schoen (1)
3,270,940.05
85.6
-
-
72.6
George
R. Taylor (1)
3,270,940.05
85.6
-
-
72.6
All
directors and named executive officers as a group
(14
persons) (1) (4) (5)
3,376,837.63
88.4
495,903.00
72.4
86.0
__________
*
less
than
1%
(1) Includes
interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee
Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V. L.P., Thomas H.
Lee
Investors Limited Partnership, 1997 Thomas H. Lee Nominee Trust, Putnam
Investment Holdings, LLC, Putnam Investments Employees’ Securities Company I,
LLC, and Putnam Investments Employees’ Securities Company II, LLC. Thomas H. Lee
Equity Fund V, L.P. and Thomas H. Lee Parallel Fund V, L.P. are Delaware limited
partnerships, whose general partner is THL Equity Advisors V, LLC, a Delaware
limited liability company. Thomas H. Lee Equity (Cayman) Fund V, L.P. is an
exempted limited partnership formed under the laws of the Cayman Islands, whose
general partner is also THL Equity Advisors V, LLC, which is registered in
the
Cayman Islands as a foreign company. Thomas H. Lee Investors Limited Partnership
(f/k/a THL-CCI Limited Partnership) is a Massachusetts limited partnership,
whose general partner is THL Investment Management Corp., a Massachusetts
corporation. Thomas H. Lee Advisors, LLC, a Delaware limited liability company,
is the general partner of Thomas H. Lee Partners, a Delaware limited
partnership, which is the sole member of THL Equity Advisors V, LLC. The 1997
Thomas H. Lee Nominee Trust is a trust with US Bank, N.A. serving as Trustee.
Thomas H. Lee, has voting and investment control over common shares owned of
record by the 1997 Thomas H. Lee Nominee Trust.
91
Scott
A.
Schoen is co-President of Thomas H. Lee Advisors, LLC and a vice president
of
THL Investment Management Corp. Todd M. Abbrecht is a Managing Director of
Thomas H. Lee Advisors, LLC and a vice president of THL Investment Management
Corp. George R. Taylor is a Director of Thomas H. Lee Advisors, LLC. Each of
Messrs. Schoen, Abbrecht and Taylor may be deemed to beneficially own class
A
common shares held of record by Thomas H. Lee Equity Fund V, L.P., Thomas H.
Lee
Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V. L.P.
Furthermore, each of Messrs. Schoen and Abbrecht may be deemed to beneficially
own class A common shares held of record by Thomas H. Lee Investors Limited
Partnership. Each of these individuals disclaims beneficial ownership of such
common shares except to the extent of their pecuniary interest
therein.
The
address of Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V,
L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P., Thomas H. Lee Investors
Limited Partnership, the 1997 Thomas H. Lee Nominee Trust, Scott A. Schoen,
Todd
M. Abbrecht and George R. Taylor is 100 Federal Street, Boston, MA02110.
Putnam
Investment Holdings, LLC, Putnam Investments Employees’ Securities Company I,
LLC and Putnam Investments Employees’ Securities Company II, LLC are
co-investment entities of Thomas H. Lee Partners and each disclaims beneficial
ownership of any securities other than the securities held directly by such
entity. The address for the Putnam entities is One Post Office Square, Boston,
MA02109.
(2) Includes
interest owned by Simmons Holdings, LLC; FPIP, LLC and FPIP Trust, LLC. Peter
Lamm and Richard Dresdale have voting and/or investment control over the shares
held by Fenway Partners Capital Fund II, L.P. The address for Fenway Capital
Fund II, L.P. is 152 West 57th Street, 59th Floor, New York, New York10019.
(3) The
address of Charles R. Eitel, Gary S. Matthews, Robert P. Burch, William S.
Creekmuir, Stephen G. Fendrich, Kristen K. McGuffey, Timothy F. Oakhill,
Kimberly A. Samon, David A. Jones, William P. Carmichael, and B. Joseph Messner
is c/o Simmons Company, One Concourse Parkway, Suite 800, Atlanta, Georgia30328.
(4)
Pursuant
to a stockholders agreement, Mr. Eitel has the voting power of the
employees and executive officers as to their common stock
shown.
(5)
Excludes 30,000 shares of class B common stock that may be acquired upon the
vesting and exercise of non-qualified stock options. The stock options vest
over
a four-year period in three equal annual installments, beginning on the second
anniversary of the agreement (December 1, 2008).
(6) Includes
shares held in trust or by immediate family members.
92
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth information as of December 30, 2006 regarding our
equity compensation plans. The only plan pursuant to which we may make equity
grants is the Equity Plan that was approved by our board of directors and
securityholders on November 30, 2006. On February 9, 2007, we merged into a
subsidiary of Simmons Holdco and became a wholly-owned subsidiary of Simmons
Holdco. As a result of the merger, our Equity Plan was assumed by Simmons
Holdco.
Number
of
securities
Number
of
remaining
available
securities
to be
for
future issuance
issued
upon
Weighted-average
under
equity
exercise
of
exercise
price of
compensation
outstanding
outstanding
plans
(excluding
options,
warrants
options,
warrants
securities
reflected
and
rights
and
rights
in
column (a))
Plan
Category
(a)
(b)
(c)
Equity
compensation plans approved by security holders
35,740
$
5.91
per share
60,876
Column
(a) of the table excludes restricted stock awards issued under the Equity Plan,
which authorizes the board of directors to grant up to 781,775 shares of class
B
common stock through options, restricted stock awards, or other awards to our
employees, directors and consultants. As of December 30, 2006, we had issued
restricted stock awards and stock options under the Equity Plan. The shares
shown in column (c) are remaining shares of class B common stock available
for
issuance after taking into consideration the shares of class B common stock
issued as a restricted stock award or underlying stock options granted.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
SEC
regulations require that we disclose any transaction, or series of similar
transactions, since the beginning of 2006, or any contemplated transactions,
in
which the Company was or is to be a participant, in which the amount involved
exceeds $120,000 and in which any of the following persons had or will have
a
direct or indirect material interest:
-
our
directors or nominees for director;
-
our
executive officers;
-
persons
owning more than 5% of our outstanding voting securities; or
-
the
immediate family members of any of the persons identified in the preceding
three
bullets.
The
SEC
refers to these types of transactions as related
person transactions
and to
the persons listed in the bullets as related
persons.
The SEC
is concerned about related person transactions because such transactions, if
not
properly monitored, may present risks of conflicts of interest or the appearance
of conflicts of interest.
Review
and Approval of Related Person Transactions. We
review
all relationships and transactions in which the company and our directors and
executive officers or their immediate family members are participants to
determine whether such persons have a direct or indirect material interest.
Our
legal department, working together with our outside legal advisors, is
responsible for the development and implementation of processes and controls
to
obtain information
from our directors and executive officers with respect to related person
transactions and for then determining, based on the facts and circumstances,
whether we or a related person has a direct or indirect material interest in
the
transaction. Each director and executive officer annually completes a
questionnaire to identify their related interests and persons, and to notify
us
of changes in that information. As required under SEC rules, transactions that
are determined to be directly or indirectly material to us or a related person
are disclosed under this Item of our Annual Report on Form 10-K.
MANAGEMENT
AGREEMENT
Pursuant
to the management agreement entered into in connection with the THL Acquisition,
THL Managers V, LLC renders certain advisory and consulting services to Simmons
Bedding. In consideration of those services, Simmons Bedding agreed to pay
to
THL Managers V, LLC, an affiliate of Thomas H. Lee Partners L.P., semi-annually,
an aggregate per annum management fee equal to the greater of:
-
$1,500,000;
or
-
an
amount
equal to 1.0% of the consolidated earnings before interest, taxes, depreciation
and amortization of Simmons Bedding for such fiscal year, but before deduction
of any such fee. Simmons Bedding paid management fees, inclusive of expenses,
of
$1.7 million in 2006.
Simmons
Bedding also agreed to indemnify THL Managers V, LLC and its affiliates from
and
against all losses, claims, damages and liabilities arising out of or related
to
the performance by Thomas H. Lee Partners Managers V, LLC of the services
pursuant to the management agreement.
93
DISTRIBUTION
TO STOCKHOLDERS
Upon
our
merger with Simmons Holdco
on
February 9, 2007,
holders
of our common stock received in the merger stock of Simmons Holdco and certain
stockholders also received cash. Simmons Holdco also used the net proceeds
from the Toggle Loan to pay transaction expenses. The
following table sets forth the proceeds distributed to certain stockholders
in
connection with the merger
(in
thousands):
Name
Proceeds
Principal
Securityholders(1):
Thomas
H. Lee Partners L.P. and Affiliates
$
238,288
Fenway
Partners Capital Fund II, L.P. and Affiliates
28,254
Directors
and Executive Officers:
Charles
R. Eitel
3,643
William
S. Creekmuir
2,359
Kristen
K. McGuffey
296
Gary
S. Matthews
253
Timothy
F. Oakhill
236
David
A. Jones
146
Immediate
Family Members of Directors and
Executive
Officers:
Charles
Ross Eitel
243
Stephanie
L. Eitel
243
Jennifer
E. Young
243
(1)
A
security holder covered by Item 403(a) of Regulation
S-K
We
have
amended and restated our Certificate of Incorporation to eliminate different
classes of common stock. Our second Amended and Restated Certificate of
Incorporation previously provided for two classes of common stock — Class
A common stock, earning a preferred return of 6% per annum, and Class B common
stock. Class A common stock was held by THL, Fenway Partners, directors,
former directors and those members of management who elected to acquire such
shares in connection with the THL Acquisition. Our third Amended and
Restated Certificate of Incorporation sets forth a single class of common stock,
identical in all respects and entitling the holders thereof to the same rights
and privileges, subject to the same qualifications, limitations and
restrictions.
SECURITYHOLDERS’
AGREEMENT AND EQUITY REGISTRATION RIGHTS AGREEMENT
In
connection with the Merger, the Securityholders’ Agreement and the Equity
Registration Rights Agreement were terminated, and substantially similar
documents were entered into among Simmons Holdco and its securityholders.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Aggregate
fees which were billed to us by our principal accountants,
PricewaterhouseCoopers LLP, for audit services related to the two most recent
fiscal years and for other professional services in the most recent two fiscal
years were as follows:
2006
2005
Audit
Fees
$
924,507
$
678,741
Tax
Fees
9,920
54,999
All
Other Fees
-
1,500
Total
$
934,427
$
735,240
Audit
Fees
consist
of fees for the audit of the Company’s annual consolidated financial statements,
the review of financial statements included in the Company’s quarterly Form 10-Q
reports, and the services that an independent auditor would customarily provide
in connection with subsidiary audits, statutory requirements, regulatory
filings, registration statements and similar engagements for the fiscal year,
such as comfort letters, attest services, consents, and assistance with review
of documents filed with the SEC. “Audit Fees” also include advice on accounting
matters that arose in connection with or as a result of the audit or the review
of periodic consolidated financial statements and statutory audits the non-U.S.
jurisdictions require.
Tax
Fees
consist
of the aggregate fees billed for professional services rendered for tax
compliance, tax advice, and tax planning.
All
Other Fees
consist
of licensing fees paid in 2005 in connection with the use of accounting and
research software.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
of
Independent Auditor
The
Audit
Committee is responsible for appointing, setting compensation, and overseeing
the work of the independent auditor. The Audit Committee has established a
policy regarding pre-approval of all audit and permissible non-audit services
provided by the independent auditor. The Audit Committee has approved the
pre-authorization of audit and non-audit services up to $50,000.
95
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) The
following consolidated financial statements of Simmons Company and its
subsidiaries are included in Part II, Item 8:
Report
of
Independent Registered Public Accounting Firm
(a)(3) The
exhibits to this report are listed in section (b) of Item 15 below.
(b) Exhibits:
The
following exhibits are filed with or incorporated by reference into this Form
10-K. For the purposes of this exhibit index, references to “Simmons Bedding”
include Simmons Bedding, both prior to and following the transactions that
occurred on December 19, 2003. The exhibits which are denominated by an asterisk
(*) were previously filed as a part of, and are hereby incorporated by reference
from either the (i) Registration Statement on Form S-4 under the Securities
Act
of 1933 for Simmons Bedding, File No. 333-76723 (referred to as “1999 S-4”),
(ii) Registration Statement on Form S-4 under the Securities Act of 1933 for
Simmons Bedding, File No. 333-113861 (referred to as “2004 S-4”), (iii)
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 for
Simmons Bedding (referred to as “9/30/00 10-Q”), (iv) Quarterly Report on Form
10-Q for the quarter ended March 30, 2002 for Simmons Bedding (referred to
as
“3/30/02 10-Q”), (v) Quarterly Report on Form 10-Q for the quarter ended June29, 2002 for Simmons Bedding (referred to as “6/29/02 10-Q”), (vi) Quarterly
Report on Form 10-Q for the quarter ended September 28, 2002 for Simmons Bedding
(referred to as “9/28/02 10-Q”), (vii) Annual Report on Form 10-K for the year
ended December 28, 2002 for Simmons Bedding (referred to as “2002 10-K”), (viii)
Annual Report on Form 10-K for the year ended December 27, 2003 for Simmons
Bedding (referred to as “2003 10-K”), (ix) Current Report on Form 8-K filed
September 2, 2004 for Simmons Bedding (referred to as “9/02/04 8-K”), (x) Annual
Report on form 10-K for the year ended December 25, 2004 for Simmons Bedding
(referred to as “2004 10-K”), (xi) registration statement on Form S-4 under the
Securities Act of 1933 for Simmons Company, File No. 333-124138 (referred to
as
“2005 S-4”), (xii) Current Report on Form 8-K filed August 4, 2005 for Simmons
Bedding (referred to as “8/4/05 8-K”), (xiii) Current Report on Form 8-K filed
August 12, 2005 for Simmons Bedding (referred to as “8/12/05 8-K”), (xiv)
Current Report on Form 8-K filed September 21, 2005 for Simmons Bedding
(referred to as “9/21/05 8-K”) (xv) Current Report on Form 8-K filed October 20,2005 for Simmons Bedding (referred to as “10/20/05 8-K”), (xvi) Current Report
on Form 8-K filed December 13, 2005 for Simmons Bedding (referred to as
“12/13/05 8-K”), (xvii) Current Report on Form 8-K filed December 19, 2005 for
Simmons Bedding (referred to as “12/19/05 8-K”), (xviii) Current Report on Form
8-K filed April 4, 2006 for Simmons Company (referred to as “4/4/06 8-K”), (xix)
Current Report on Form 8-K filed April 13, 2006 for Simmons Company (referred
to
as “4/13/06 8-K”), (xx) Current Report on Form 8-K filed April 19, 2006 for
Simmons Company (referred to as “4/19/06 8-K”), (xxi) Current Report on Form 8-K
filed April 24, 2006 for Simmons Company (referred to as “4/24/06 8-K), (xxii)
Quarterly Report on Form 10-Q for the quarter ended April 1, 2006 for Simmons
Company (referred to as “4/1/06 10-Q”), (xxiii) Current Report on Form 8-K filed
May 31, 2006 for Simmons Company (referred to as “5/31/06 8-K”), (xxiv)
Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 for Simmons
Company (referred to as “7/1/06 10-Q”), (xxv) Current Report on Form 8-K filed
September 22, 2006 for Simmons Company (referred to as “9/22/06 8-K”), (xxvi)
Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 for
Simmons Company (referred to as “9/30/06 10-Q”), (xxvii) Current Report on Form
8-K filed October 5, 2006 for Simmons Company (referred to as “10/5/06 8-K”),
(xxviii) Current Report on Form 8-K filed December 6, 2006 for Simmons Company
(referred to as “12/6/06 8-K”), (xxviv) Current Report on Form 8-K filed
February 12, 2007 (referred to as “2/12/07 8-K”). Exhibits filed herewith have
been denoted by a pound sign (#).
Certificate
of Ownership and Merger of Simmons Company with and into
Simmons
Holdings,
Inc. (2003 10-K)
*3.2.1
The
Merger Agreement dated February 7, 2007 by and among Simmons Holdco,
Inc.,
Simmons Merger Company, and Simmons Company. (2/12/07
8-K)
*3.3
Amended
and Restated By-laws of Simmons Company. (2005 S-4)
*4.1
Indenture
(including form of note) dated as of December 19, 2003, among Simmons
Bedding Company (f/k/a THL Bedding Company), the Guarantors party
thereto
and Wells Fargo Bank Minnesota, National Association, as trustee.
(2003
10-K)
*4.1.1
Amendment
No. 1 to Simmons Company Securityholders’ Agreement. (12/06/06
8-K)
*4.2
Indenture
(including form of note) dated as of December 15, 2004 between Simmons
Company and Wells Fargo Bank, National Association, as trustee. (2005
S-4)
Lease
Agreement at Concourse between Concourse I, Ltd., as Landlord, and
Simmons
Bedding,
as Tenant, dated as of April 20, 2000, as amended. (9/30/00
10-Q)
*10.3.1
Second
Amendment to Lease Agreement at Concourse between Teachers Concourse,
LLC,
as Landlord, and Simmons Bedding, as Tenant, dated as of October6, 2006.
(9/30/06 10-Q)
*10.4
Lease
between Beaver Ruin Business Center-Phase V between St. Paul
Properties,
Inc.,
as Landlord, and Simmons Bedding, as Tenant, dated as of October19, 1994,
as
amended
by Addendum to Lease, dated as of September 1, 1995. (1999
S-4)
*10.5
Loan
Agreement, dated as of November 1, 1982, between the City of
Janesville,
Wisconsin
and Simmons Bedding, as successor by merger to Simmons
Manufacturing
Company,
Inc., relating to $9,700,000 City of Janesville,
Wisconsin
Industrial
Development Revenue Bond, Series A. (1999 S-4)
*10.6
Loan
Agreement between the City of Shawnee and Simmons Bedding 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 as of December 1, 1996 relating
to
$5,000,000
Private Activity Revenue Bonds, Series 1996. (1999 S-4)
*10.7
Loan
Agreement dated as of December 12, 1997 between Simmons Caribbean
Bedding,
Inc.
and Banco Santander Puerto Rico. (1999 S-4)
*10.8
Simmons
Retirement Savings Plan adopted February 1, 1987, as amended
and
Senior
Manager Amended and Restated Restricted Stock Agreement dated as
of April17, 2006, among Simmons Company and William S. Creekmuir. (4/24/2006
8-K)
*10.17
Senior
Manager Restricted Stock Agreement dated as of December 19, 2003,
between
THL
Bedding Company and Rhonda C. Rousch. (2003 10-K)
10.17.1
Amended
and Restated Restricted Stock Agreement dated as of April 17, 2006,
among
Simmons Company and Rhonda C. Rousch. (4/24/06 8-K)
*10.18
Restricted
Stock Agreement dated as of December 19, 2003, between THL
Bedding
Holding
Company and the Persons named therein. (2003 10-K)
*10.19
THL
Bedding Holding Company Equity Incentive Plan. (2003
10-K)
*10.19.1
Amended
and Restated Simmons Company Equity Incentive Plan. (12/06/06
8-K)
*10.20
THL
Bedding Holding Company Deferred Compensation Plan. (2003
10-K)
*10.21
Employment
Agreement dated as of December 19, 2003, among THL Bedding
Holding
Company,
Simmons Company and Charles R. Eitel. (2003 10-K)
*10.21.1
Supplement
to Employee Agreement dated December 7, 2005 between Charles R. Eitel
and
Simmons
Company and Simmons Bedding Company. (12/13/05 8-K)
*10.23
Employment
Agreement dated as of December 19, 2003, among THL Bedding
Holding
Supplement
to Employee Agreement dated December 9, 2005 between William S.
Creekmuir
and
Simmons Company and Simmons Bedding Company. (12/13/05
8-K)
*10.25
Management
Subscription and Stock Purchase Agreement dated as of December 19,2003,
by
and among THL Bedding Holding Company and the Persons named therein.
(2003
10-K)
*10.26
Amended
and Restated Credit and Guaranty Agreement, dated as of August 27,2004,
among
Simmons
Bedding Company, as Company, THL-SC Bedding Company and certain
subsidiaries
of
the Company, as Guarantors, the financial institutions listed therein,
as
Lenders, UBS Securities LLC, as Joint Lead Arranger and as Co-Syndication
Agent, Deutsche Bank AG, New
York
Branch, as Administrative Agent and Collateral Agent, General Electric
Capital Corporation, as Co-Documentation Agent, CIT Lending Services
Corporation, as Co-Documentation Agent, and Goldman Sachs Credit
Partners
L.P., as Sole Bookrunner, a Joint Lead Arranger and as Co-Syndication
Agent. (9/02/04 8-K)
*10.26.1
First
Amendment dated December 16, 2005 to the Amended and Restated Credit
and
Guaranty
Agreement dated as of August 27, 2004. (12/19/05 8-K)
*10.26.2
Second
Amended and Restated Credit and Guaranty Agreement, dated as of May25,2006, among Simmons Bedding Company, as Company, THL-SC Bedding Company
and certain subsidiaries of the Company, as Guarantors, the financial
institutions listed therein, as Lenders, Goldman Sachs Credit Partners
L.P., as Sole Bookrunner, Lead Arranger and Syndication Agent, Deutsche
Bank AG, New York Branch, as Administrative Agent and Collateral
Agent,
General Electric Capital Corporation, as Co-Documentation Agent and
Cit
Lending Services Corporation, as Co-Documentation Agent. (5/31/06
8-K)
*10.26.3
First
Amendment dated February 9, 2007 to the second amended and restated
credit
and guaranty agreement dated May 25, 2006. (2/12/07
8-K)
*10.27
Senior
Unsecured Term Loan and Guaranty Agreement, dated December 19, 2003,
among
THL
Bedding Company, as Company, THL-SC Bedding Company and certain
subsidiaries
of
the Company, as Guarantors, the financial institutions listed therein,
as
Lenders, Goldman
Sachs
Credit Partners L.P., as Sole Bookrunner, a Joint Lead Arranger and
as
Co-Syndication
Agent,
UBS Securities LLC, as Joint Lead Arranger and as Co-Syndication
Agent,
and
Deutsche
Bank AG, New York Branch, as Administrative Agent. (2003
10-K)
*10.28
Assumption
Agreement, dated December 19, 2003, made by Simmons Holdings,
Inc.,
Simmons
Company and certain subsidiaries of Simmons, as Guarantors, in favor
of
Deutsche
Bank, AG, New York Branch, as Administrative Agent for banks and
other
financial
institutions or entities, the Lenders, parties to the Credit Agreement
and
Term Loan Agreement. (2003 10-K)
*10.29
Pledge
and Security Agreement dated December 19, 2003, between each of the
grantors
party
thereto and Deutsche Bank AG, New York Branch, as the Collateral
Agent.
(2003 10-K)
*10.30
2002
Stock Option Plan. (2002 10-K)
*10.31
Simmons
Company Employee Stock Ownership Plan adopted January 31, 1998, as
amended
Offer
of Employment dated as of July 14, 2005, among Simmons Bedding and
Robert
P.
Burch.
(8/4/05 8-K)
*10.32.1
Non-Compete
Agreement dated as of July 14, 2005, among Simmons Bedding and Robert
P.
Burch.
(8/4/05 8-K)
*10.32.2
Relocation
Agreement dated as of July 14, 2005, among Simmons Bedding and Robert
P.
Burch.
(8/4/05 8-K)
*10.33
Offer
of Employment dated as of August 3, 2005, among Simmons Bedding and
Stephen
G.
Fendrich. (8/12/05 8-K)
*10.33.1
Non-Compete
Agreement dated as of August 3, 2005, among Simmons Bedding and
Stephen
G.
Fendrich. (8/12/05 8-K)
*10.33.2
Relocation
Agreement dated as of August 3, 2005, among Simmons Bedding and Stephen
G.
Fendrich. (8/12/05 8-K)
*10.34
General
Release and Separation Agreement dated as of August 9, 2005, among
Simmons
Bedding,
Simmons Company and Robert W. Hellyer. (8/12/05 8-K)
*10.35
Restricted
Stock Agreement dated as of September 9, 2005, between Simmons
Company
and
Robert P. Burch. (9/21/05 8-K)
*10.35.1
Amended
and Restated Restricted Stock Agreement dated as of April 17, 2006,
among
Simmons Company and Robert P. Burch. (4/24/06 8-K)
*10.36
Restricted
Stock Agreement dated as of September 9, 2005, between Simmons
Company
and
Timothy F. Oakhill. (9/21/05 8-K)
*10.36.1
Amended
and Restated Restricted Stock Agreement dated as of April 17, 2006,
amending earlier agreement dated December 19, 2003, between Simmons
Company and Timothy F. Oakhill. (4/24/06 8-K)
*10.36.2
Amended
and Restated Restricted Stock Agreement dated as of April 17, 2006,
amending earlier agreement dated September 9, 2005, between Simmons
Company and Timothy F. Oakhill. (4/24/06 8-K)
*10.37
Restricted
Stock Agreement dated as of March 31, 2006, between Simmons Company
and
Stephen G. Fendrich. (4/4/06 8-K)
*10.37.1
Amended
and Restated Restricted Stock Agreement dated as of April 18, 2006,
between Simmons Company and Stephen G. Fendrich. (4/24/06
8-K)
*10.38
Restricted
Stock Agreement dated as of March 31, 2006, between Simmons Company
and
Kristen K. McGuffey. (4/6/06 8-K)
*10.38.1
Amended
and Restated Restricted Stock Agreemented dated as of April 17, 2006,
between Simmons Company and Kristen K. McGuffey. (4/24/06
8-K)
*10.39
Offer
of Employment dated as of March 30, 2006, between Simmons Bedding
and
Kimberly A. Samon. (4/13/06 8-K)
*10.40
Non-Compete
Agreement dated as of April 7, 2006, between Simmons Bedding and
Kimberly
A. Samon. (4/13/06 8-K)
*10.41
General
Release and Separation Agreement dated as of March 31, 2006, among
Simmons
Bedding, Simmons Company and Rhonda C. Rousch. (4/19/06
8-K)
*10.42
Amended
and Restated Restricted Stock Agreement dated as of April 18, 2006,
among
Simmons Company and Robin Burns-McNeill. (4/24/06 8-K)
*10.43
Amended
and Restated Restricted Stock Agreement dated as of April 18, 2006,
among
Simmons Company and William P. Carmichael. (4/24/06
8-K)
*10.44
Amended
and Restated Restricted Stock Agreement dated as of April 18, 2006,
among
Simmons Company and B. Joseph Messner. (4/24/06 8-K)
*10.45
Amended
and Restated Restricted Stock Agreement dated as of April 18, 2006,
among
Simmons Company and David A. Jones. (4/24/06 8-K)
*10.46
Purchase
Agreement by and among Simmons Bedding Company, Simmons Acquisition,
Inc.,
SCI Income Trust and Simmons Canada Inc. dated as of September 20,2006.
(9/22/06 8-K)
*10.47
Restricted
Stock Agreement dated as of May 4, 2006, between Simmons Company
and
Kimberly A. Samon. (4/1/06 10-Q)
*10.48
Restricted
Stock Agreement dated as of September 29, 2006, between Simmons Company
and Kristen K. McGuffey. (10/5/06 8-K)
*10.49
Restricted
Stock Agreement dated as of September 29, 2006, between Simmons Company
and Timothy F. Oakhill. (10/5/06 8-K)
*10.50
Employment
Agreement dated as of November 10, 2006, among Simmons Company, Simmons
Bedding Company and Gary S. Matthews. (9/30/06 10-Q)
*10.51
Management
Subscription and Stock Purchase Agreement dated as of December 1,2006, by
and among Simmons Company and Gary S. Matthews. (12/06/06
8-K)
*10.52
Restricted
Stock Agreement dated as of December 1, 2006, between Simmons Company
and
Gary S. Matthews. (12/06/06 8-K)
*10.53
Stock
Option Agreement dated as of December 1, 2006, between Simmons Company
and
Gary S. Matthews. (12/06/06 8-K)
*10.54
Restricted
Stock Agreement dated as of September 29, 2006, between Simmons Company
and Kimberly A. Samon. (10/5/06 8-K)
*10.55
Unit
Purchase Agreement by and among ST San Diego, LLC, Sleep Country
USA,
Inc., SC Holdings, Inc. and Simmons Bedding Company. (7/1/06
10-Q)
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
KNOW
ALL
THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints William S. Creekmuir, jointly and severally, his or
her
attorneys-in-fact, each with full power of substitution, for him in any and
all
capacities, to sign any and all amendments to this Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that
each said attorneys-in-fact or his substitutes, may do or cause to be done
by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
