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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended NOVEMBER 30, 1997 Commission file number 1-8738
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SEALY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET
SEATTLE, WASHINGTON 98101
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(Address of principal executive offices)* (Zip Code)
Registrant's telephone number, including area code (206) 625-1233
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants to Purchase Class B Common Stock
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 23, 1998 was $49,419,835.
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. [_]
The number of shares of the registrant's common stock outstanding as of
February 23, 1998 was 30,344,756.2711.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
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PART I
ITEM 1. BUSINESS
GENERAL
Sealy Corporation (the "Company" or the "Parent"), through its subsidiaries,
is the largest bedding manufacturer in North America and manufactures,
distributes and sells a broad line of conventional bedding products including
mattresses and foundations. The Company's conventional bedding products include
the SEALY(R), SEALY POSTUREPEDIC(R), SEALY POSTUREPEDIC CROWN JEWEL(R), SEALY
CORRECT COMFORT(R), and the STEARNS & FOSTER(R) brands and account for
approximately 99% of the Company's total net sales for the year ended November
30, 1997. In January, 1997, the Company completed the sale of its Samuel
Lawrence subsidiary and no longer manufactures or markets wood furniture. The
Company has a components parts manufacturing subsidiary which produces
substantially all of the Company's mattress innerspring requirements and
approximately 50% of the Company's boxspring component parts requirements.
Another subsidiary, Sealy, Inc., provides corporate and administrative services
for the Company.
HISTORY OF THE COMPANY
The Company was founded in 1907 under the name Ohio Mattress Company. In
1924, the Company was granted its first license to produce Sealy-brand products.
Starting in 1956, the Company began acquiring Sealy-brand licenses in other
geographic areas, and by 1987, had acquired all of the capital stock of its
licensor, then named Sealy, Incorporated (which prior to that time was
independent of the Company), along with all but one of the remaining Sealy
conventional bedding domestic licensees. The Company expanded its bedding
manufacturing operations in 1983 by acquiring Stearns & Foster, a producer of
premium mattresses, boxsprings and convertible sleep sofas. In 1985, the
Company acquired Woodstuff Manufacturing, Inc., a manufacturer of waterbed
furniture, which with a later decline of waterbed sales was converted to
manufacturing solely conventional wood bedroom furniture and doing business as
Samuel Lawrence Furniture Company. In January, 1997, the Company completed the
sale of its Samuel Lawrence subsidiary and no longer manufactures or markets
wood furniture.
In 1989, the Company's common stock was acquired through a leveraged buyout
(the "LBO") which was financed in part by First Boston Securities Corporation
("FBSC"), an affiliate of The First Boston Corporation ("First Boston"). In
April 1990, the Company exchanged certain outstanding debt issued to FBSC for
new debt at lower interest rates plus additional common stock (the "Exchange").
In December 1990, FBSC transferred its equity and debt interest in the Company
to its affiliate MB L.P. I ("MBLP"). In November 1991, the Company successfully
completed a recapitalization in which the Company's capital structure was
significantly improved, the face amount of its indebtedness and interest thereon
was reduced by approximately $417 million, the Company's interest expense
obligations were substantially reduced and the principal repayment schedule on a
portion of its existing bank term loan facility was extended. As a result of
this recapitalization, MBLP's equity interest in the Company increased to
approximately 94%, consisting of shares of Class A Common Stock, $.01 par value
(the "Shares").
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell/Chilmark"), led an investor group which purchased MBLP's 94%
equity interest in the Company (the "Acquired Shares") for a cash purchase price
of $250 million (the "Acquisition").
On May 7, 1993, the Company completed a refinancing plan which consisted of
(i) the sale of $200.0 million of 9 1/2% Senior Subordinated Notes Due 2003 (the
"Parent Notes") pursuant to a public offering, (ii) the application of $194.5
million of net proceeds therefrom to redeem all of the then outstanding 12.4%
Senior Subordinated Notes of the Company Due 2001 (approximately $139.6
million), and to reduce amounts outstanding under the Company's then existing
credit agreement and (iii) the execution of a new secured credit agreement (the
"1993 Credit Agreement") by and among the Company, certain banks and other
financial institutions and Banque Paribas, Citicorp USA, Inc., Bank of America
(formerly Continental Bank N.A.) and General Electric Capital Corporation, as
managing agents.
On May 27, 1994, the Company entered into a restated secured credit agreement
(the "1994 Credit Agreement") with a majority of its then current group of
senior lenders (the "Senior Lenders"), which modified the terms of the 1993
Credit Agreement by reducing the amounts available under its existing term loan
facilities thereunder from an aggregate of $250 million to a single facility of
$150 million (the "Term Loan Facility") and
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by increasing the amount available under its existing revolving credit facility
thereunder from $75 million to $125 million (the "Revolving Credit Facility").
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as
subsequently amended (the "Consent Solicitation"), the Company solicited
consents from the record holders (the "Registered Holders") of its Parent Notes
to certain amendments, consents and waivers under the Indenture (the
"Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank,
F.S.B., as successor trustee (the "Trustee"), under which the Parent Notes were
issued. Following receipt of the requisite consents of the Registered Holders,
on February 21, 1997, the Company and the Trustee executed a Supplemental
Indenture incorporating the amendments to the Indenture. The Supplemental
Indenture provided for (i) an increase in the interest rate on the Parent Notes
to 10 1/4%, (ii) provision to allow for the payment of a special dividend of up
to One Hundred Million Dollars ($100,000,000) (the "Dividend") to qualifying
equity security holders of the Company, (iii) an increase in the redemption
premiums paid to Registered Holders in the event the Parent Notes are
repurchased by the Company, and (iv) the corresponding waiver of Section 4.05 of
the Indenture, such that the Dividend will not constitute a "Restricted Payment"
(as defined in the Indenture). The Company paid an aggregate of Four Million
Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had
timely consented.
Concurrent with the distribution of the Consent Solicitation documentation,
the Company entered into negotiations for a new senior secured financing
facility. On February 25, 1997, the Company entered into the $275,000,000
Second Restated Secured Credit Agreement (the "1997 Credit Agreement") with a
majority of its then current group of senior lenders. The proceeds of the 1997
Credit Agreement were used (a) to refinance approximately $48.7 million of
indebtedness under the Company's 1994 Credit Agreement, (b) to pay a $99.8
million Dividend, and (c) for general corporate purposes, including, without
limitation, for working capital.
In December 1997, Sealy Mattress Company (the "Issuer"), a wholly owned
subsidiary of Parent, issued $125 million principal amount of 9 7/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes") and $128 million
principal amount of 10 7/8% Senior Subordinated Discount Notes due 2007 (the
"Senior Subordinated Discount Notes and, together with the Senior Subordinated
Notes, the "Notes"). The Issuer issued the Notes in a private placement (the
"Offerings") pursuant to separate Indentures, each dated as of December 18, 1997
(the "Indentures"). The Notes are guaranteed fully and unconditionally, and
jointly and severally on a senior subordinated basis (the "Note Guarantees"), by
Parent and certain of the Issuer's current and all of the Issuer's future U.S.
Subsidiaries ("the Subsidiary Guarantors" and together with the Parent, the
"Guarantors"). The Notes are not guaranteed by certain of the Issuer's U.S.
Subsidiaries or by any of its current or future foreign subsidiaries.
Pursuant to an agreement entered into in connection with the private
placement of the Notes, the Company is required to file a registration statement
(the "Exchange Offer Registration Statement") relating to $125 million and $128
million principal amount of the 9 7/8% and 10 7/8% Senior Subordinated Notes and
Senior Subordinated Discount Notes, respectively, due 2007 (the "Exchange
Notes") to be issued in an exchange offer for the original Notes. The Exchange
Notes will have terms substantially identical in all material respects to the
Notes and will be guaranteed by the Guarantors on the same basis as the Notes.
The Company intends to register the Exchange Notes using Form S-4.
On December 18, 1997, concurrent with the consummation of the Offerings, the
Company consummated (i) a merger whereby, among other things, funds managed by
Bain Capital, Inc., together with other equity investors, including members of
management (the "Management Investors" and collectively with the other
investors, the "Investors"), acquired an approximate 90% economic equity stake
and an approximate 84.8% voting stake in Parent, (ii) a tender offer to purchase
for cash all of the Parent Notes and the related Consent Solicitation to modify
certain terms of the Indenture and (iii) a refinancing whereby the Issuer issued
the Notes, entered into and borrowed under the Senior Credit Agreements as
defined herein and repaid Parent indebtedness outstanding under the 1997 Credit
Agreement. Approximately 99% of the Parent Notes were purchased as a result of
the tender offer and the Parent has a call in May 1998 with respect to the
remaining outstanding Parent Notes. As a result of the above merger, the
warrants to purchase Class B Common Stock of the Company, upon exercise, are now
only entitled to receive the same cash consideration paid in the above merger to
holders of the Company's Class B Common Stock. As part of the above merger all
of the Company's Series A Warrants were redeemed at a redemption price per
Warrant of $0.9411 and Series B Warrants were redeemed at a redemption price per
Warrant of $0.3777. This redemption was completed on February 3, 1998. The
above merger has been accounted for as a recapitalization.
CONVENTIONAL BEDDING
Industry and Competition. According to industry sales data compiled by the
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International Sleep Products Association ("ISPA"), a bedding industry trade
group, approximately 800 manufacturers of mattresses and foundations make up the
domestic conventional bedding industry, generating wholesale revenues estimated
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at $3.4 billion during calendar year 1997. The market for conventional bedding
represents more than 85% of the entire bedding market in North America.
According to ISPA, approximately 75% of conventional bedding is sold to
furniture stores and specialty sleep shops. Most of the remaining conventional
bedding is sold to department stores, national mass merchandisers, membership
clubs and contract customers such as motels, hotels and hospitals. Management
estimates that approximately two-thirds of conventional bedding is sold for
replacement purposes and that the average time between consumer purchases of
conventional mattresses is approximately 10 to 12 years. Factors such as
disposable income and sales of homes also have some effect on bedding purchases.
Management believes that sales by companies with recognized national brands
account for more than half of total conventional bedding sales. The Company
supplies such nationally recognized brands as Sealy, Sealy Posturepedic, Sealy
Posturepedic Crown Jewel, Sealy Correct Comfort, and Stearns & Foster. Sealy
branded products are considered by management to be the most well-recognized in
the domestic conventional bedding industry. Competition in conventional bedding
is generally based on quality, brand name recognition, service and price. The
Company's largest competitors include Simmons Company, Serta, Inc. and Spring
Air Company. Management believes the Company derives a competitive advantage
over its conventional bedding competitors as a result of strong consumer
recognition of Sealy branded products.
Products. The Company manufactures a variety of Sealy and Stearns & Foster
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brand conventional bedding in various sizes ranging in retail price from under
$200 to approximately $3,000 per queen size set. Sealy Posturepedic brand
mattress is the largest selling mattress brand in North America. Approximately
97% of the Sealy brand and the Stearns & Foster brand conventional bedding
products sold in North America are produced by the Company, with the remainder
being produced by Sealy Mattress Company of New Jersey, Inc. ("Sealy New
Jersey"), a licensee. The Stearns & Foster product line consists of top quality,
premium mattresses sold under the Stearns & Foster brand name.
Customers. The Company serves over 7,000 retail outlets (approximately 3,200
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customers), which include furniture stores, national mass merchandisers,
specialty sleep shops, department stores, contract customers and other stores.
The top five conventional bedding customers accounted for approximately 21% of
the Company's net sales for the year ended November 30, 1997 and no single
customer accounted for over 10% of the Company's net sales.
Sales and Marketing. The Company's sales depend primarily on its ability to
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provide quality products with recognized brand names at competitive prices.
Additionally, the Company works to build brand loyalty with its ultimate
consumers, principally through targetted national advertising and cooperative
advertising with its dealers, along with superior "point-of-sale" materials
designed to emphasize the various features and benefits of the Company's
products which differentiate them from other brands.
The Company's sales force structure is generally based on regions of the
country and districts within those regions, and also includes a sales staff for
specific national accounts. The Company believes that it has one of the most
comprehensive training and development programs for its sales force, including
its University of Sleep/R/ curriculum, which provides ongoing training sessions
with programs focusing on advertising, merchandising and sales education,
including techniques to help analyze a dealer's business and profitability.
The Company's sales force emphasizes follow-up service to retail stores and
provides retailers with promotional and merchandising assistance as well as
extensive specialized professional training and instructional materials.
Training for retail sales personnel focuses on several programs, designed to
assist retailers in maximizing the effectiveness of their own sales personnel,
store operations, and advertising and promotional programs, thereby creating
loyalty to, and enhanced sales of, the Company's products.
Suppliers. The Company purchases fabric, polyfiber, wire and foam from a
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variety of vendors. The Company purchases approximately 50% of its Sealy
foundation parts from a single third-party source, which has patents on various
interlocking wire configurations (the "Wire Patents"), and manufactures the
remainder of these parts as a licensee under the Wire Patents. The Company
purchases substantially all of its Stearns & Foster foundation parts from the
same single third-party source. In order to reduce the risks of dependence on
external supply sources and to enhance profitability, the Company has expanded
its own internal components parts manufacturing capacity and, as a licensee of
the Wire Patents, internally produces the remainder of its Sealy foundation
parts. See "Components Division." As is the case with all of the Company's
product lines, the Company does not consider itself dependent upon any single
outside vendor as a source of
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supply to its conventional bedding business and believes that sufficient
alternative sources of supply for the same, similar or alternative components
are available.
Manufacturing and Facilities. The Company manufactures most conventional
-----------------------------
bedding to order and has adopted "just-in-time" inventory techniques in its
manufacturing process to more efficiently serve its dealers' needs and to
minimize their inventory carrying costs. Most bedding orders are scheduled,
produced and shipped within 72 hours of receipt. This rapid delivery capability
allows the Company to minimize its inventory of finished products and better
satisfy customer demand for prompt shipments.
The Company operates 25 bedding manufacturing facilities and three component
manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico and
Mexico. Management believes that through the utilization of extra shifts, it
will be able to continue to meet growing demand for its products without a
significant investment in facilities. See Item 2, "Properties," herein. The
Company also operates a research and development center in Cleveland, Ohio with
a staff which tests new materials and machinery, trains personnel, compares the
quality of the Company's products with those of its competitors and develops new
processes. The Company has developed and patented a computerized model of an
adult person, known as Dataman(R), which is used in testing the support level of
its mattresses.
COMPONENTS DIVISION
The Company operates a Components Division with headquarters in Rensselaer,
Indiana. The Components Division sells its component parts at current market
prices exclusively to the Company's bedding plants and licensees. The
Components Division currently provides substantially all of the Company's
mattress innerspring unit requirements. The Components Division also supplies
approximately 50% of the Company's Sealy foundation parts requirements under a
license of the Wire Patents. In March 1997, the Company divested the assets of
its mattress insulator pad manufacturing operation in South Brunswick, New
Jersey. The Components Division operates three owned manufacturing sites
located in Rensselaer, Indiana; Delano, Pennsylvania, and Colorado Springs,
Colorado See Item 2, "Properties," herein.
Over the last eight years, the Company has made substantial commitments to
ensure that the coil-making equipment at its component plants remains state-of-
the-art. Since 1989, the Company has installed 30 automated coil-producing
machines. This equipment has resulted in higher capacity at lower per-unit
costs and has increased self-production capacity for the Company's innerspring
requirements over that time period from approximately 60% to approximately 100%.
In addition to reducing the risks associated with relying on single sources
of supply for certain essential raw materials, the Company believes the vertical
integration resulting from its component manufacturing capability provides it
with a significant competitive advantage. The Company believes that it is the
only conventional bedding manufacturer in the United States with substantial
innerspring and form wire component-making capacity.
WOOD FURNITURE
The Company manufactured and marketed conventional bedroom furniture through
its Samuel Lawrence subsidiary under the Samuel Lawrence label. In 1996, Samuel
Lawrence had approximately 500 customers as one of many manufacturers of wood
bedroom furniture. In January, 1997, the Company completed the sale of its
Samuel Lawrence subsidiary and no longer manufactures wood bedroom furniture.
LICENSING
At November 30, 1997, there are 14 separate license arrangements in effect
with domestic independent and foreign independent licensees. Sealy New Jersey (a
bedding manufacturer), Sealy Furniture of Maryland (a sleep sofa manufacturer)
and Kolcraft Enterprises, Inc. (a crib mattress manufacturer) are the only
domestic manufacturers that are licensed to use the Sealy trademark, subject to
the terms of license agreements. Under license agreements between Sealy New
Jersey and the Company, Sealy New Jersey has the perpetual right to use certain
of the Company's trademarks in the manufacture and sale of Sealy brand and
Sterns & Foster brand products in the United States. Sealy entered into a long-
term license agreement with Klaussner Corporation Services ("Klaussner") on
December 19, 1996 under which Klaussner will manufacture and market sofas, sleep
sofas, chairs, recliners and other upholstered furniture products in North
America, primarily under the Sealy
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Furniture(TM) logo. During the fiscal year ended November 30, 1997, Sealy
entered into licensing arrangements with Pacific Coast Feather Company for the
manufacture and sale of pillows, comforters and mattress pads under the Sealy
brand name and Dorel Industries for the manufacture and sale of futons under the
Sealy Furniture brand name each with a commencement date of April 1, 1998.
The Company's licensing division generates royalties by licensing Sealy brand
technology and trademarks to manufacturers located throughout the world. The
Company also provides its licensees with product specifications, quality control
inspections, research and development, statistical services and marketing
programs. In the fiscal year ended November 30, 1997, the licensing division as
a whole generated royalties of approximately $6.8 million, which were accounted
for as a reduction of selling, general and administrative expenses in the
Consolidated Financial Statements included herein.
WARRANTIES
Sealy and Stearns & Foster bedding offer limited warranties on their
manufactured products. The periods for "no-charge" warranty service varies
among products. Prior to fiscal year 1995, such warranties ranged from one year
on promotional bedding to 20 years on certain Posturepedic and Stearns & Foster
bedding. All currently manufactured Sealy Posturepedic models, Stearns & Foster
bedding and some other Sealy-brand products offer a 10-year non-prorated
warranty service period. Historically, the Company's warranty costs have been
immaterial for each of its product lines.
TRADEMARKS AND LICENSES
The Company owns, among others, the Sealy and Stearns & Foster trademarks and
tradenames and also owns the Posturepedic, Posturepedic Crown Jewel, Correct
Comfort, Comfort Series, Dataman and University of Sleep trademarks, service
marks and certain related logos and design marks.
EMPLOYEES
As of November 30, 1997, the Company had 5,456 full-time employees.
Approximately 66% of the Company's employees at its 28 North American plants are
represented by various labor unions with separate collective bargaining
agreements. Due to the large number of collective bargaining agreements, the
Company is periodically in negotiations with certain of the unions representing
its employees. The Company considers its overall relations with its work force
to be satisfactory.
SEASONALITY/OTHER
The Company's business is somewhat seasonal, with lower sales usually
experienced during the first quarter of each fiscal year and higher bedding
sales usually experienced in the last three quarters of each fiscal year. See
Note 11 to the Consolidated Financial Statements of the Company included in Part
II, Item 8 herein.
Most of the Company's sales are by short term purchase orders. Since the
level of production of products is generally promptly adjusted to meet customer
order demand, the Company has 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).
The Company has three manufacturing facilities in Canada and one in Mexico
which comprise all of the Company's foreign-owned manufacturing operations at
November 30, 1997. The Company's licensee for Mexico agreed to terminate its
license permitting Sealy to enter the market directly, and commence production
in May 1996. The Company began marketing its Sealy brand in South Korea
through local distributors during 1995 upon expiration of its Korean license
agreement. In addition the Company has license agreements in Thailand, Japan,
the United Kingdom, Australia, New Zealand, South Africa, Israel and Jamaica.
Additional international test markets are currently operating in Spain and
Brazil. The Company does not derive a material portion of its sales or revenues
from its foreign-owned operations or from customers in any other foreign
country.
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ITEM 2. PROPERTIES
The offices of the Company are located at 520 Pike Street, Seattle,
Washington 98101. Corporate, licensing and marketing services are provided to
the Company by Sealy, Inc. (a wholly-owned subsidiary of the Company), located
in Cleveland, Ohio. The principal address of Sealy, Inc. is Halle Building,
10th Floor, 1228 Euclid Avenue, Cleveland, Ohio 44115.
The Company services certain national account customers in offices located in
Chicago, Illinois, and also administers component operations at its Rensselaer,
Indiana facility. The Company leases a research and development facility in
Cleveland, Ohio. The Company's leased facilities are occupied under leases
which expire from 1997 to 2015, including renewal options.
The following table sets forth certain information regarding manufacturing
facilities operated by the Company at February 23, 1998:
APPROXIMATE
SQUARE
LOCATION FOOTAGE TITLE
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UNITED STATES
Arizona Phoenix 76,000 Owned (a)
California Richmond 238,000 Owned (a)
South Gate 185,000 Owned (a)
Colorado Colorado Springs 70,000 Owned (a)
Denver 92,900 Owned (a)
Florida Orlando 97,600 Owned (a)
Georgia Atlanta 292,500 Owned (a)
Illinois Batavia 212,700 Leased (b)
Indiana Rensselaer 131,000 Owned (a)
Rensselaer 124,000 Owned (a)
Kansas Kansas City 102,600 Leased (a)
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned (a)
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Owned (a)
New York Albany 102,300 Owned (a)
North Carolina Lexington 97,400 Owned (a)
Ohio Medina 140,000 Owned (a)
Oregon Portland 140,000 Owned (a)
Pennsylvania Clarion 85,000 Owned (a)
Delano 143,000 Owned (a)
Tennessee Memphis 225,000 Owned (a)
Texas Brenham 220,000 Owned (a)
North Richland Hills 124,500 Owned (a)
CANADA
Alberta Edmonton 144,500 Owned
Quebec Saint Narcisse 76,000 Owned
Ontario Toronto 80,200 Leased
PUERTO RICO Carolina 58,600 Owned (a)
MEXICO Toluca 95,200 Owned
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3,934,600
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(a) The Company has granted a mortgage or otherwise encumbered its interest in
this facility as collateral for secured indebtedness.
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(b) The Company has subleased 76,000 square feet to an unrelated tenant.
The Company considers its present facilities to be generally well maintained
and in sound operating condition.
REGULATORY MATTERS
The Company's principal wastes are wood, cardboard and other nonhazardous
materials derived from product component supplies and packaging. The Company
also periodically disposes (primarily by recycling) of small amounts of used
machine lubricating oil and air compressor waste oil. The Company, generally,
is subject to the Federal Water Pollution Control Act, the Comprehensive
Environmental Response, Compensation and Liability Act and amendments and
regulations thereunder and corresponding state statutes and regulations. The
Company believes that it is in material compliance with all applicable federal
and state environmental statutes and regulations. Except as set forth in Item
3. "Legal Proceedings" below, compliance with federal, state or local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
should not have any material effect upon the capital expenditures, earnings or
competitive position of the Company. The Company is not aware of any pending
federal environmental legislation which would have a material impact on the
Company's operations. Except as set forth in Item 3, "Legal Proceedings," the
Company has not been required to make, and during the next two fiscal years,
does not expect to make any material capital expenditures for environmental
control facilities.
The Company's conventional bedding product lines are subject to various
federal and state laws and regulations relating to flammability and other
standards. The Company believes that it is in material compliance with all such
laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and
one of its subsidiaries are parties to an Administrative Consent Order ("ACO")
issued by the New Jersey Department of Environmental Protection ("DEP").
Pursuant to the ACO the Company and such subsidiary agreed to conduct soil and
groundwater investigation and remediation at the plant previously owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that
its manufacturing processes were a source of the contaminants found to exist
above regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.
The DEP previously approved both the Company's soil remediation plans and its
initial groundwater remediation plans. Further investigation in 1996 revealed
certain additional areas of soil contamination resulting from activities at the
South Brunswick facility prior to the Company's acquisition of the site. In
1997, the Company with DEP approval completed essentially all soil remediation
and conducted a pilot test for a Company-proposed revision to the groundwater
remediation program.
While the Company cannot predict the ultimate timing or cost to remediate
this facility based on facts currently known, management believes the previously
established accrual for site investigation and remediation costs is adequate to
cover the Company's reasonably estimable liability and does not believe the
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.
In March, 1994, the Company filed a claim in the U.S. District Court for the
District of New Jersey against former owners of the site and their lenders under
the Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. In March, 1997, the
Company received $1.7 million from a former owner of the site and one of the
lenders to the former owner in final settlement of this litigation.
In January 1997, the Company filed a claim in the U.S. District Court of New
Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability act seeking
contribution for site investigation and remedial costs. A parallel case seeking
a judgement of non-liability was filed by some (but not all) of these insurance
companies in the U.S. District Court for the Northern District of Ohio. The
Company is awaiting a ruling by the District Courts involved.
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The Company has also voluntarily proceeded to develop a remediation plan for
isolated soil and groundwater contamination at its Oakville, Connecticut
property that the Company believes is solely attributable to the manufacturing
operations of previous unaffiliated occupants. Based on the facts currently
known, management does not believe that resolution of this matter will have a
material adverse effect on the Company's financial position or future
operations.
On May 22, 1997, the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust final
judgments ("the Judgments") entered on December 30, 1964 and December 26, 1967.
These Judgments, among other things, prohibited the Company from suggesting
resale prices to its dealers. During the pendency of the Company's motion to
terminate the Judgments, and based upon allegations received by the Department
of Justice ("the Department") concerning a possible resale price maintenance
agreement with a Stearns & Foster dealer, the Department, on September 8, 1997,
issued to the Company a Civil Investigative Demand seeking documents relating
to, among other things, communications between the Company and dealers
concerning the retail price of mattresses. In response to the Civil
Investigative Demand, the Company produced certain documents and the deposition
of a Company executive was taken. Immediately following such document
production and deposition, the Department consented to the termination of the
Judgments and an order terminating the Judgments was entered by the Court on
September 19, 1997. After the Court terminated the Judgments, the Department
notified the Company on September 29, 1997 that it was limiting the Civil
Investigative Demand to certain narrow specifications. In October 1997, the
Company produced additional documents in response to the Civil Investigative
Demand. On November 24, 1997 the Company received a request from the Department
for clarification and additional information. The Company has responded to that
request.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As a result of the Recapitalization (see Note 16) effective on December 18,
1997, Merger Warrant holders, upon exercise of their Merger Warrants at a
conversion rate of 47.98 to 1 are entitled only to receive a cash payment of
$14.2927 which is the spread between the Recapitalization share price of
$14.3027 and the Merger Warrant exercise price of $0.01. As a result of the
Recapitalization, Warrants not exercised prior to such Recapitalization can no
longer be converted to Class B shares and upon subsequent exercise will receive
the same amount in cash without interest. As of December 17, 1997, the Company
forwarded to a third party paying agent the amount necessary to fund the future
cash requirements with respect to remaining then outstanding Merger Warrants and
Class B Common Stock.
The Company completed its redemption of all of the Company's Series A and
Series B warrants on February 3, 1998.
As of February 23, 1998, there are 15 holders of record of the Company's
Class A shares, 7 holders of record of the Company's Class B shares, 15 holders
of record of the Company's Class L shares and 7 holders of record of the
Company's Class M shares. See Note 16 to the Consolidated Financial Statements,
Part II, Item 8 herein for description of change in capital structure.
On May 17, 1996, a $35.5 million dividend was paid to all holders of record
as of May 7, 1996 of Sealy common stock and to holders of Merger Warrants. In
addition, on February 28, 1997, a $99.8 million dividend was paid to all holders
of record as of February 27, 1997 of Sealy common stock and to holders of Merger
Warrants. Prior to the May 17, 1996 dividend, no dividends had been paid on any
class of common equity of the Company during the prior three fiscal years of the
Company. The Company's Senior Credit Agreements and the indentures governing the
Notes (the "Indentures") limit the Company's ability to pay cash dividends to
its stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other data
of the Company (two periods of which are less than one year due to accounting
requirements for acquisition transactions) for the years ended November 30,
1997, December 1, 1996, November 30, 1995 and 1994, for the ten months ended
November 30, 1993, and for the two months ended January 31, 1993.
During the period from December 1, 1992 through November 30, 1997, the
Company's capital structure changed significantly, in large part as a result of
the Acquisition in February 1993. Due to required purchase accounting
adjustments relating to such transactions, and the resultant changes in control,
the consolidated financial and other data for each period reflected in the
following tables during this period are not comparable to such data for the
other such periods.
The selected consolidated financial and other data set forth in the following
tables have been derived from the Company's audited consolidated financial
statements. The report of KPMG Peat Marwick LLP, independent auditors, covering
the Company's Consolidated Financial Statements for the years ended November 30,
1997, December 1, 1996, and November 30, 1995, is included elsewhere herein.
These tables should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company included elsewhere herein.
9
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SUCCESSOR (a) PRE-SUCCESSOR (a)
------------------------------------------------------ -----------------
TEN TWO
YEAR YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
NOV.30, DEC. 1, NOV. 30, NOV. 30, NOV. 30, JAN. 31,
1997 1996 1995 1994 1993 1993
------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Net Sales $804.8 $697.6 $653.9 $697.7 $579.7 $103.5
Costs and expenses 764.2 672.8 610.9 641.6 531.0 100.9
Income before income tax
and extraordinary item cummulative
effect of change in accounting principle 40.6 24.8 43.0 56.1 48.7 2.6
Extraordinary loss (b) 2.0 -- -- -- 2.9 --
Cumulative effect of change in
accounting principle (c) 4.3 -- -- -- -- --
Net income (loss) $ 11.7 $ (0.5)(d) $ 19.5 $ 29.2 $ 24.7 $ 1.0
OTHER DATA:
- -----------
Depreciation and amortization of intangibles $ 24.1 $ 26.6 $ 24.2 $ 23.6 $ 19.1 4.3
Operating income (e) 72.0 53.6 74.0 89.5 79.9 9.3
EBITDA (f) 96.1 80.2 98.2 113.1 99.0 13.7
Capital expenditures 29.1 12.0 11.8 12.8 10.4 3.3
Interest expense, net 31.4 28.8 31.0 33.4 31.2 6.7
Ratio of EBITDA to interest expense,
net/(earnings deficiency) 3.1x 2.8x 3.2x 3.4x 3.2x 2.0x
Ratio of earnings to fixed charges/
(earnings deficiency) (g) 2.2x 1.8x 2.3x 2.5x 2.4x 1.4x
SUCCESSOR (a)
-----------------------------------------------------
11/30/97 12/01/96 11/30/95 11/30/94 11/30/93
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Balance Sheet Data:
Total assets $721.1 $739.9 $776.2 $810.6 $823.1
Long-term obligations 330.0 269.5 269.4 329.5 384.5
Total debt 330.0 288.1 286.9 349.9 406.2
Stockholders' equity 205.1 293.0 330.9 322.2 284.3
(a) The Company employed the purchase method of accounting for the February,
1993 Acquisition. Accordingly, historical financial and other data for the
Successor and Pre-Successor periods are not comparable.
(b) During 1997 and 1993, the Company recorded extraordinary losses of $2.0 and
$2.9 million, net of income tax of $1.4 and $1.5 million, respectively,
representing the remaining unamortized debt issuance costs related to long
term obligations repaid as a result of the refinancings in such years.
(c) During the fourth quarter of 1997, the Company changed its accounting policy
to comply with EITF 97-13, "Accounting for Costs Incurred in Connection with
a Consulting Contract That Combines Business Process Reengineering and
Information Technology Transformation," which resulted in a loss of $4.3
million, net of income tax of $2.9 million, representing the write-off of
previously capitalized costs as described in the EITF.
(d) On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly-owned subsidiary that manufactured and
marketed solid wood bedroom furniture under the "Samuel Lawrence" brand
name. The divestiture resulted in an aggregate book loss of $17.6 million,
which was recorded in the fiscal year ended December 1, 1996. The loss is
comprised of a loss on net assets held for sale of $11.8 million and income
tax expense of $5.8 million arising from the tax gain on the transaction.
(e) Operating income is calculated by adding interest expense, net to net sales
less costs and expenses.
(f) EBITDA is calculated by adding interest expense, net, income tax (benefit)
and depreciation and amortization of intangibles to net income (loss) before
extraordinary item and cummulative effect of change in accounting principle.
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to service and incur debt. EBITDA does not represent net
income or cash flows from operations as those terms are defined by generally
accepted accounting principles ("GAAP") and does not necessarily indicate
whether cash flows will be sufficient to fund cash needs.
10
(g) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income tax and extraordinary item plus
fixed charges. Fixed charges consist of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense which management believes is representative of the interest
component of rent expense.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997 COMPARED WITH YEAR ENDED DECEMBER 1, 1996
NET SALES. Net sales for the year ended November 30, 1997 ("Fiscal 1997"),
were $804.8 million, an increase of $107.2 million, or 15.4% from the year ended
December 1, 1996 ("Fiscal 1996"). This increase is attributable to a $168.3
million increase in conventional bedding sales offset by a $61.1 million
decrease in sales of wood bedroom furniture. Conventional bedding sales
increased 26.7% over the prior year, driven by a 24.1% increase in conventional
bedding unit shipments and a 2.1% increase in average unit selling price. These
increases were due to sales growth in the Posturepedic, Stearns & Foster and
promotional product lines, in addition to successful strategic distribution
initiatives. The increase in average unit selling price is primarily
attributable to the introduction of new or reengineered higher-end products.
The decrease in sales of wood bedroom furniture, sold under the Samuel
Lawrence brand, is due to the sale of this business on January 15, 1997. A
description of this business unit is provided in Note 14 to the Consolidated
Financial Statements.
COST OF GOODS SOLD. Cost of goods sold as a percentage of net sales
decreased 0.3% to 56.6%. This improvement is primarily attributable to the
impact of lower sales of the lower margin wood bedroom furniture, partially
offset by an increase in bedding cost of goods sold. The increase in bedding
cost of goods sold as a percentage of net sales is primarily attributable to the
introduction of lower price point Posturepedic products, along with selective
pricing initiatives, partially offset by economies of scale from increased sales
volume.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $45.3 million, and increased as a percent of net sales
from 31.1% to 32.6%. This increase was primarily attributable to increases in
bedding marketing spending of $35.1 million, delivery expenses of $5.7 million
and incentive compensation of $3.5 million. Increased marketing spending was
due to increased sales volume, along with an increased spending rate for
cooperative advertising and promotions. The increase in delivery expense was due
to the increase in sales volume. The Company also experienced a $4.9 million
increase in bad debt and other financing expenses, of which $4.0 million related
to the bankruptcy filing of Montgomery Ward.
EBITDA. EBITDA increased $15.9 million or 19.9%, to $96.1 million, or 11.9%,
of net sales for Fiscal 1997 versus $80.2 million, or 11.5% of net sales for
Fiscal 1996.
OPERATING INCOME. Operating income was $72.0 for Fiscal 1997, an increase of
$18.4 million or 34.4% over Fiscal 1996.
INTEREST EXPENSE. Interest expense, net for Fiscal 1997 increased $2.6
million primarily as a result of increased average debt levels resulting from
the February 1997 dividend and increased rate related to the February 1997
restructuring of the Parent Notes.
INCOME TAXES. The Company's effective income tax rates for Fiscal 1997 and
1996 differ from the Federal statutory rate because of the application of
purchase accounting, the effect of certain foreign tax rate differentials and
state and local income taxes. The Company's effective tax rate for Fiscal 1997
was approximately 55.4% compared to 102.0% for Fiscal 1996. The higher
effective tax rate for Fiscal 1996 was due primarily to taxes arising from the
Samuel Lawrence Divestiture and the impact of the permanent differences related
to the 1993 Acquisition. See Note 6 to the Consolidated Financial Statements.
EXTRAORDINARY ITEM. The Company recorded a $2.0 million charge, net of
income tax benefit of $1.4 million, representing the write-off of the remaining
unamortized debt issuance costs related to long-term obligations repaid as a
result of the February 25, 1997 refinancing.
11
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. During the fourth quarter
of 1997, the Company changed its accounting policy to comply with EITF 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract That
Combines Business Process Reengineering and Information Technology
Transformation," which resulted in a loss of $4.3 million, net of income tax of
$2.9 million, representing the write-off of previously capitalized costs
primarily related to the Company's new Business Systems project.
FISCAL 1996 COMPARED WITH FISCAL 1995
NET SALES. Net sales for the year ended December 1, 1996 ("Fiscal 1996"),
were $697.6 million, an increase of $43.7 million, or 6.7% from the year ended
November 30, 1995 ("Fiscal 1995"). This increase is primarily attributable to a
$37.0 million increase in conventional bedding sales and a $10.0 million
increase in wood bedroom furniture sales. These increases were partially offset
by the elimination of sleep sofa sales as a result of the closing of this
business unit in March, 1995.
The strong bedding sales performance represents an 8.2%, or $48.6 million
increase in conventional bedding unit shipments, offset partially by a 1.8% or
$11.6 million decrease in the average unit selling price. Increased unit volume
is attributed to increased distribution and same store sales of Stearns & Foster
luxury bedding, along with incremental placements of new Sealy Posturepedic
products. The decrease in average unit selling price is primarily attributable
to pricing initiatives and increased volume of lower priced Sealy Posturepedic
products.
Sales of wood bedroom furniture increased due to increase product
distribution and same store sales primarily due to favorable results from new
furniture collections.
COST OF GOODS SOLD. Cost of goods sold was $397.3 million for Fiscal 1996
compared to $362.4 million for Fiscal 1995, and increased from 55.4% to 56.9% of
net sales. This increase is primarily attributed to the previously mentioned
decrease in average unit selling price, the start-up costs associated with the
new insulator pad facility that was subsequently sold, and inflationary bedding
raw material increases.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $0.3 million, but decreased as a percent of net sales from
33.1% to 31.1%. Increased operating expenses of $17.1 million were partially
offset by a decrease in marketing spending of $14.1 million and a prior year
$2.7 million charge associated with closing the sleep sofa business. The
increase in operating expenses is due primarily to increases in incentive
bonuses and administrative and sales salaries. Additionally, the Company
incurred executive severance and transition expenses of $1.9 million. Marketing
spending declined from $117.8 million in Fiscal 1995 to $103.7 million in Fiscal
1996 as a result of adjustments in the Company's marketing strategies.
LOSS ON NET ASSETS HELD FOR SALE. Loss on net assets held for sale of $11.8
million relates to the Samuel Lawrence divestiture, and is comprised of excess
of net assets sold over the proceeds received, as well as transaction costs
related to the sale. See Note 14 to Consolidated Financial Statements.
PERFORMANCE SHARE PLAN. The Company recorded a non-cash charge of $4.5
million in Fiscal 1996, representing final year vesting in the Company's
Performance Share Plan (the "Plan"). During Fiscal 1995, the Company recorded a
non-cash credit of $13.3 million for the estimated reduction in the value of the
benefits issuable under the Plan. See Note 10 to Consolidated Financial
Statement.
EBITDA. EBITDA decreased $18.0 million, or 18.4%, to $80.2 million, or
11.5%, of net sales for Fiscal 1996 versus $98.2 million, or 15.0%, of net sales
for Fiscal 1995.
OPERATING INCOME. Operating income was $53.6 million for the year ended
December 1, 1996, a decrease of $20.4 million, or 27.6%, versus the year ended
November 30, 1995.
INTEREST EXPENSE. Interest expenses, net for Fiscal 1996 decreased $2.2
million primarily due to a $27.8 million decrease in average outstanding debt,
along with lower debt issuance cost amortization.
INCOME TAXES. The company's effective income tax rates for Fiscal 1996 and
1995 differ from the Federal statutory rate because of the application of
purchase accounting, the effect of certain foreign tax rate differentials and
state and local income taxes. The Company's effective tax rate for Fiscal 1996
was approximately 102% compared to 54.8% for Fiscal 1995. The higher effective
tax rate for Fiscal 1996 is
12
primarily due to taxes arising from the Samuel Lawrence Divestiture and the
impact of permanent differences related to the February 1993 Acquisition. See
Note 6 to the Consolidated Financial Statement.
NET INCOME (LOSS). For reasons set forth above, net income for Fiscal 1996
declined $20.0 million to a loss of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1997, the Company's principal sources of funds are cash flows
from operations and borrowings under the Revolving Credit Facility. The
Company's principal use of funds consists of payments of principal and interest
on its secured indebtedness, the dividend described below, capital expenditures
and interest payments on its outstanding Notes.
The 1997 Credit Agreement, the Parent Note Indentures, the
Senior Credit Agreements and the Indentures contain certain negative and
affirmative covenants including, but not limited to, requirements and
restrictions relating to capital expenditures, dividends, working capital, net
worth and other financial ratios. At November 30, 1997, the Company was in
compliance with the financial covenants contained in the 1997 Credit
Agreement and the Parent Note Indenture.
The Parent Notes are unsecured, subordinated obligations of Parent. Interest
on the Parent Notes is payable in semi-annual installments, currently at the
rate of 10 1/4% per annum (see below). The outstanding principal amount of the
Parent Notes is payable on May 1, 2003. The Parent Notes may be redeemed at the
option of the Company on or after May 1, 1998.
In March 1997, the Company divested the assets of its mattress insulator pad
manufacturing operation in South Brunswick, New Jersey for approximately net
book value.
On February 25, 1997, the Company entered into the 1997 Credit Agreement
with a majority of its then current group of senior lenders, which modified the
terms of the prior credit agreement by increasing the amounts available under
the revolving credit portion of the facility from $125.0 million to $275.0
million, and eliminating the term loan portion of such agreement, amending the
pricing terms, certain covenants and other provisions and revising the
composition of the lending group. The 1997 Credit Agreement provide for a
reducing revolving credit facility with a $25.0 million discretionary letter of
credit facility and a discretionary swing loan facility of up to $20.0 million.
On February 28, 1997, the Company made an initial borrowing under the 1997
Credit Agreement of $156.4 million. Letters of credit of $13.1 million also
were outstanding, leaving approximately $105.5 million of undrawn availability
under the 1997 Credit Agreement. The proceeds of the 1997 Credit
Agreement were used (a) to refinance approximately $48.7 million of indebtedness
under the Company's 1994 Credit Agreement, (b) to pay a $99.8 million
dividend, and (c) for general corporate purposes, including, without limitation,
for working capital.
On February 6, 1997, the board of directors of the Company authorized the
payment of a dividend to all stockholders and holders of certain warrants of
record as of February 27, 1997. The dividend, which was paid on February 28,
1997, amounted to approximately $99.8 million, or $3.31 per share, and was
financed through borrowings under the 1997 Credit Facility.
On January 15, 1997, the Company sold its subsidiary that manufactured wood
bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from the
Samuel Lawrence Divestiture amounted to $35.0 million, and the Company recorded
a loss of $17.6 million in connection with such transaction. The loss is
comprised of a loss on net assets held for sale of $11.8 million and income tax
expense of $5.8 million arising from the tax gain on the transaction. See Note
14 of Notes to Consolidated Financial Statements.
On October 30, 1997, Parent entered into an agreement and plan of merger (the
"Merger Agreement") with Sandman Merger Corporation, a transitory Delaware
merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell"). Zell owned approximately 87% of the issued and outstanding
common stock of Parent (the "Existing Common Stock"). Pursuant to the Merger
Agreement, upon the satisfaction of certain conditions, Sandman was merged with
and into Parent with Parent being the surviving corporation effective on
December 18, 1997 (the "Closing Date") and the Company was recapitalized (the
"Recapitalization") whereby certain equity investors, including members of
management, acquired an approximate 90.0% economic equity stake (84.8% voting
equity stake) in the Company. A portion of the issued and
13
outstanding shares of common stock of the Company was converted into the right
to receive aggregate cash equal to $419.4 million less (i) certain seller fees
and expenses and (ii) certain costs in connection with the extinguishment of
certain outstanding options and warrants of the Company and the remaining
portion was converted into voting preferred stock and then reconverted into
$25.0 million in aggregate principal amount of junior subordinated notes of the
Company and a retained voting common stock interest in the Company of
approximately 15.2%. Concurrent with the Recapitalization, the Company
refinanced existing indebtedness (the "Refinancing") by Sealy Mattress Company
(the "Issuer"), a wholly owned subsidiary of the Parent, entering into and
borrowing $460 million under the Senior Credit Agreements and by issuing $125
million of Senior Subordinated Notes and $128 million of Senior Subordinated
Discount Notes.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital Holdings, Inc.
("Harvard"), Sealy Investors 1 LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the Stockholders Agreement"). The Stockholders Agreement
(i) required that each of the parties thereto vote all of its voting securities
of Parent and take all other necessary or desirable actions to cause the size of
the Board of Directors of Parent to be established at seven members and to cause
three designees of the Bain Funds and one designee of Harvard to be elected to
the Board of Directors; (ii) granted Parent and the Bain Funds a right of first
offer on any proposed transfer of shares of capital stock of Parent held by
Zell, Harvard or the LLCs; (iii) granted Harvard a right of first offer on any
proposed transfer of shares of capital stock of Parent held by the Bain Funds;
(iv) granted tag-along rights on certain transfers of shares of capital stock of
Parent; (v) required the Stockholders to consent to a sale of Parent to an
independent third party if such sale is approved by holders of constituting a
majority of the then outstanding shares of voting common stock of Parent; and
(vi) except in certain instances, prohibits Zell from transferring any shares of
capital stock of Parent until the tenth anniversary of the date of the
consummation of the Recapitalization. Certain of the foregoing provisions of the
Stockholders Agreement terminate upon the consummation of an initial Public
Offering or an Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns &
Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a
California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and
Sealy Mattress Company of San Diego, a California corporation, to the capital of
the Issuer. Immediately after the Capital Contribution, the Issuer became the
only direct subsidiary of Parent and owns 100% of the operations of Parent. At
the Closing, Sandman was merged with and into Parent with Parent the surviving
corporation.
On November 18, 1997, Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its Parent Notes and a related solicitation (the "Consent
Solicitation") of consents to modify certain terms of the Indenture under which
the Parent Notes were issued (the "Parent Note Indenture"). The purchase price
to be paid in respect to validly tendered Parent Notes and related consents were
determined by a formula set forth in the offer to purchase with respect to the
Tender Offer. The Offerings were conditioned upon the consummation of the Tender
Offer for, and the obtaining of consents with respect to, at least a majority in
aggregate principal amount of the Parent Notes outstanding. Parent's obligation
to accept for purchase and to pay for the Parent Notes validly tendered pursuant
to the Tender Offer was conditioned upon, among other things, consummation of
the other elements of the Recapitalization.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility and a discretionary swing loan facility of up
to $20.0 million. Upon consummation of the Recapitalization, the Issuer entered
into the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a
credit agreement providing for Tranche A Term Loans and revolving borrowings
(the "Senior Revolving Credit Agreement" and, together with the Senior AXELs
Credit Agreement, the "Senior Credit Agreements"). The Senior Credit Agreements
provided for loans of up to $550.0 million, consisting of a $450.0 million term
loan facility (the "Term Loan Facility") and a $100.0 million revolving credit
facility (the "Revolving Credit Facility"). The Issuer distributed the proceeds
of the Term Loan Facility and its initial borrowings under the Revolving Credit
Facility to parent to provide a portion of the funds necessary to consummate the
Transactions. Indebtedness of the Issuer under the Senior Credit Agreements is
secured and guaranteed by Parent and certain of the Issuer's current and all of
the Issuer's future U.S. subsidiaries and will bear interest at a floating rate.
See Note 17 to the Consolidated Financial Statements for further details
14
regarding guarantees including consolidating condensed financial statements for
guarantors and non-guarantors. The Senior Credit Agreements will require the
Company to meet certain financial tests, including minimum levels of adjusted
EBITDA as determined in the agreements, minimum interest coverage and maximum
leverage ratio. The Senior Credit Agreements also contain covenants which,
among other things, limit capital expenditures, indebtedness and/or the
incurrence of additional indebtedness, investments, dividends, transactions with
affiliates, asset sales, mergers and consolidations, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other matters
customarily restricted in such agreements.
Indebtedness under the Senior Credit Agreements bears interest at a
floating rate. Indebtedness under the Revolving Credit Facility and the Term
Loans initially (subject to reduction based on attainment of certain leverage
ratio levels) bears interest at a rate based upon (i) the Base Rate (defined as
the highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in respect
of the Tranche A Term Loans and the loans under the Revolving Credit Facility
(the "Revolving Loans"), 1.50% in respect of the AXELs Series B, 1.75% in
respect of the AXELs Series C and 2.00% in respect of the AXELs Series D, or
(ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit Agreements)
for one, two, three or six months (or, subject to general availability, two
weeks or twelve months), in each case plus 2.25% in respect of Tranche A Term
Loans and Revolving Loans, 2.50% in respect of AXELs Series B, 2.75% in respect
of AXELs Series C and 3.00% in respect to AXELs Series D.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche A Term Loans are subject to quarterly
amortization payments commencing in December 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in December 1998 with the AXELs Series B amortizing in nominal
amounts until the maturity of the Tranche A Term Loans, the AXELs Series C
amortizing in nominal amounts until the maturity of the AXELs Series B and the
AXELs Series D amortizing in nominal amounts until the maturity of the AXELs
Series C. The Revolving Credit Facility matures in December 2002. In addition,
the Senior Credit Agreements provide for mandatory repayments, subject to
certain exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the ordinary
course of business of the Issuer and its subsidiaries, the net proceeds of
insurance, the net proceeds of certain debt and equity issuances, and excess
cash flow (as defined in the Senior Credit Agreements).
The Notes were issued pursuant to an Indenture (the "Senior Subordinated Note
Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Company, the Guarantors and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").
The Senior Subordinated Notes are limited in aggregate principal amount to
$300.0 million, of which $125.0 million was issued in the Offering, and matures
on December 15, 2007. Interest on the Senior Subordinated Notes accrue at the
rate of 9 7/8% per annum and is payable semi-annually in arrears on June 15 and
December 15 of each year, commencing on June 15, 1998, to Holders of record on
the immediately preceding June 1 and December 1. Additional Senior Subordinated
Notes may be issued from time to time after the date of the Senior Subordinated
Note Indenture, subject to the provisions of the Senior Subordinated Note
Indenture.
Except as provided below, the Senior Subordinated Notes are not redeemable at
the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time
15
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
2002.................. 104.937%
2003.................. 103.292%
2004.................. 101.646%
2005 and thereafter... 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued under
the Senior Subordinated Note Indenture at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; (as defined in the Indentures) provided that at least
$80.0 million in aggregate principal amount of Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Notes held by the Company and its Subsidiaries); and
provided further that such redemption shall occur within 120 days of the date of
the closing of any such Equity Offering.
The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in the
Offering, and mature on December 15, 2007. The Senior Subordinated Discount
Notes were offered at a substantial discount from their principal amount at
maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest
(other than liquidated damages, if applicable) will accrue or be paid in cash on
the Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the issuance
date and the Full Accretion Date, on a semi-annual bond equivalent basis.
Beginning on the Full Accretion Date, interest on the Senior Subordinated
Discount Notes will accrue at the rate of 10 7/8% per annum and will be payable
in cash semi-annually in arrears on June 15 and December 15 of each year,
commencing on June 15, 2003, to Holders of record on the immediately preceding
June 1 and December 1. Additional Senior Subordinated Discount Notes may be
issued from time to time after the date of the Senior Subordinated Discount Note
Indenture, subject to the provisions of the Senior Subordinated Discount Note
Indenture. Interest on the Senior Subordinated Discount Notes will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from the Full Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
2002.................. 105.437%
2003.................. 103.625%
2004.................. 101.812%
2005 and thereafter... 100.000%
16
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under the
Senior Subordinated Discount Note Indenture at redemption price of 110.875% of
the Accreted Value, plus accrued and unpaid Liquidated Damages thereon, if any,
to the redemption date, with the net cash proceeds of any Equity Offerings;
provided that at least $50.0 million in aggregate Accreted Value of Senior
Subordinated Discount Notes remain outstanding immediately after the occurrence
of such redemption (excluding Senior Subordinated Discount Notes held by the
Company and its Subsidiaries); and provided, further, that such redemption shall
occur within 120 days of the date of the closing of any such Equity Offering.
The Company made capital expenditures aggregating $29.1 million and $12.0
million during Fiscal 1997 and 1996, respectively. The increase in capital
spending in Fiscal 1997 was primarily attributable to the Company's upgrade of
its computer system. The Company has funded Fiscal 1997 capital expenditures
with cash generated by operations. Management believes that annual capital
expenditure limitations in the Senior Credit Agreements will not significantly
inhibit the Company from meeting its ongoing capital needs. At November 30,
1997, the Company had approximately $135.0 million available under its Revolving
Credit Facility with Letters of Credit issued totaling approximately $10.0
million. The Company's net weighted average borrowing cost was 9.0% for Fiscal
1997 and 1996.
FOREIGN OPERATIONS AND EXPORT SALES
The company has three manufacturing facilities in Canada and one in Mexico
which comprise all of the Company's foreign-owned manufacturing operations at
November 30, 1997. The Company's licensee for Mexico agreed to terminate its
license permitting Sealy to enter the market directly, and commence production
in May 1996. The Company began marketing its Sealy brand in South Korea
through local distributors during 1995 upon expiration of its Korean license
agreement. In addition the Company has license agreements in Thailand, Japan,
the United Kingdom, Australia, New Zealand, South Africa, Israel and Jamaica.
Additional international test markets are currently operating in Spain and
Brazil. The Company does not derive a material portion of its sales or revenues
from its foreign-owned operations or from customers in any other foreign
country.
NEW ACCOUNTING PRONOUNCEMENTS
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection with
an overall information technology transformation project should be expensed as
incurred (EITF 97-13). The transition provisions require companies that had
previously capitalized such business process reengineering costs to identify
these costs and quantify the unamortized amounts remaining on the balance sheet
as of the beginning of the quarter which includes November 20, 1997. These
unamortized amounts are required to be written off as a cumulative effect of a
change in accounting principle in such quarter. The Company has adopted EITF
97-13 resulting in a loss of $4.3 million, net of income tax benefit of $2.9
million, representing the cumulative write-off of previously capitalized costs
as of August 31, 1997 primarily relating to the Company's new Business Systems
project. All business process reengineering costs subsequent to August 31, 1997
have been expensed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earning per Share. SFAS No.
128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"), and
requires the calculation and dual presentation of basic and diluted earnings per
share ("EPS"), replacing the measures of primary and fully-diluted EPS as
reported under Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, earlier
application is not permitted. Accordingly, EPS presented on the accompanying
statements of income are calculated under the guidance of Opinion 15. Under
SFAS No. 128, the basic and diluted EPS on net income for Fiscal 1997 would have
been $0.39 and $0.38, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information", were
issued. The Company plans to adopt these standards when required in Fiscal
1999.
17
CHANGE IN FISCAL YEAR
A Form 8-K was filed October 11, 1995 reporting that the Board of Directors
of the Company approved the change of the Company's fiscal year from one ending
on November 30 in each year to a 52-53 week fiscal year. The first such fiscal
year commenced on Friday, December 1, 1995 and ended on the 53rd Sunday
thereafter or Sunday, December 1, 1996. Subsequent fiscal years will end on the
Sunday nearest the last day of November.
YEAR 2000 ISSUE
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant. The Company has conducted a comprehensive impact analysis
to determine what computing platforms and date-aware functions with respect to
its existing computer operating systems will be disrupted by the Year 2000
Issue. In January, 1998, the Company completed a prioritization of the impacted
areas identified to date and commenced the detailed program code changes through
a contracted third party vendor which has experience in Year 2000 conversions
for the Company's existing system including the same release of such system.
The Company is in the preliminary stages of assessment of its vendors and
customers status with respect to the Year 2000 Issue. The required code
changes, testing and implementation necessary to address the Year 2000 Issue is
projected to be completed by May, 1999, and is expected to cost approximately
$4.0 million.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although the Company believes its plans are based upon reasonable assumptions as
of the current date, it can give no assurances that such expectations can be
attained. Factors that could cause actual results to differ materially from the
Company's expectations include: general business and economic conditions,
competitive factors, raw materials pricing, and fluctuations in demand.
18
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19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Sealy Corporation
Consolidated Financial Statements
November 30, 1997 and December 1, 1996
(With Independent Auditors' Report Thereon)
20
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
Sealy Corporation:
We have audited the accompanying consolidated balance sheets of Sealy
Corporation and subsidiaries as of November 30, 1997 and December 1, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended November 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sealy Corporation
and subsidiaries as of November 30, 1997 and December 1, 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended November 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Cleveland, Ohio
January 7, 1998
21
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 30, December 1,
1997 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,057 $ 16,619
Accounts receivable, less allowance for doubtful
accounts (1997 - $7,696; 1996 - $6,814) 93,918 77,179
Inventories 46,007 33,992
Net assets held for sale -- 35,492
Prepaid expenses 7,935 2,587
Prepaid Taxes 14,594 1,522
Deferred income taxes -- 6,337
-------- --------
168,511 173,728
Property, plant and equipment - at cost:
Land 9,760 12,109
Buildings and improvements 53,890 53,741
Machinery and equipment 86,248 82,664
Construction in progress 19,705 7,549
-------- --------
169,603 156,063
Less accumulated depreciation 43,995 34,697
-------- --------
125,608 121,366
Other assets:
Goodwill - net of accumulated amortization
(1997 - $57,261; 1996 - $45,532) 406,778 428,460
Patents and other intangibles - net of accumulated
amortization (1997 - $6,540; 1996 - $5,187) 4,491 5,844
Debt issuance costs, net, and other assets 15,679 10,530
-------- --------
426,948 444,834
$721,067 $739,928
======== ========
See accompanying notes to consolidated financial statements.
22
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 30, December 1,
1997 1996
--------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long-term obligations $ --- $ 18,620
Accounts payable 49,676 35,797
Accrued expenses:
Customer incentives and advertising 30,704 20,704
Compensation 17,771 14,047
Other 20,200 23,691
Deferred income taxes 1,936 --
-------- --------
120,287 112,859
-------- --------
Long-term obligations 330,000 269,507
Other noncurrent liabilities 35,713 34,822
Deferred income taxes 30,001 29,746
Stockholders' equity:
Preferred stock, $.01 par value; Authorized,
10,000 shares; Issued, none -- --
Class A common stock, $.01 par value;
Authorized, 49,500 shares;
Issued (1997- 29,932; 1996 - 29,409) 299 294
Class B common stock, $.01 par value;
Authorized, 500 shares, Issued (1997 -
11; 1996 - 11) -- --
Additional paid-in capital 257,320 256,489
Retained (deficit) earnings (50,614) 37,418
Foreign currency translation adjustment (1,939) (1,207)
-------- --------
205,066 292,994
-------- --------
Commitment and contingencies -- --
-------- --------
$721,067 $739,928
======== ========
See accompanying notes to consolidated financial statements.
23
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24
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended
-------------------------------------------
November 30, December 1, November 30,
1997 1996 1995
-------------- ----------- -------------
Net sales $804,834 $697,638 $653,942
-------- -------- --------
Cost and expenses:
Cost of goods sold 455,905 397,259 362,416
Selling, general and
administrative
(including provisions for bad
debts of $4,528, $918 and $812,
respectively) 262,023 216,674 216,670
Loss on net assets held for sale -- 11,762 --
Stock based compensation 1,635 4,779 (13,260)
Amortization of intangibles 13,264 13,594 14,056
Interest expense, net 31,396 28,797 31,018
-------- -------- --------
Income before income taxes,
extraordinary item, and
cumulative effect of change in 40,611 24,773 43,042
accounting principle
Income taxes 22,509 25,279 23,572
-------- -------- --------
Income/(loss) before extraordinary
item and cumulative effect of
change in accounting principle 18,102 (506) 19,470
Extraordinary item - loss from early
extinguishment of debt (net of
income tax bnefit of $1,353)
(Note 16) 2,030 -- --
Cumulative effect of change in
accounting principle (net of
income tax benefit of $2,885)
(Note 15) 4,329 -- --
-------- -------- --------
Net income/(loss) $ 11,743 $ (506) $ 19,470
======== ======== ========
Earnings/(loss) per common share:
Before extraordinary item and
cumulative effect of change
in accounting principle $ 0.59 $ (0.02) $ 0.65
Extraordinary item (0.07) -- --
Cumulative effect of change in
accounting principle (0.14) -- --
-------- -------- --------
Net earnings/(loss) per common share $ 0.38 $ (0.02) $ 0.65
======== ======== ========
Weighted average number of common
shares and equivalents outstanding
and equivalents outstanding during
period 30,880 29,428 30,143
See accompanying notes to consolidated financial statements.
25
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class A Class B Foreign
--------------- --------------- Additional Retained Currency
Common Stock Common Stock Paid-in Earnings Translation
Shares Amount Shares Amount Capital (Deficit) Adjustment Total
------ ------ ------ ------ ---------- -------- ----------- ---------
November 30, 1994 29,434 $ 294 -- $-- $269,229 $ 53,917 $(1,207) $322,233
Net income -- -- -- -- -- 19,470 -- 19,470
Performance share plan -- -- -- -- (13,260) -- -- (13,260)
Management stock award 10 1 -- -- -- -- -- 1
Valuation adjustment on
common stock and warrants
subject to repurchase -- -- -- -- 2,300 -- -- 2,300
Stock options exercised 7 -- -- -- 67 -- -- 67
Warrants exercised -- -- 9 -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- 70 70
------ ------ ------ ------ ---------- -------- ----------- ---------
November 30, 1995 29,451 295 9 -- 258,336 73,387 (1,137) 330,881
Net loss -- -- -- -- -- (506) -- (506)
Performance share plan -- -- -- -- 4,510 -- -- 4,510
Management stock award 68 -- -- -- 269 -- -- 269
Valuation adjustment on
common stock and warrants
subject to repurchase -- -- -- -- (308) -- -- (308)
Warrants exercised -- -- 2 -- -- -- -- --
Repurchase of management stock (110) (1) -- -- -- -- -- (1)
Dividend -- -- -- -- -- (35,463) -- (35,463)
Withdrawals from performance
share plan -- -- -- -- (3,498) -- -- (3,498)
Shares tendered under
performance share plan -- -- -- -- (2,820) -- -- (2,820)
Foreign currency translation -- -- -- -- -- -- (70) (70)
------ ------ ------ ------ ---------- -------- ----------- ---------
December 1, 1996 29,409 294 11 -- 256,489 37,418 (1,207) 292,994
Net Income -- -- -- -- -- 11,743 -- 11,743
Management stock award 285 3 -- -- 1,299 -- -- 1,302
Performance share plan 233 2 -- -- (134) -- -- (132)
Exercised stock options 5 -- -- -- 29 -- -- 29
Valuation adjustment on
common stock and warrants
subject to repurchase -- -- -- -- (363) -- -- (363)
Dividend -- -- -- -- -- (99,775) -- (99,775)
Foreign currency translation -- -- -- -- -- -- (732) (732)
------ ------ ------ ------ ---------- -------- ----------- ----------
November 30, 1997 29,932 $ 299 11 $-- $257,320 $(50,614) $(1,939) $205,066
====== ====== ====== ====== ========== ======== =========== ==========
See accompanying notes to consolidated financial statements.
26
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
-----------------------------------------
November 30, December 1, November 30,
1997 1996 1995
------------ ----------- ------------
Cash flows from operating activities:
Net income/(loss) $ 11,743 $ (506) $ 19,470
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation 10,851 13,037 10,144
Cumulative effect of change in accounting principle 7,214 -- --
Extraordinary item - early extinguishment of debt 3,383 -- --
Loss on net assets held for sale -- 11,762 --
Loss on disposal of assets 1,061 178 813
Stock based compensation 1,165 4,779 (13,260)
Deferred income taxes 8,528 5,781 11,974
Amortization of:
Intangibles 13,264 13,594 14,056
Debt issuance cost 1,841 2,683 3,136
Other, net (4,449) 922 (1,502)
Changes in operating assets and liabilities:
Accounts receivable (16,739) (4,119) (3,975)
Inventories (12,015) (5,543) 7,267
Prepaid expenses (5,348) (821) 952
Prepaid taxes (3,119) (1,522) --
Accounts payable/accrued
expenses/other noncurrent liabilities 24,669 4,192 14,252
--------- -------- ---------
Net cash provided by operating activities 42,049 44,417 63,327
--------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (29,140) (12,045) (11,804)
Proceeds from sale of subsidiary 35,000 -- --
Proceeds from sale of property, plant and equipment 5,561 1,089 7,468
--------- -------- ---------
Net cash provided by (used in) investing activities 11,421 (10,956) (4,336)
--------- -------- ---------
Cash flows from financing activities:
Repayment of long-term obligations (63,127) (23,727) (62,952)
Net borrowing from Revolving Credit Facility 105,000 25,000 --
Dividend (99,775) (35,463) --
Debt issuance costs (6,130) -- --
---------- -------- ---------
Net cash used in financing activities (64,032) (34,190) (62,952)
--------- -------- ---------
Change in cash and cash equivalents (10,562) (729) (3,961)
Cash and cash equivalents:
Beginning of period 16,619 17,348 21,309
--------- -------- ---------
End of period $ 6,057 $ 16,619 $ 17,348
========= ======== =========
Supplemental disclosures:
Taxes paid, net $ 12,432 $ 14,334 $ 9,405
Interest paid, net $ 29,523 $ 26,487 $ 28,670
Other non-cash activity:
Goodwill reduction resulting from pre-acquisition
net operating loss utilization $ 9,953 -- --
See accompanying notes to consolidated financial statements.
27
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
(a) Business
--------
Sealy Corporation (the "Company" or the "Parent"), is engaged in the
home furnishings business and manufactures, distributes and sells conventional
bedding products including mattresses and foundations. Substantially all of the
Company's trade accounts receivable are from retail businesses. The Company
recognizes revenue upon shipment of goods to customers.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity at the time of purchase of three
months or less to be cash equivalents. Cash equivalents are stated at cost
which approximates market value.
(d) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are depreciated over their expected useful
lives principally by the straight-line method for financial reporting purposes
and by both accelerated and straight-line methods for tax reporting purposes.
(e) Amortization of Intangibles
---------------------------
Goodwill represents the excess of the purchase price paid over the fair
value of net assets acquired and is amortized on a straight-line basis over a
forty year period. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted future cash
flows. The amount of goodwill impairment, if any, would be measured based on
projected discounted future results using a discount rate reflecting the
Company's average cost of funds.
Other intangibles include patents and trademarks which are amortized on
the straight-line method over periods ranging from 5 to 20 years.
The costs related to the issuance of debt are capitalized and amortized
to interest expense using the effective-interest method over the lives of the
related debt.
(f) Earnings Per Common Share
-------------------------
Net earnings per common share is based upon weighted average number of
shares of the Company's common stock and common stock equivalents outstanding
for the periods presented. Common stock equivalents included in the
computation, using the treasury stock method, represent shares issuable upon the
assumed exercise of warrants, stock options and performance shares that would
have a dilutive effect in periods in which there were earnings.
28
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(g) 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 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 in income in the period that includes the enactment date.
(h) Advertising Costs
-----------------
The Company expenses all advertising costs as incurred. Advertising
expenses for the years ended November 30, 1997, December 1, 1996, and November
30, 1995 amounted to $97,314, $74,649 and $92,726, respectively.
(i) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Reclassification
----------------
Certain reclassifications of previously reported financial information
were made to conform to the 1997 presentation.
(k) Fiscal Year
-----------
Effective December 1, 1995, the Company changed its fiscal year end from
November 30 to a 52- or 53-week year ending on the Sunday closest to November
30. Accordingly, the 1997 fiscal year ended on November 30, the 1996 fiscal
year ended on December 1 and the 1995 fiscal year ended on November 30. All
general references to years relate to fiscal years unless otherwise noted.
(2) Inventories
Inventories are valued at cost not in excess of market, using the first-in,
first-out (FIFO) method. The major components of inventory as of November 30,
1997 and December 1, 1996 were as follows:
1997 1996
------- -------
(in thousands)
Raw materials $26,251 $18,300
Work in process 12,594 11,624
Finished goods 7,162 4,068
------- -------
$46,007 $33,992
======= =======
29
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Long-Term Obligations
Long-term debt as of November 30, 1997 and December 1, 1996 consisted of
the following:
1997 1996
-------- --------
(in thousands)
$275,000,000 Second Restated
Secured Credit Agreement-Revolving
Credit Facility $130,000 $ --
1994 Restated Credit Agreement:
Revolving Credit Facility -- 25,000
Term Loan Facility -- 63,052
10 1/4% Senior Subordinated Notes 200,000 200,000
Other -- 75
-------- --------
330,000 288,127
Less current portion -- 18,620
-------- --------
$330,000 $269,507
======== ========
On May 27, 1994, the Company entered into a restated secured credit agreement
(the "1994 Credit Agreement") with a majority of its then current group of
senior lenders (the "Senior Lenders"), which modified the terms of the 1993
Credit Agreement by reducing the amounts under its existing term loan facilities
thereunder from an aggregate of $250 million to a single facility of $150
million (the "Term Loan Facility") and by increasing the amount available under
its existing revolving credit facility thereunder from $75 million to $125
million (the "Revolving Credit Facility"). The Revolving Credit Facility
provided sublimits for a $30 million discretionary letter of credit facility
("Letters of Credit") and a discretionary swing loan facility of up to $5
million.
The $275,000,000 Second Restated Secured Credit Agreement (the "1997 Credit
Agreement") was consummated on February 25, 1997 and consists of a $275 million
reducing revolving credit facility with a $25 million discretionary letter of
credit facility and a discretionary swing loan facility of up to $20 million
("Revolving Credit Facility"). The 1997 Credit Agreement has a final maturity
date of January 15, 2003, and provides for periodic reductions in the amounts of
available credit in accordance with the following schedule:
Remaining
Commitment Revolver
Reduction Date Reduction Commitment
-------------- ----------- ------------
November 29, 1998 $15 million $260 million
November 28, 1999 $20 million $240 million
December 3, 2000 $30 million $210 million
December 2, 2001 $30 million $180 million
June 2, 2002 $30 million $150 million
Additional mandatory commitment reductions will occur equal to 100% of net
after-tax cash proceeds from any sale of assets in excess of $15 million in each
fiscal year, and equal to 50% of net proceeds from the issuance of permitted
subordinated debt.
30
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Base rate loans and Eurodollar rate loans are based on a pricing grid which
provides for an interest rate plus a margin. The margin is adjustable on the
Company's total senior debt to adjusted EBITDA ratio. For the first six months
of the 1997 Credit Agreement, the margin on the Eurodollar rate borrowing was
1.25%. In September, 1997, the margin decreased to 1.0% and remained as such
through November 30, 1997. The initial commitment fee, which is also subject to
a pricing grid, was 0.375% during the first six months of the 1997 Credit
Agreement. In September 1997, the commitment fee decreased to 0.3% and remained
as such through November 30, 1997.
During the twelve months ended November 30, 1997, the maximum amount
outstanding under the Revolving Credit Facility, excluding Letters of Credit,
was $160 million. At November 30, 1997, the Company had approximately $135
million available under the Revolving Credit Facility, with Letters of Credit
issued totaling approximately $10 million. The Company's net weighted average
borrowing cost was 9.0% for fiscal 1997 and 1996.
All obligations of the Company under the 1997 Credit Agreement are jointly
and severally guaranteed by each direct and indirect domestic subsidiary of the
Company and secured by the first priority liens on and security interests in
substantially all of the assets of the Company and its domestic subsidiaries and
by first priority pledges of substantially all of the capital stock of most of
the subsidiaries of the Company; however, such security is subject to release
upon the Company attaining specified senior unsecured (either actual or implied)
credit ratings. The Company also is subject to certain affirmative and negative
covenants under both the 1997 Credit Agreement and the Indenture relating to its
10 1/4% Senior Subordinated Notes due 2003, including requirements and
restrictions with respect to capital expenditures, dividends, maximum leverage
and other financial ratios.
The 10 1/4% (formerly 9 1/2%) Senior Subordinated Notes (the "Parent Notes")
sold pursuant to a public offering on May 7, 1993 mature on May 1, 2003 with
interest payable semiannually in cash on May 1 and November 1 of each year. The
Notes may be redeemed at the option of the Company on or after May 1, 1998,
under the conditions and at the redemption prices as specified in the note
indenture, dated as of May 7, 1993, under which the Parent Notes were issued
(the "Parent Note Indenture"). The Parent Notes are subordinated to all existing
and future Senior Debt of the Company as defined in the Parent Note Indenture.
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as
subsequently amended (the "Consent Solicitation"), the Company solicited
consents from the record holders (the "Registered Holders") of its Parent Notes
to certain amendments, consents and waivers under the Indenture (the
"Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank,
F.S.B., as successor trustee (the "Trustee"), under which the Notes were issued.
Following receipt of the requisite consents of the Registered Holders, on
February 21, 1997, the Company and the Trustee executed a Supplemental Indenture
incorporating the amendments to the Indenture. The Supplemental Indenture
provided for (i) an increase in the interest rate on the Notes to 10 1/4%, (ii)
provision to allow for the payment of a special dividend of up to One Hundred
Million Dollars ($100,000,000) (the "Dividend") to qualifying equity security
holders of the Company, (iii) an increase in the redemption premiums paid to
Registered Holders in the event the Notes are repurchased by the Company, and
(iv) the corresponding waiver of Section 4.05 of the Indenture, such that the
Dividend will not constitute a "Restricted Payment" (as defined in the
Indenture). The Company paid an aggregate of Four Million Dollars ($4,000,000)
on a pro rata basis to those Registered Holders that had timely consented.
In December, 1997, the Company completed a Recapitalization which included
the tendering of Parent Notes and repayment of Parent indebtedness under the
1997 Credit Agreement. See Note 16, Subsequent Events.
31
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) Lease Commitments
The Company leases certain operating facilities, offices and equipment. The
following is a schedule of future minimum annual lease commitments and sublease
rentals at November 30, 1997.
Commitments Under
-------------------
Sublease
Operating Rental
Fiscal Year Leases Income
----------- --------- --------
(in thousands)
1998 $ 8,028 $102
1999 6,357 -
2000 5,663 -
2001 4,349 -
2002 3,830
Later years 10,264 -
------- ----
$38,491 $102
======= ====
Rental expense charged to operations is as follows:
Year Year Year
Ended Ended Ended
Nov. 30, 1997 Dec. 1, 1996 Nov. 30, 1995
------------- ------------ -------------
(in thousands)
Minimum rentals $ 9,153 $ 9,096 $9,084
Contingent rentals (based
upon delivery equipment
mileage) 1,361 1,067 809
------- ------- ------
$10,514 $10,163 $9,893
======= ======= ======
The Company has the option to renew certain plant operating leases, with
the longest renewal period extending through 2015. Most of the operating leases
provide for increased rent through increases in general price levels.
(5) Stock Option and Restricted Stock Plans
The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989, the
1992 Stock Option Plan ("1992 Plan") in 1992 and the 1997 Stock Option Plan
("1997 Plan") in 1996 and reserved 100,000 shares, 600,000 shares and 2,400,000
shares, respectively, of Class A Common Stock of the Company (the "Shares") for
future issuance. Options under the 1989 Plan, the 1992 Plan and the 1997 Plan
may be granted either as Incentive Stock Options as defined in Section 422A of
the Internal Revenue Code or Nonqualified Stock Options subject to the
provisions of Section 83 of the Internal Revenue Code.
Prior to fiscal year 1995, the Company issued options under the 1989 Plan
totaling 3,300 Shares (net of subsequent forfeitures), all of which are
exercisable on or after November 30, 1994. Any unexercised options terminate on
the tenth anniversary of the date of grant or earlier, in connection with
termination of employment.
32
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The options outstanding (net of forfeitures) and the related exercise price for
all 1989 Plan options as of November 30, 1997 adjusted for the dividends paid on
May 17, 1997 and February 28, 1997 were 4,862 Shares and $34.02. No 1989 Plan
options have been exercised since the date of grant.
Outstanding options (net of subsequent forfeitures) and the related exercise
prices adjusted for the dividends paid in May 17, 1997 and February 28, 1997
under the 1992 Plan are as follows: 63,158 granted in June, 1992 with an
exercise price of $5.12 per Share; 67,584 granted in June, 1993 with an exercise
price of $6.16 per Share; 77,175 granted in June, 1994 with an exercise price of
$9.17 per Share; 105,105 granted in June, 1995 with an exercise price of $10.85
per Share and 130,830 granted in June, 1996 with an exercise price of $7.23 per
Share. The 1992 Plan options are exercisable 25% upon grant and 25% per year
thereafter. The exercise price is equal to the estimated fair value of the
Company's stock at the date of grant. 1992 Plan options totaling 11,958 shares
were exercised during the three years ended November 30, 1997. At November 30,
1997, options for 351,833 Shares issued under the 1992 Plan are exercisable.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994
and June 27, 1995. The 1993 Plan provides for the one-time automatic grant of
ten-year options to acquire up to 10,000 Shares to all current and future
directors who are not employed by the Company, by Zell/Chilmark or by their
respective affiliates ("Non-Employee Directors"). Options granted under the
1993 Plan vest immediately and are initially exercisable at a price equal to the
fair market value of the Shares on the date of grant. For options granted prior
to March 1, 1994, the exercise price of options granted pursuant to this Plan
increased on the first anniversary date of such grant by 4%, which became the
fixed exercise price for all such options. Options issued thereafter, if any,
will be exercisable over their term at the fair market value on the date of
grant. Pursuant to the 1993 Plan, the Company granted options to acquire up to
50,000 Shares to Non-Employee Directors in fiscal year 1993 at an initial
exercise price of $9.05 per Share. The 1993 Plan was amended on June 27, 1995 to
provide for the grant of an additional option to purchase 5,000 Shares to each
eligible director and thereafter providing for the automatic annual grant of an
option to each eligible director to purchase an additional 5,000 Shares at fair
market value on the date of grant. Pursuant to the 1993 Plan, the Company
granted options to acquire up to 5,000 Shares to each eligible director in
fiscal 1995, 1996 and 1997 with a fixed exercise price of $15.95, $10.63 and
$9.60 per Share, respectively. The options outstanding (net of forfeitures) and
their related strike prices at November 30, 1997 adjusted for the dividends
paid on May 17, 1996 and February 28, 1997 are 60,780 Shares at $6.21, 30,384
Shares at $10.52, 26,872 Shares at $7.01, and 20,000 Shares at $9.60 for the
1993, 1995, 1996 and 1997 grants, respectively. As of November 30, 1997 no
options under the 1993 Plan have been exercised.
In 1996, pursuant to an employment agreement with the Company's CEO, the
Company granted him an aggregate of 67,635 shares of restricted stock with a
fair value of $637,800 at date of grant. The restricted stock was to vest at a
rate of approximately 25% at each anniversary date of the grant. The Company
also awarded a grant of ten-year stock options to acquire up to an aggregate of
587,342 Shares at an exercise price of $7.23 per Share (representing fair market
value at the time of grant) adjusted for the dividends paid on May 17, 1997 and
February 28, 1997. The stock options were to vest at a rate of 25% at each
anniversary date of the grant. On May 31, 1997 the Human Resources Committee,
under the 1997 Plan, granted the CEO a ten-year stock option to acquire up to
75,000 Shares at an exercise price of $9.60 per Share (representing fair market
value of the time of grant).
In May 1997, the Company granted ten-year stock options to acquire 921,400
shares at an exercise price of $9.60 per share (representing fair market value
at the time of grant). The options vest 50% on the third anniversary date of the
grant and 50% on the fourth anniversary date of the grant. Outstanding options
(net of forfeitures) at November 30, 1997 were 910,200.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and makes no charges against capital with respect to
options granted. SFAS No. 123 does however require the disclosure of pro forma
information regarding Net income and Earnings per share determined as if the
Company had accounted for its stock options under the fair value method. For
purposes of this pro forma disclosure the estimated fair value of the options is
amortized to expense over the options' vesting period.
1997 1996
- --------------------------------------------------------------------------------
Net income (loss) As reported $11,743 $ (506)
Pro forma $10,814 $ (892)
Net Earnings (loss) per share: As reported $ 0.38 $ (0.02)
Pro forma $ 0.35 $ (0.03)
- --------------------------------------------------------------------------------
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to Fiscal 1996 and all related Plans were terminated effective
December 18, 1997, the above pro forma effect may not be representative of that
to be expected in future years.
The fair value for all options granted in Fiscal 1997 and 1996 were estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: the expected life for all options is
seven years; the expected dividend yield for all stock is zero percent and the
expected volatility of all stock is zero percent. Adjustments were made to the
then outstanding options and related stock prices as a result of the dividends
paid on May 17, 1996 and February 28, 1997. Such adjustments were treated as
modifications of outstanding awards in accordance with SFAS No. 123. The risk
free interest rates utilized for the grants made during Fiscal 1997 and 1996 and
for the May 1996 and February 1997 modifications of all then outstanding grants
are as follows:
Risk Free Interest Rate
--------------------------------------------
Original Modification Modification
Option Grant Date Grant May 1996 February 1997
- ----------------- -------- ------------ -------------
1989 Plan:
December 1989 - - 5.15%
1992 Plan:
June 1992 - - 6.06%
June 1993 - - 6.22%
June 1994 - - 6.31%
June 1995 - - 6.38%
June 1996 6.77% - 6.46%
1993 Plan:
March 1993 - 6.26% 6.46%
June 1995 - 6.51% 6.46%
June 1996 6.77% - 6.46%
May 1997 6.64% - -
CEO Award:
March 1996 5.82% - 6.46%
1997 Plan:
June 1997 6.64% - -
A summary of the status and changes of shares subject to options and the
related average price per share is as follows:
Shares Subject Average Option
to Options Price Per Share
============== ===============
Outstanding November 30, 1995 346,450 $12.41
-------------- ---------------
Granted 531,500 $10.58
Adjustment 7,622 -
Canceled (37,500) 11.66
-------------- ---------------
Outstanding December 1, 1996 848,072 11.19
-------------- ---------------
Granted 941,400 9.40
Adjustment 341,478 -
Exercised (4,958) 5.82
Canceled (41,700) 10.81
-------------- ---------------
Outstanding November 30, 1997 2,084,292 $ 8.52
-------------- ---------------
Options exercisable and shares available for future grant at Fiscal Year End:
1997 1996 1995
- --------------------------------------------------------------------------------
Options exercisable 641,895 312,447 225,450
Weighted-average option price per
share of options exercisable $7.91 $11.29 $11.39
Weighted-average fair value of
options granted during the year $9.60 $10.63 $15.95
Shares available to grant 1,741,086 339,550 413,550
- --------------------------------------------------------------------------------
The ranges of exercise prices and the remaining contractual life of options
as of November 30, 1997 were:
- -------------------------------------------------------------------------------
Range of exercise prices $5.12 to $10.85 $34.02
- -------------------------------------------------------------------------------
Options outstanding:
Outstanding as of November 30, 1997 2,079,430 4,862
Weighted-average remaining
contractual life 8.4 Yrs. 2.0 Yrs.
Weighted-average exercise price $8.44 $34.02
Options exercisable:
Outstanding as of November 30, 1997 637,033 4,862
Weighted-average remaining
contractual life 7.0 Yrs. 2.0 Yrs.
Weighted-average exercise price $7.66 $34.02
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan (the
"1996 Transitional Plan") effective December 1, 1996 which terminates on January
3, 2000, and no grants shall thereafter be awarded under the Plan. All grants
awarded under the Plan prior to such date shall remain in effect until they have
been exercised or terminated in accordance with the terms and provisions of the
Plan. On January 6, 1997, 281,400 Shares, which vest on January 3, 2000, were
granted under the Plan with a fair value of $3,632,874 at date of grant. The
Plan provides for partial vesting at a rate of 50% if a grantee incurs a
"termination" (as defined in the Plan) from January 3, 1999 to January 2, 2000.
During Fiscal 1997, 35,800 Shares were forfeited and 39,700 additional Shares
were issued resulting in Shares outstanding at November 30, 1997 of 285,300.
As a result of the Recapitalization (see Note 16) effective on December 18,
1997, the Human Resources Committee of the Company's Board of Directors removed
all restrictions on the then outstanding restricted
33
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
stock issued under the 1996 Transitional Plan and those shares were paid out as
a result of the Recapitalization at the Recapitalization share price of
$14.3027. As of December 18, 1997, the Human Resources Committee accelerated
vesting of the Company issued and then outstanding stock options under the 1989
Plan, 1992 Plan, 1993 Plan and 1997 Plan (collectively the "Terminated Stock
Option Plans"); terminated the Terminated Stock Option Plans; and paid each
holder of options under the Terminated Stock Option Plans reasonable
compensation for such terminations which compensation was equal to the spread
between the Merger share price of $14.3027 and the respective per share exercise
price for the terminated stock options. Prior to December 18, 1997 certain
members of senior management were offered and elected to cancel their options
under the Terminated Stock Option Plans and their restricted stock under the
1996 Transitional Plan. Those senior executives received nonqualified stock
options which were subsequently cancelled and exchanged on December 18, 1997 for
ten-year stock options to acquire 145,516 shares of the Company's post-
Recapitalization Class L Common Stock at an exercise price of $10.125 per share
and ten-year stock options to acquire 1,309,644 shares of the Company's post-
Recapitalization Class A Common Stock at an exercise price of $0.125 per share.
See Note 16 for description of new Class A and Class L Common shares. These
options were fully vested at the time of grant and the exercise price was set at
25% of fair market value at the time of grant.
(6) Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Income tax expense attributable to income from continuing
operations consists of:
Year Year Year
Ended Ended Ended
Nov. 30, 1997 Dec. 1, 1996 Nov. 30, 1995
------------- -------------- -------------
(in thousands)
Current:
Federal $10,679 $15,494 $ 6,384
State and local 2,616 1,196 1,404
Canada, Commonwealth
of Puerto Rico and Mexico 4,016 2,808 3,810
------- ------- -------
17,311 19,498 11,598
Deferred 5,198 5,781 11,974
------- ------- -------
Income tax expense $22,509 $25,279 $23,572
======= ======= =======
Income before income taxes from Canadian operations amounted to $8,643,
$7,042 and $7,247, for the years ended November 30, 1997, December 1, 1996 and
November 30, 1995.
The differences between the effective tax rate and the statutory U.S. Federal
income tax rate are explained as follows:
Year Year Year
Ended Ended Ended
Nov. 30, 1997 Dec. 1, 1996 Nov. 30, 1995
------------- ------------ -------------
Income tax expense (benefit)
computed at statutory U.S.
Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal tax benefit 6.2 6.1 4.5
Permanent differences resulting
from purchase accounting 9.4 16.1 9.6
Foreign tax rate differential
and effects of foreign
earnings repatriation 3.5 6.5 5.4
Sale of subsidiary 1.8 37.3 --
Other items, net (0.5) 1.0 0.3
---- ----- ----
55.4% 102.0% 54.8%
==== ===== ====
At November 30, 1997 and December 1, 1996, the total deferred tax assets and
deferred tax liabilities were $15,571 and $19,265, $47,508 and $42,674,
respectively. The significant components of the deferred tax assets were
accrued salaries and benefits of $7,669 and $7,447, respectively and net
operating loss carryforwards of $3,577 in Fiscal 1996, and the deferred tax
liabilities relating to property, plant and equipment were $21,445 and $23,601
and intangible assets of $12,262 and $13,204, respectively.
34
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A provision has not been made for U.S. or foreign taxes on undistributed
earnings of subsidiaries which operate in Canada and Puerto Rico. Upon
repatriation of such earnings, withholding taxes might be imposed that are then
available for use as credits against a U.S. Federal income tax liability,
subject to certain limitations. The amount of taxes that would be payable on
repatriation of the entire amount of undistributed earnings is immaterial.
During 1997, goodwill was reduced by $9,953 for the utilization of previously
unrecognized pre-acquisition net operating loss carryforwards.
(7) Retirement Plans
Substantially all employees are covered by profit sharing plans, where
specific amounts are set aside in trust for retirement benefits. The total
profit sharing expense was $5.9 million, $5.0 million, and $5.4 million for the
years ended November 30, 1997, December 1, 1996, and November 30, 1995,
respectively.
(8) Warrants
Series A and Series B Warrants
------------------------------
Series A and Series B Warrants (collectively, "Restructure Warrants") were
issued under a Warrant Agreement (the "Agreement") dated as of November 6, 1991
between the Company and its subsidiary, Sealy, Inc., as warrant agent. The
Restructure Warrants, when exercised, entitled the Holder thereof to receive one
Share in exchange for the exercise price per Share for Series A warrants and
Series B warrants, subject to adjustment under certain circumstances. As of
November 30, 1997, the Series A and Series B Warrants were exercisable into
4,337,959 and 1,686,446 Shares, respectively.
Under the Agreement, adjustments are to be made to the exercise ratio and
exercise price of the Restructure Warrants in the event the Company issues
shares of its capital stock at less than Current Market Value (including under
employee benefit plans). The Company has issued shares under its Performance
Share Plan, 1996 Transitional Plan and certain employee issuances, triggering
the anti-dilution adjustments, and these adjustments have been made pursuant to
the Warrant Agreement. The Series A and Series B Warrants conversion ratio and
exercise price at November 30, 1997 were 1.0207 and $15.6751 per share and
1.0207 and $22.0431 per share, respectively and at December 1, 1996 were 1.0115
and $15.8182 per share and 1.0115 and $22.2444 per share, respectively,
The Restructure Warrants were exercisable at any time and from time to time
on or prior to November 6, 2001 ("Expiration Date"). The Restructure Warrants
may terminate and become void prior to the Expiration Date in the event that
such warrants are redeemed by the Company pursuant to its right to redeem the
Restructure Warrants on any date after November 6, 1996 at a redemption price
per Share as defined in the Warrant Agreement. On October 27, 1997, the
Company's Board of Directors, in connection with the Recapitalization (see Note
16), authorized such a redemption effective February 3, 1998 (the "Redemption
Date") of all outstanding Restructure Warrants. In accordance with criteria set
forth in the Warrant Agreement and as defined in the Warrant Agreement, two
independent financial firms performed a valuation effective December 2, 1997 and
established a redemption price. The redemption price was $0.9411 for each Series
A Warrant and $0.3777 for each Series B Warrant. Holders were given the option
to exercise their Restructure Warrants prior to the redemption date, surrender
their certificates representing their Restructure Warrants and receive the
redemption price within five business days of the surrender, or receive the
redemption price within five business days of the Redemption Date.
35
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Merger Warrants
---------------
Merger Warrants were issued under a Warrant Agreement ("Warrant Agreement")
dated as of August 1, 1989 between the Company and KeyCorp Shareholder Services,
Inc., as successor warrant agent. Each Merger Warrant, when exercised, will
entitle the holder thereof to receive one fiftieth of one share of Class B
Common Stock ("Warrant Shares") of the Company (50 to 1 ratio) in exchange for
the exercise price of $.01 per share, subject to adjustment under certain
circumstances. The Company has issued shares under its Performance Share Plan,
1996 Transitional Restricted Stock Plan and certain employee issuances,
triggering the anti-dilution adjustment provision, and these adjustments have
been made pursuant to the Warrant Agreement resulting in a revised conversion
ratio of 48.64 to 1 on December 1, 1996 and 47.98 to 1 on November 30, 1997.
The Merger Warrants became exercisable subsequent to August 9, 1995. As a
result of exercised Merger Warrants, 607 and 2,085 shares of Class B Common
Stock were issued in Fiscal 1997 and 1996, respectively.
The Company is required to offer to repurchase the Merger Warrants and
Warrant Shares upon the removal of any limitations to repurchase or upon the
occurrence of certain other events. Merger Warrants and Warrant Shares are,
therefore, not considered to be a part of the Company's stockholders' equity
but, are included in other noncurrent liabilities in the accompanying
consolidated balance sheets. Authorized Merger Warrants at November 30, 1997
and December 1, 1996 are exercisable into an aggregate of 203,751 and 207,747
shares of Class B Common Stock, respectively.
As a result of the Recapitalization (see Note 16) effective on December 18,
1997, Merger Warrant holders upon exercise of their Merger Warrants at a
conversion rate of 47.98 to 1 are entitled only to receive a cash payment of
$14.2927 which is the spread between the Recapitalization share price of
$14.3027 and the Merger Warrant exercise price of $0.01. As a result of the
Recapitalization, Warrants not exercised prior to such Recapitalization can no
longer be converted to Class B shares and upon subsequent exercise will receive
the same amount in cash without interest. As of December 17, 1997, the Company
forwarded to a third party paying agent the amount necessary to fund the future
cash requirements with respect to remaining then outstanding Merger Warrants and
Class B Common Stock.
(9) Common Stock
Prior to the Merger, holders of Class A Common Stock were entitled to one
vote per share on all matters submitted to a vote of stockholders while the
holders of Class B Common Stock were entitled to one-half vote per share. Except
with respect to voting rights, the terms of the Class A Common Stock and the
Class B Common Stock were identical. Shares of Class B Common Stock, under
certain circumstances, were convertible into shares of Class A Common Stock. In
connection with the Recapitalization (see Note 16), new Class A, B, L and M
Common Shares were issued.
(10) Performance Share Plan
Effective April 1, 1992, the Company adopted a Performance Share Plan
("Plan") for certain employees of the Company. Under the Plan, the Board of
Directors may approve the issuance of up to 3.0 million performance share units
each representing the right to receive up to one Share if the Company meets
specified cumulative operating cash flow targets over the five-year period
ending December 1, 1996. During fiscal 1996, two participants withdrew from the
Plan resulting in an adjustment to additional paid-in capital. As of December
1, 1996, the conclusion of the Plan, 451,740 Shares were awarded under the Plan
of which 207,549 Shares were tendered to the Company by Plan participants to
cover their estimated tax liability, resulting in the issuance of 244,191
Shares in January 1997.
The Plan is a variable stock compensation plan pursuant to which the fair
value of Shares issuable under the Plan will be recorded as compensation expense
over the Plan's five-year term ending December 1, 1996. In addition to the
annual amount of compensation expense under the Plan, such amount will be
adjusted to give
36
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
cumulative effect to any change in the amount of non-cash compensation expense
previously recorded in prior reporting periods, resulting from subsequent
increases or decreases in the fair value of the Shares or the number of
performance share units outstanding since such reporting period and to any
change in management's estimate of its ability to achieve the cumulative
operating cash flow targets as defined in the Plan. Performance Share Plan
expense for the year ended December 1, 1996 amounted to $4.5 million. The
Company recorded a $13.3 million credit to non-cash compensation expense under
the Plan for the year ended November 30, 1995.
(11) Summary of Interim Financial Information (Unaudited)
Earnings
Net per
Gross Income/ Common
Net Sales Profit (Loss) Share
------------ ----------- ---------- -----------
(dollars in thousands, except per share amounts)
1997:
First quarter $168,904 $ 72,890 $ 1,158 $ 0.04
Second quarter 180,625 80,951 3,282 0.11
Third quarter 229,919 101,864 7,917 0.26
Fourth quarter 225,386 93,224 (614) (0.02)
1996:
First quarter $159,475 $ 69,583 $ 2,854 $ 0.09
Second quarter 165,177 68,935 2,909 0.10
Third quarter 192,546 84,434 7,083 0.24
Fourth quarter 180,440 77,427 (13,352) (0.45)
During the first and fourth quarters of Fiscal 1997, the Company recorded
an after-tax loss of $2.0 million ($0.07 per share), from early extinguishment
of debt in connection with the Refinancing, and $4.3 million ($0.14 per share),
from write-offs in connection with EITF 97-13 (see Note 15), respectively.
During the fourth quarter of Fiscal 1996, the Company recorded an after-tax loss
on pending sale of subsidiary of $17.6 million and a noncash charge of $3.2
million in connection with the Company's Performance Share Plan.
(12) Contingencies
In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and
one of its subsidiaries are parties to an Administrative Consent Order ("ACO")
issued by the New Jersey Department of Environmental Protection ("DEP").
Pursuant to the ACO the Company and such subsidiary agreed to conduct soil and
groundwater investigation and remediation at the plant previously owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that
its manufacturing processes were a source of the contaminants found to exist
above regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.
The DEP previously approved both the Company's soil remediation plans and
its initial groundwater remediation plans. Further investigation in 1996
revealed certain additional areas of soil contamination resulting from
activities at the South Brunswick facility prior to the Company's acquisition of
the site. In 1997, the Company with DEP approval completed essentially all soil
remediation and conducted a pilot test for a Company-proposed revision to the
groundwater remediation program.
37
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
While the Company cannot predict the ultimate timing or cost to remediate
this facility based on facts currently known, management believes the previously
established accrual for site investigation and remediation costs is adequate to
cover the Company's reasonably estimable liability and does not believe the
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.
In March, 1994, the Company filed a claim in the U.S. District Court for the
District of New Jersey against former owners of the site and their lenders under
the Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. In March, 1997, the
Company received $1.7 million from a former owner of the site and one of the
lenders to the former owner in final settlement of this litigation.
In January 1997, the Company filed a claim in the U.S. District Court of New
Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case seeking
a judgement of non-liability was filed by some (but not all) of these insurance
companies in the U.S. District Court for the Northern District of Ohio. The
Company is awaiting a ruling by the District Courts involved.
The Company has also voluntarily proceeded to develop a remediation plan for
isolated soil and groundwater contamination at its Oakville, Connecticut
property that the Company believes is solely attributable to the manufacturing
operations of previous unaffiliated occupants. Based on the facts currently
known, management does not believe that resolution of this matter will have a
material adverse effect on the Company's financial position or future
operations.
On May 22, 1997, the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust final
judgments ("the Judgments") entered on December 30, 1964 and December 26, 1967.
These Judgements, among other things, prohibited the Company from suggesting
resale prices to its dealers. During the pendency of the Company's motion to
terminate the Judgments, and based upon allegations received by the Department
of Justice ("the Department") concerning a possible resale price maintenance
agreement with a Stearns & Foster dealer, the Department, on September 8, 1997,
issued to the Company a Civil Investigative Demand seeking documents relating
to, among other things, communications between the Company and dealers
concerning the retail price of mattresses. In response to the Civil
Investigative Demand, the Company produced certain documents and the deposition
of a Company executive was taken. Immediately following such document
production and deposition, the Department consented to the termination of the
Judgments and an order terminating the Judgments was entered by the Court on
September 19, 1997. After the Court terminated the Judgments, the Department
notified the Company on September 29, 1997 that it was limiting the Civil
Investigative Demand to certain narrow specifications. In October 1997, the
Company produced additional documents in response to the Civil Investigative
Demand. On November 24, 1997 the Company received a request from the Department
for clarification and additional information. The Company has responded to that
request.
(13) Financial Instruments
Due to the short maturity of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, their carrying values
approximate fair value. The carrying amount of long-term debt under the Term
Loan Facility and Revolving Credit Facility approximate fair value because the
interest rate adjusts to market interest rates. The fair value of long-term debt
under the 10 1/4% Senior Subordinated Notes, based on a quoted market price, was
$215 million and $201 million at November 30, 1997 and December 1, 1996,
respectively.
(14) Disposition
On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed
solid wood bedroom furniture under the "Samuel Lawrence" brand name. The
divestiture produced cash proceeds of $35.0 million and resulted in a book loss
of $17.6 million. The loss on sale of this subsidiary includes income tax
expense of $5.8 million arising from the tax gain on the
38
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
transaction, as well as transaction costs related to the sale. A summary of the
net assets held for sale at December 1, 1996 is as follows (amounts in
thousands):
Accounts receivable $ 9,228
Inventory 6,907
Other current assets 480
Property, plant and equipment, net 10,329
Other assets 26,246
Accounts payable and accrued expenses (4,939)
Other liabilities (1,998)
Excess of net assets over proceeds from sale (10,761)
--------
Net assets held for sale $ 35,492
========
(15) New Accounting Pronouncements
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection with
an overall information technology transformation project should be expensed as
incurred (EITF 97-13). The transition provisions require companies that had
previously capitalized such business process reengineering costs to identify
these costs and quantify the unamortized amounts remaining on the balance sheet
as of the beginning of the quarter which includes November 20, 1997. These
unamortized amounts are required to be written off as a cumulative effect of a
change in accounting principle in such quarter. The Company has adopted EITF
97-13 resulting in a loss of $4.3 million, net of income tax benefit of $2.9
million, representing the cumulative write-off of previously capitalized costs
as of August 31, 1997 primarily relating to the Company's new Business Systems
project. All business process reengineering costs subsequent to August 31, 1997
have been expensed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earning per Share. SFAS No.
128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"), and
requires the calculation and dual presentation of basic and diluted earnings per
share ("EPS"), replacing the measures of primary and fully-diluted EPS as
reported under Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, earlier
application is not permitted. Accordingly, EPS presented on the accompanying
statements of income are calculated under the guidance of Opinion 15. Under
SFAS No. 128, the basic and diluted EPS on net income for fiscal 1997 would have
been $0.39 and $0.38, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information", were
issued. The Company plans to adopt these standards when required in fiscal
1999.
(16) Subsequent Events
On October 30, 1997, Parent entered into an agreement and plan of merger
(the "Merger Agreement") with Sandman Merger Corporation, a transitory Delaware
merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell"). Zell owned approximately 87% of the issued and outstanding
common stock of Parent (the "Existing Common Stock"). Pursuant to the Merger
Agreement, upon the satisfaction of certain conditions, Sandman was merged with
and into Parent with Parent being the surviving corporation effective on
December 18, 1997 (the "Closing Date") and the Company was recapitalized (the
"Recapitalization") whereby certain equity investors, including members of
management, acquired an approximate 90.0% economic equity stake (84.8% voting
equity stake) in the Company. A portion of the issued and outstanding shares of
common stock of the Company was converted into the right to receive aggregate
cash
39
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
equal to $419.4 million less (i) certain seller fees and expenses and (ii)
certain costs in connection with the extinguishment of certain outstanding
options and warrants of the Company and the remaining portion was converted into
voting preferred stock and then reconverted into $25.0 million in aggregate
principal amount of junior subordinated notes of the Company and a retained
voting common stock interest in the Company of approximately 15.2%. Concurrent
with the Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned
subsidiary of the Parent, entering into and borrowing $460 million under the
Senior Credit Agreements and by issuing $125 million of Senior Subordinated
Notes and $128 million of Senior Subordinated Discount Notes.
After the Recapitalization, the issued and outstanding capital stock of the
Company will consist of Class A common stock, par value $0.01 per share ("Class
A Common"), Class B common stock, par value $0.01 per share ("Class B Common"),
Class L common stock, par value $0.01 per share ("Class L Common"), and Class M
common stock, par value $0.01 per share ("Class M Common" and collectively with
the Class A Common, Class B Common and Class L Common, "Common Stock"). The
Class L Common and the Class M Common are senior in right of payment to the
Class A Common and Class B Common. Holders of Class B Common and Class M Common
have no voting rights except as required by law. The holders of Class A Common
and Class L Common are entitled to one vote per share on all matters to be voted
upon by the stockholders of the Company, including the election of directors.
The Board of Directors of the Company is authorized to issue preferred stock,
par value $0.01 per share, with such designations and other terms as may be
stated in the resolutions providing for the issue of any such preferred stock
adopted from time to time by the Board of Directors.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc.
("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to cause
the size of the Board of Directors of Parent to be established at seven members
and to cause three designees of the Bain Funds and one designee of Harvard to be
elected to the Board of Directors; (ii) granted Parent and the Bain Funds a
right of first offer on any proposed transfer of shares of capital stock of
Parent held by Zell, Harvard or the LLCs; (iii) granted Harvard a right of first
offer on any proposed transfer of shares of capital stock of Parent held by the
Bain Funds; (iv) granted tag-along rights on certain transfers of shares of
capital stock of Parent; (v) required the Stockholders to consent to a sale of
Parent to an independent third party if such sale is approved by holders
constituting a majority of the then outstanding shares of voting common stock of
Parent; and (vi) except in certain instances, prohibits Zell from transferring
any shares of capital stock of Parent until the tenth anniversary of the date of
the consummation of the Recapitalization. Certain of the foregoing provisions of
the Stockholders Agreement terminate upon the consummation of an initial Public
Offering or an Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns &
Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a
California corporation, Sealy Components-Pads, Inc., a Delaware corporation, and
Sealy Mattress Company of San Diego, a California corporation, to the capital of
the Issuer. Immediately after the Capital Contribution, the Issuer became the
only direct subsidiary of Parent and owns 100% of the operations of Parent. At
the Closing, Sandman was merged with and into Parent with Parent the surviving
corporation.
On November 18, 1997 Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the Indenture under which the Parent Notes were issued
(the "Parent Note Indenture"). The purchase price to be paid in respect to
validly tendered Parent Notes and related consents were determined by a formula
set forth in the offer to purchase with respect to the Tender Offer. The
Offerings were conditioned upon the consummation of the Tender Offer for, and
the obtaining of consents with respect to, at least a majority in aggregate
principal amount of the Parent Notes outstanding. Parent's obligation to accept
for purchase and to pay for the Parent Notes validly tendered pursuant to the
Tender Offer was conditioned upon, among other things, consummation of the other
elements of the Recapitalization.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility and a discretionary swing loan facility of up
to $20.0 million. Upon consummation of the Transactions, the Issuer entered into
the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a credit
agreement providing for Tranche A Term Loans and revolving borrowings (the
"Senior Revolving Credit Agreement" and, together with the Senior AXELs Credit
Agreement, the "Senior Credit Agreements"). The Senior Credit Agreements
provided for loans of up to $550.0 million, consisting of a $450.0 million term
loan facility (the "Term Loan Facility") and a $100.0 million revolving credit
facility (the "Revolving Credit Facility"). The Issuer distributed the
40
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
proceeds of the Term Loan Facility and its initial borrowings under the
Revolving Credit Facility to Parent to provide a portion of the funds necessary
to consummate the Transactions. Indebtedness of the Issuer under the Senior
Credit Agreements is secured and guaranteed by Parent and certain of the
Issuer's current and all of the Issuer's future U.S. subsidiaries and will bear
interest at a floating rate. See Note 17 for further details regarding
guarantees including consolidating condensed financial statements for guarantors
and non-guarantors. The Senior Credit Agreements will require the Company to
meet certain financial tests, including minimum levels of adjusted EBITDA as
determined in the agreements, minimum interest coverage and maximum leverage
ratio. The Senior Credit Agreements also contains covenants which, among other
things, limit capital expenditures, indebtedness and/or the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, mergers and consolidations, prepayments of other indebtedness
(including the Notes), liens and encumbrances and other matters customarily
restricted in such agreements.
Indebtedness under the Senior Credit Agreements bears interest at a
floating rate. Indebtedness under the Revolving Credit Facility and the Term
Loans initially (subject to reduction based on attainment of certain leverage
ratio levels) bears interest at a rate based upon (i) the Base Rate (defined as
the highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in respect
of the Tranche A Term Loans and the loans under the Revolving Credit Facility
(the "Revolving Loans"), 1.50% in respect of the AXELs Series B, 1.75% in
respect of the AXELs Series C and 2.00% in respect of the AXELs Series D, or
(ii) the Adjusted Eurodollar Rate (as defined in the Senior Credit Agreements)
for one, two three or six months (or, subject to general availability, two weeks
or twelve months), in each case plus 2.25% in respect of Tranche A Term Loans
and Revolving Loans, 2.50% in respect of AXELs Series B, 2.75% in respect of
AXELs Series C and 3.00% in respect to AXELs Series D.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche A Term Loans are subject to quarterly
amortization payments commencing in December 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in December 1998 with the AXELs Series B amortizing in nominal
amounts until the maturity of the Tranche A Term Loans, the AXELs Series C
amortizing in nominal amounts until the maturity of the AXELs Series B and the
AXELs Series D amortizing in nominal amounts until the maturity of the AXELs
Series C. The Revolving Credit Facility matures in December 2002. In addition,
the Senior Credit Agreements provide for mandatory repayments, subject to
certain exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the ordinary
course of business of the Issuer and its subsidiaries, the net proceeds of
insurance, the net proceeds of certain debt and equity issuances, and excess
cash flow (as defined in the Senior Credit Agreements).
The Notes were issued pursuant to an Indenture (the "Senior Subordinated Note
Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Issuer, the Guarantors and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").
The Senior Subordinated Notes are limited in aggregate principal amount
to $300.0 million, of which $125.0 million was issued in the Offering, and
matures on December 15, 2007. Interest on the Senior Subordinated Notes accrue
at the rate of 9 7/8% per annum and is payable semi-annually in arrears on June
15 and December 15 of each year, commencing on June 15, 1998, to Holders of
record on the immediately preceding June 1 and December 1. Additional Senior
Subordinated Notes may be issued from time to time after the date of the Senior
Subordinated Note Indenture, subject to the provisions of the Senior
Subordinated Note Indenture.
Except as provided below, the Senior Subordinated Notes are not redeemable at
the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the
41
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Liquidated Damages thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on December 15 of the years indicated below:
Percentage of
Year Principal Amount
---- ----------------
2002.................. 104.937%
2003.................. 103.292%
2004.................. 101.646%
2005 and thereafter... 100.000%
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued under
the Senior Subordinated Note Indenture at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; (as defined in the indentures) provided that at least
$80.0 million in aggregate principal amount of Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Notes held by the Company and its Subsidiaries); and
provided further that such redemption shall occur within 120 days of the date of
the closing of any such Equity Offering.
The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in the
Offering, and mature on December 15, 2007. The Senior Subordinated Discount
Notes were offered at a substantial discount from their principal amount at
maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest
(other than liquidated damages, if applicable) will accrue or be paid in cash on
the Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the issuance
date and the Full Accretion Date, on a semi-annual bond equivalent basis.
Beginning on the Full Accretion Date, interest on the Senior Subordinated
Discount Notes will accrue at the rate of 10 7/8% per annum and will be payable
in cash semi-annually in arrears on June 15 and December 15 of each year,
commencing on June 15, 2003, to Holders of record on the immediately preceding
June 1 and December 1. Additional Senior Subordinated Discount Notes may be
issued from time to time after the date of the Senior Subordinated Discount Note
Indenture, subject to the provisions of the Senior Subordinated Discount Note
Indenture. Interest on the Senior Subordinated Discount Notes will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from the Full Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 15 of the years indicated below:
Percentage of
Year Principal Amount
---- ----------------
2002.................. 105.437%
2003.................. 103.625%
2004.................. 101.812%
2005 and thereafter... 100.000%
42
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under the
Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of
the Accreted Value, plus accrued and unpaid liquidated damages thereon, if any,
to the redemption date, with the net cash proceeds of any Equity Offerings; (as
defined in the Indentures) provided that at least $50.0 million in aggregate
Accreted Value of Senior Subordinated Discount Notes remain outstanding
immediately after the occurrence of such redemption (excluding Senior
Subordinated Discount Notes held by the Company and its Subsidiaries); and
provided, further, that such redemption shall occur within 120 days of the date
of the closing of any such Equity Offering.
The unaudited pro forma balance sheet data of the Company as of November 30,
1997 shown below gives effect to the Recapitalization and the Refinancing as if
they each had occurred on November 30, 1997 (in 000's):
ASSETS
Current assets $ 177,717
Other assets 574,231
---------
Total assets $ 751,948
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities $ 118,250
Long-term debt obligations, including current portion 687,648
Other liabilities 67,982
---------
Total liabilities 873,880
Stockholders' deficit (121,932)
---------
Total liabilities and stockholders' deficit $ 751,948
=========
The unaudited pro forma statement of operations data for the year ended
November 30, 1997 shown below gives effect to (i) the Recapitalization; (ii) the
Refinancing; and (iii) the divestitures of the Company's Samuel Lawrence
subsidiary and South Brunswick plant in January, 1997 and March, 1997,
respectively, as if they each occurred on December 2, 1996 (in 000's) but does
not reflect certain non-recurring Recapitalization charges and an extraordinary
loss related to the Refinancing:
Revenue $799,503
========
Net loss $ (9,403)
========
Net loss per common share $ (0.30)
========
(17) Guarantor/Non-Guarantor Financial Information
As discussed in Note 16, the Parent and each of the Guarantor Subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes.
Substantially all of the Issuer's operating income and cashflow is generated by
its subsidiaries. As a result, funds necessary to meet the Issuer's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations, including
the payment of principal and interest on the Notes. Although holders of the
Notes will be direct creditors of the Issuer's principal direct subsidiaries by
virtue of the guarantees, the Issuer has subsidiaries ("Non-Guarantor
Subsidiaries") that are not included among the Guarantor Subsidiaries, and such
subsidiaries will not be obligated with respect to the Notes. As a result, the
claims of creditors of the Non-Guarantor Subsidiaries will effectively have
priority with
43
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
respect to the assets and earnings of such companies over the claims of
creditors of the Issuer, including the holders of the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of November 30, 1997 and
December 1, 1996, consolidating condensed statements of operations and
cash flows for each of the years in the three year period ended
November 30, 1997.
2. Sealy Corporation (the "Parent" and a "guarantor"), Sealy Mattress
Company (the "Issuer"), combined Guarantor Subsidiaries and combined
Non-Guarantor Subsidiaries with their investments in subsidiaries
accounted for using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
44
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Assets
Current assets:
Cash and cash equivalents $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
Accounts receivable, net -- 3,434 79,150 11,334 -- 93,918
Inventories -- 1,912 39,240 5,190 (335) 46,007
Prepaid expenses and other assets (9,206) 294 29,819 1,622 -- 22,529
-----------------------------------------------------------------------------------
(9,206) 5,660 150,271 22,121 (335) 168,511
Property, plant and equipment - at cost -- 4,664 152,045 12,894 -- 169,603
Less accumulated depreciation -- 1,254 40,603 2,138 -- 43,995
-----------------------------------------------------------------------------------
-- 3,410 111,442 10,756 -- 125,608
Other assets:
Goodwill and other intangibles, net -- 14,461 361,976 34,832 -- 411,269
Net investment in and advances
to (from) subsidiaries and affiliates 543,783 2,636 (357,823) (28,591) (160,005) --
Debt issuance costs, net and
other assets 8,918 35 6,641 85 -- 15,679
-----------------------------------------------------------------------------------
552,701 17,132 10,794 6,326 (160,005) 426,948
-----------------------------------------------------------------------------------
Total assets $543,495 $26,202 $ 272,507 $ 39,203 ($160,340) $721,067
===================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion - long-term obligations $ -- $ -- -- $ -- $ -- $ --
Accounts payable -- 2,086 40,743 6,847 -- 49,676
Accrued incentives and advertising -- 1,473 26,782 2,449 -- 30,704
Accrued compensation -- 246 16,244 1,281 -- 17,771
Other accrued expenses 2,287 222 18,172 1,573 (118) 22,136
----------------------------------------------------------------------------------
2,287 4,027 101,941 12,150 (118) 120,287
Long-term obligations 330,000 -- -- -- -- 330,000
Other noncurrent liabilities 2,969 -- 32,744 -- -- 35,713
Deferred income taxes 3,173 896 22,693 3,239 -- 30,001
Stockholders' equity 205,066 21,279 115,129 23,814 (160,222) 205,066
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $543,495 $26,202 $ 272,507 $ 39,203 ($160,340) $721,067
===================================================================================
45
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 1, 1996
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Assets
Current assets:
Cash and cash equivalents $ -- $ 54 $ 3,118 $ 13,447 $ -- $ 16,619
Accounts receivable, net -- 2,861 67,296 7,022 -- 77,179
Inventories -- 1,551 28,251 4,464 (274) 33,992
Net assets held for sale -- -- -- 35,492 -- 35,492
Prepaid expenses and deferred taxes (5,603) 228 13,925 1,896 -- 10,446
------------------------------------------------------------------------------------
(5,603) 4,694 112,590 62,321 (274) 173,728
Property, plant and equipment - at cost -- 4,214 135,581 16,268 -- 156,063
Less accumulated depreciation -- 976 31,593 2,128 -- 34,697
------------------------------------------------------------------------------------
-- 3,238 103,988 14,140 -- 121,366
Other assets:
Goodwill and other intangibles, net -- 14,873 383,692 35,739 -- 434,304
Net investment in and advances
to (from) subsidiaries and affiliates 586,883 24,776 (337,985) (35,875) (237,799) --
Debt issuance costs, net and
other assets 7,981 -- 2,495 54 -- 10,530
------------------------------------------------------------------------------------
594,864 39,649 48,202 (82) (237,799) 444,834
------------------------------------------------------------------------------------
Total assets $ 589,261 $47,581 $ 264,780 $ 76,379 ($238,073) $739,928
====================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion - long-term obligations $ 18,620 $ -- $ -- $ -- $ -- $ 18,620
Accounts payable -- 1,556 30,161 4,080 -- 35,797
Accrued incentives and advertising -- 1,101 17,668 1,935 -- 20,704
Accrued compensation -- 227 12,687 1,133 -- 14,047
Other accrued expenses 6,251 157 17,837 (458) (96) 23,691
------------------------------------------------------------------------------------
24,871 3,041 78,353 6,690 (96) 112,859
Long-term obligations 269,398 -- 74 35 -- 269,507
Other noncurrent liabilities 2,606 -- 32,210 6 -- 34,822
Deferred income taxes (608) 901 24,925 4,528 -- 29,746
Stockholders' equity 292,994 43,639 129,218 65,120 (237,977) 292,994
------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $589,261 $47,581 $ 264,780 $ 76,379 ($238,073) $739,928
====================================================================================
46
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ -- $ 37,973 $708,914 $75,042 ($17,095) $804,834
Costs and expenses:
Cost of goods sold -- 23,256 400,785 48,878 (17,014) 455,905
Selling, general and administrative 1,336 11,464 233,512 17,346 -- 263,658
Amortization of intangibles -- 411 11,764 1,089 -- 13,264
Interest expense, net 32,114 -- (75) (643) -- 31,396
(Loss) Income from equity investees 8,969 8,258 -- -- (17,227) --
Income from non-guarantor
equity investees -- 20 (4,104) -- 4,084 --
Capital charge and intercompany
interest allocation (69,376) 3,689 64,821 866 -- --
-------------------------------------------------------------------------------------
Income/(loss) before income taxes,
extraordinary item and cumulative
effect of a change in accounting
principle 26,957 (9,125) 2,211 7,506 13,062 40,611
Income taxes 13,103 (156) 6,140 3,422 -- 22,509
-------------------------------------------------------------------------------------
Income/(loss) before extraordinary item
and cumulative effect of change in
accounting principle 13,854 (8,969) (3,929) 4,084 13,062 18,102
Extraordinary item 2,030 -- -- -- -- 2,030
Cumulative effect of a change in
accounting principle -- -- 4,329 -- -- 4,329
-------------------------------------------------------------------------------------
Net income/(loss) $ 11,824 ($8,969) ($8,258) $ 4,084 $ 13,062 $ 11,743
=====================================================================================
47
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 1, 1996
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ -- $ 33,296 $560,540 $120,223 ($16,421) $697,638
Costs and expenses:
Cost of goods sold -- 19,867 305,100 88,592 (16,300) 397,259
Selling, general and administrative 150 9,082 190,628 21,593 -- 221,453
Loss on net assets held for sale -- 11,762 -- -- -- 11,762
Amortization of intangibles -- 411 11,450 1,733 -- 13,594
Interest expense, net 30,364 -- 91 (1,658) -- 28,797
(Loss) income from equity investees (2,608) 1,796 -- -- 812 --
Income from non-guarantor
equity investees -- (15,829) (2,920) -- 18,749 --
Capital charge and intercompany
interest allocation (35,043) 3,209 41,595 (9,761) -- --
-----------------------------------------------------------------------------------
Income/(loss) before income taxes 7,137 2,998 14,596 19,724 (19,682) 24,773
Income taxes 7,522 390 16,392 975 -- 25,279
-----------------------------------------------------------------------------------
Net income/(loss) ($385) $ 2,608 ($1,796) $ 18,749 ($19,682) ($506)
===================================================================================
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ -- $30,460 $537,672 $96,296 ($10,486) $653,942
Costs and expenses:
Cost of goods sold -- 16,548 286,088 70,209 (10,429) 362,416
Selling, general and administrative (13,080) 8,382 192,205 15,903 -- 203,410
Amortization of intangibles -- 411 12,143 1,502 -- 14,056
Interest expense, net 33,113 -- (819) (1,276) -- 31,018
(Loss) income from equity investees (11,870) (9,001) -- -- 20,871 --
Income from non-guarantor
equity investees -- (1,346) (4,160) -- 5,506 --
Capital charge and intercompany
interest allocation (32,794) 2,773 29,678 343 -- --
-----------------------------------------------------------------------------------
Income/(loss) before income taxes 24,631 12,693 22,537 9,615 (26,434) 43,042
Income taxes 5,104 823 13,536 4,109 -- 23,572
-----------------------------------------------------------------------------------
Net income/(loss) $ 19,527 $11,870 $ 9,001 $ 5,506 ($26,434) $ 19,470
===================================================================================
48
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net cash provided by (used in)
operating activities $ 29,901 ($40,205) $ 7,532 $ 44,782 $ 39 $ 42,049
------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of subsidiary -- 35,000 -- -- -- 35,000
Purchase of property, plant and
equipment -- (450) (27,109) (1,581) -- (29,140)
Proceeds from sale of property, plant
and equipment -- 5,150 410 1 -- 5,561
Net activity in investment in and
advances to (from) subsidiaries and
affiliates 34,131 13,862 23,942 (7,284) (64,651) --
------------------------------------------------------------------------------------
Net proceeds provided by (used in)
investing activities 34,131 53,562 (2,757) (8,864) (64,651) 11,421
Cash flows from financing activities:
Dividend (99,775) -- -- -- -- (99,775)
Repayment of long-term obligations, net (63,127) -- -- -- -- (63,127)
Net borrowing - revolving credit facility 105,000 -- -- -- -- 105,000
Debt issuance costs (6,130) -- -- -- -- (6,130)
Net equity activity with Parent -- (13,391) (5,831) (45,390) 64,612 --
------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (64,032) (13,391) (5,831) (45,390) 64,612 (64,032)
------------------------------------------------------------------------------------
Change in cash and cash equivalents -- (34) (1,056) (9,472) -- (10,562)
Cash and cash equivalents:
Beginning of period -- 54 3,118 13,447 -- 16,619
------------------------------------------------------------------------------------
End of period $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
====================================================================================
49
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 1, 1996
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net cash provided by (used in)
operating activities $ 15,398 $16,923 $32,242 $ 19,105 ($39,251) $ 44,417
-----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and
equipment -- (134) (11,581) (870) 540 (12,045)
Proceeds from sale of property, plant
and equipment -- -- 1,579 50 (540) 1,089
Net activity in investment in and
advances to (from) subsidiaries and
affiliates 17,267 (8,175) (26,695) 1,888 15,715 --
-----------------------------------------------------------------------------------
Net proceeds provided by (used in)
investing activities 17,267 (8,309) (36,697) 1,068 15,715 (10,956)
Cash flows from financing activities:
Dividend (35,463) -- -- -- -- (35,463)
Repayment of long-term obligations, net (22,202) -- (1,608) 83 -- (23,727)
Net borrowing - revolving credit facility 25,000 -- -- -- -- 25,000
Debt issuance costs -- -- -- -- -- --
Net equity activity with Parent -- (8,569) (4,830) (10,137) 23,536 --
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (32,665) (8,569) (6,438) (10,054) 23,536 (34,190)
-----------------------------------------------------------------------------------
Change in cash and cash equivalents -- 45 (10,893) 10,119 -- (729)
Cash and cash equivalents:
Beginning of period -- 9 14,011 3,328 -- 17,348
-----------------------------------------------------------------------------------
End of period $ -- $ 54 $ 3,118 $ 13,447 $ -- $ 16,619
===================================================================================
50
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1995
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
Net cash provided by (used in)
operating activities $ 26,749 $ 22,771 $ 42,832 $ 23,472 ($52,497) $ 63,327
-----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and
equipment -- (79) (8,204) (3,521) -- (11,804)
Proceeds from sale of property, plant
and equipment -- -- 7,417 51 -- 7,468
Net activity in investment in and
advances to (from) subsidiaries and
affiliates 32,251 (5,468) (11,113) (25,456) 9,786 --
-----------------------------------------------------------------------------------
Net proceeds provided by (used in)
investing activities 32,251 (5,547) (11,900) (28,926) 9,786 (4,336)
Cash flows from financing activities:
Dividend -- -- -- -- -- --
Repayment of long-term obligations, net (59,000) -- (3,918) (34) -- (62,952)
Net borrowing - revolving credit facility -- -- -- -- -- --
Debt issuance costs -- -- -- -- -- --
Net equity activity with Parent -- (17,162) (16,484) (8,404) 42,050 --
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (59,000) (17,162) (20,402) (8,438) 42,050 (62,952)
-----------------------------------------------------------------------------------
Change in cash and cash equivalents -- 62 10,530 (13,892) (661) (3,961)
Cash and cash equivalents:
Beginning of period -- (53) 3,481 17,220 661 21,309
-----------------------------------------------------------------------------------
End of period $ -- $ 9 $ 14,011 $ 3,328 $ -- $ 17,348
===================================================================================
51
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following sets forth the name, age, principal occupation and employment
and business experience during the last five years of each of the Company's
directors:
JOSH BEKENSTEIN
Mr. Bekenstein, age 39, is a Managing Director of Bain Capital, Inc.
("Bain"). Mr. Bekenstein helped start Bain in 1984 and has been involved in
numerous venture capital and leveraged acquisitions over the past thirteen
years. Mr. Bekenstein presently serves on the Board of Directors of a number of
public and private companies, including Waters Corporation, Bright Horizons
Childrens Centers, Inc. and Small Fry Snack Foods. Prior to Bain, Mr. Bekenstein
was a consultant at Bain & Company, where he worked on strategy consulting
projects for a number of Fortune 500 clients.
PAUL EDGERLEY
Mr. Edgerley, age 41, has been Managing Director of Bain since 1993. From
1990 to 1993 he was a General Partner of Bain Venture Capital, and from 1988 to
1990 he was a Principal of Bain Capital Partners. He serves on the Boards of
Directors of Steel Dynamics, Inc. and GS Industries, Inc.
JAMES W. JOHNSTON
Mr. Johnston, age 51, is President and Chief Executive Officer of Stonemarker
Enterprises, Inc., a consulting and investment company. He has been a director
of Sealy, Inc. since March 4,1993. Mr. Johnston was Vice Chairman RJR Nabisco,
Inc. from 1995 to 1996. He also served as Chairman and CEO of R. J. Reynolds
Tobacco Co. from 1989 to 1995, Chairman R. J. Reynolds Tobacco Co. from 1995
to 1996 and Chairman R.J. Reynolds Tobacco International from 1993 to 1996. Mr.
Johnston served on the board of RJR Nabisco, Inc. and RJR Nabisco Holdings
Corp. from 1992 to 1996. From 1984 until joining Reynolds, Mr. Johnston was
Division Executive, Northeast Division, of Citibank, N.A., a subsidiary of
Citicorp, where he was responsible for Citibank's New York Banking Division, its
banking activities in upstate New York, Maine and Mid-Atlantic regions, and its
national student loan business. Mr. Johnston is also a director of The Wachovia
Corporation.
RONALD L. JONES
Mr. Jones, age 55, since March 2, 1996 has been President and Chief Executive
Officer of the Company. From October, 1988 until joining the Company, Mr. Jones
served as President of Masco Home Furnishings. From 1983 to 1988, Mr. Jones was
President of HON Industries.
MICHAEL KRUPKA
Mr. Krupka, age 32, joined Bain in 1991 and became a Managing Director in
1997. Prior to joining Bain, Mr. Krupka spent several years as a consultant at
Bain & Company where he focused on technology and technology-related companies.
In addition, he has served in several senior operating roles at Bain portfolio
companies. He serves on the Board of Directors of Jostens Learning Corp. and J
Tech, Inc.
52
JOHN M. SALLAY
Mr. Sallay, age 42, is a Managing Director of Harvard Private Capital Group,
Inc. ("HPC"), which manages the private equity and real estate portfolios of the
Harvard University endowment fund. Prior to joining HPC in 1990, Mr. Sallay was
a consultant with McKinsey & Company, Inc. of New York. Mr. Sallay serves on
the Board of Directors of E-Z Serve Corporation and United Auto Group, Inc.
JONAS STEINMAN
Mr. Steinman, age 32, since June, 1995 has been a Principal at Chase Capital
Partners. Previously he was employed as an Associate by Chase Capital Partners
and its predecessor, Chemical Venture Partners.
EXECUTIVE OFFICERS
The following sets forth the name, age, title and certain other information
with respect to the executive and certain other appointed officers of the
Company:
BRUCE G. BARMAN
Dr. Barman, age 52, since January, 1995 has been Vice President Research and
Development of the Company. From 1991 until he joined the Company, Dr. Barman
was Vice President-Research and Development of Griffith Laboratories N.A., a
custom food products producer for a customer base of major North American food
service and food processing companies.
JOHN G. BARTIK
Mr. Bartik, age 46, since March, 1995 has been Vice President Tax and
Assistant Treasurer of the Company. From 1990 to 1995, he was Treasurer of the
Company and from 1985 has served as the Company's Director of Taxation.
JEFFREY C. CLAYPOOL
Mr. Claypool, age 50, since September, 1991 has been Vice President Human
Resources of the Company.
GARY T. FAZIO
Mr. Fazio, age 47, since 1990 has been Vice President Sales of the Company.
Mr. Fazio joined the Company as a general manager in 1981. From 1987 to 1990,
he was Regional Vice President of the Company.
DOUGLAS E. FELLMY
Mr. Fellmy, age 48, since July, 1992 has been Vice President Operations of
the Company. Previously, Mr. Fellmy served as Regional Vice President-
Operations since April 1990 and also as President of the Components Division
since December 1989. Mr. Fellmy has served, since 1971, in numerous other
capacities with the Company's Components Division.
JAMES F. GOUGHENOUR
Mr. Goughenour, age 60, since June, 1997 has been Vice President Technology
and Strategic Planning of the Company. From 1979 until he joined the Company,
Mr. Goughenour had been with the HON Company, serving as Vice President.
DAVID J. MCILQUHAM
Mr. McIlquham, age 43, since April, 1990 has been Vice President-Marketing of
the Company.
53
SHARON J. PETRELLA
Ms. Petrella, age 41, since January, 1995 has been Vice President Information
Technology of the Company. From 1983 until she joined the Company, Ms. Petrella
had been with The Little Tikes Toy Company, Division of Rubbermaid, in various
positions.
LAWRENCE J. ROGERS
Mr. Rogers, age 49, since February, 1994 has been Vice President
International of the Company. Previously, Mr. Rogers has served, since 1979, in
numerous other capacities within the Company's operations, including President-
Sealy Canada.
RICHARD F. SOWERBY
Mr. Sowerby, age 43, since April, 1995 has been Vice President Controller of
the Company. Previously, from 1991, Mr. Sowerby served as Corporate Controller
of Elliott Company, a manufacturer and servicer of turbo machinery equipment.
RONALD H. STOLLE
Mr. Stolle, age 49, since March, 1995 has been Vice President Treasurer of
the Company. Previously, from 1987, Mr. Stolle served as Director, Treasury
Operations for Reliance Electric Company, a manufacturer of industrial and
telecommunication products.
KENNETH L. WALKER
Mr. Walker, age 49, since May, 1997 has been Vice President, General Counsel
and Secretary of the Company. Previously, from 1991, Mr. Walker served as Vice
President, General Counsel and Secretary of Varity Corporation, a manufacturer
of automotive components, diesel engines and farm machinery.
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
During Fiscal 1997, Kenneth L. Walker and James F. Goughenour failed to file
with the SEC on a timely basis a required report when they became executive
officers of the Company and were granted stock options and restricted stock by
the Company; and Bruce G. Barman failed to file with the SEC on a timely basis a
required report when he was granted stock options and restricted stock by the
Company. In making this statement, the Company has relied on the Forms 3, 4 and
5, and amendments thereto, furnished to the Company.
54
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company for each of the
years ended November 30, 1997, December 1, 1996, and November 30, 1995, of those
persons who served as (i) the chief executive officer during Fiscal 1996 and
1997, and (ii) the other four most highly compensated executive officers of the
Company for Fiscal 1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ------------------------------------------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
NAME AND ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
- --------------------------- ---- -------- -------- --------------- ------------- ------------- ------------- ---------------
(a) (b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald L. Jones (c)
Chief Executive 1997 $527,516 $633,052 $1,168 -- 75,000(d) -- $ 21,583
Officer and President 1996 381,262 423,584 456,168(c) $637,800(e) 400,000(f) -- 2,476
1995 -- -- -- -- -- -- --
Lyman M. Beggs (g) 1997 -- -- -- -- -- -- 1,495,821(g)
Chairman, Chief 1996 153,318 91,988 -- -- -- -- 3,059,545(g)
Executive Officer and 1995 525,336 -- 75,914(h) 107,000(i) -- -- 21,262
President
Gary T. Fazio 1997 203,833 182,289 248 203,978(j) 32,000(d) -- 16,524
Vice President - Sales 1996 196,226 86,559 -- -- -- 426,030 15,864
1995 187,765 -- -- -- -- -- 15,151
Douglas Fellmy 1997 197,333 177,739 -- 203,978(j) 32,000(d) -- 16,016
Vice President - 1996 188,134 83,135 -- -- -- 426,030 15,237
Operations 1995 171,052 -- -- -- -- -- 13,434
David J. McIlquham 1997 199,167 179,023 242 203,978(j) 32,000(d) -- 16,165
Vice President - 1996 188,505 83,302 -- -- -- 426,030 15,268
Marketing 1995 171,052 -- -- -- -- -- 13,794
Lawrence J. Rogers 1997 180,305 158,953 -- 203,978(j) 32,000(d) -- 14,271
Vice President - 1996 175,812 100,385 -- -- -- 395,046 13,884
International 1995 164,551 15,503 -- -- -- -- 13,049
(a) Such amount reflects the value of Shares earned under the Performance Share
Plan which concluded on December 1,1996.
(b) Represents amounts paid on behalf of each of the Named Executive Officers
for the following three respective categories of compensation: (i) Company
premiums for life and accidental death and dismemberment insurance (ii)
Company premiums for long-term disability benefits, and (iii) Company
contributions to the Company's defined contribution plans. Amounts for each
of the Named Executive Officers for each of the three respective preceding
categories is as follows: Mr. Jones: (1997-$3,083, $1,000, $17,500; 1996-
$1,943, $533, $0); Mr. Beggs: (1997-$3,083, $0, $0; 1996-$3,525, $267, $0;
1995-$3,501, $800, $16,960; Mr. Fazio: (1997-$1,257, $999, $14,268; 1996-
$1,305, $849, $13,710; 1995-$1,254, $753, $13,144); Mr. McIlquham: (1997-
$1,227, $996, $13,942; 1996-$1,255, $817, $13,195; 1995-$1,137, $683,
$11,974;); Mr. Fellmy: (1997-$1,216, $987, $13,813; 1996-$1,252, $816,
$13,169; 1995-$1,106, $665, $11,623); Mr. Rogers (1997-$622, $1,027,
$12,621; 1996-$747, $763, $12,374;1995-$947, $583, $11,519 ).
(c) Pursuant to his Employment Agreement, Mr. Jones commenced employment with
the Company as of February 27, 1996. The terms of the Employment Agreement
are described more fully in "Compensation Pursuant to Plans and Other
Arrangements - Executive Employment Agreements." Such amount primarily
consists of a $250,000 payment upon commencement of employment and $205,000
in relocation and other transitional matters.
55
(d) On May 31, 1997, the Company issued ten-year non-qualified stock options at
an exercise price of $9.60, pursuant to the Company's 1997 Stock Option Plan
to, among others, certain Named Executive Officers as follows: Ronald L.
Jones: 75,000 shares; Gary T. Fazio: 32,000 shares; David J. McIlquham:
32,000 shares; Douglas Fellmy: 32,000 shares; and Lawrence J. Rogers: 32,000
shares.
(e) Such amount reflects the Company's determination of the fair value at the
date of grant of 67,635 shares issued to Mr. Jones, pursuant to his
Employment Agreement. Although the 1997 Credit Agreement and Note Indenture
contain restrictions on the Company's ability to pay dividends, if declared
and paid on the Company's Shares, such dividends would be paid on such
Shares issued to Mr. Jones. The February 28,1997 Dividend was paid on such
shares. As of November 30,1997, the value of Mr. Jones' restricted stock
holdings was $967,363.
(f) Pursuant to his Employment Agreement, the Company granted Mr. Jones ten-year
options to acquire up to 400,000 Shares at an exercise price of $10.63 per
Share as further described in "Compensation Pursuant to Plans and Other
Arrangements - Executive Employment Agreements."
(g) Mr. Beggs' employment with the Company terminated on March 15,1996. Mr.
Beggs was awarded $2,578,902 in 1996 and $844,475 in 1997 in connection with
his withdrawal from the Performance Share Plan and settlement of all related
claims. In addition, he received $394,236 in 1996 and $525,648 in 1997 in
salary continuation. Mr. Beggs' remaining equity loan balance (see footnote
(h) below) was forgiven in addition to a gross up payment to cover his tax
liability, together totaling $80,890. He was also reimbursed $1,725 in 1997
for professional fees incurred relating to the preceding transactions. His
Employment Agreement and the terms of his termination and certain payments
made in connection therewith are described more fully in "Compensation
Pursuant to Plans and Other Arrangements -- Executive Employment
Agreements."
(h) Mr. Beggs commenced employment with the Company as of August 24, 1992. Under
the terms of his Employment Agreement, Mr. Beggs received $75,914 in 1995 as
the result of: (i) the forgiveness of a portion of an equity loan from the
Company to Mr. Beggs, reflecting the loss of equity in his previous
residence of $45,383; (ii) professional fees, personal use of auto, travel
and entertainment expenses; and (iii) payments to cover Mr. Beggs' tax
liabilities on the foregoing items.
(i) Such amount reflects the Company's determination of the fair value at the
date of grant of 10,000 shares issued to Mr. Beggs as of November 30,1995
pursuant to his Employment Agreement. These Shares were repurchased by the
Company in connection with Mr. Beggs' termination of employment. The
Employment Agreement also provided for the issuance to Mr. Beggs of an
additional 90,000 Shares, which were forfeited upon his termination. See
"Compensation Pursuant to Plans and Other Arrangements--Executive Employment
Agreements." Hence, Mr. Beggs no longer had any restricted stock holdings at
the end of Fiscal 1996.
(j) Such amount reflects the Company's determination of the fair value at the
date of grant of restricted stock issued, on January 6,1997, pursuant to the
Company's 1996 Transitional Restricted Stock Plan to, among others, certain
Named Executive Officers as follows: Gary T. Fazio: 15,800 shares; David J.
McIlquham: 15,800 shares; Douglas Fellmy: 15,800 shares; and Lawrence J.
Rogers: 15,800 shares. As of November 30, 1997 the value of each of the
above noted Named Executive Officers holdings pursuant to this plan was
$225,983.
56
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------- -------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS/SARS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM (a)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------------- ----------- ------------ ----------- ---------- --------- ------------
Ronald L. Jones 75,000 8.0% $9.60 6/1/2007 $453,000 $1,147,500
Chief Executive Officer
and President
Gary T. Fazio 32,000 3.5% $9.60 6/1/2007 $193,280 $ 489,600
Vice President - Sales
Douglas Fellmy 32,000 3.5% $9.60 6/1/2007 $193,280 $ 489,600
Vice President -
Operations
David McIlquham 32,000 3.5% $9.60 6/1/2007 $193,280 $ 489,600
Vice President -
Marketing
Lawrence J. Rogers 32,000 3.5% $9.60 6/1/2007 $193,280 $ 489,600
Vice President -
International
(a) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and
Exchange Commission and are not intended to be a forecast of the
Company's stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the stock.
There can be no assurance that the amounts reflected in this table
will be achieved. In accordance with rules promulgated by the
Securities and Exchange Commission, Potential Realizable Value is
based upon the exercise price of the options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FY-END (#) AT FY-END ($)
ON EXERCISE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) REALIZED (a) (b) (c)
- ---------------------------- ----------- -------- -------------------------------- -------------------------
Ronald L. Jones -- -- 146,836/515,506 $1,038,527/$3,468,270
Chief Executive Officer
and President
Gary T. Fazio -- -- -- / 32,000 -- / $150,486
Vice President - Sales
Douglas Fellmy -- -- -- / 32,000 -- / $150,486
Vice President -
Operations
David McIlquham -- -- -- / 32,000 -- / $150,486
Vice President -
Marketing
Lawrence J. Rogers -- -- -- / 32,000 -- / $150,486
Vice President -
International
(a) Includes options exercisable within 60 days after November 30, 1997.
(b) Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price.
(c) Represents the total gain which would be realized if all in-the-money
options beneficially held at November 30, 1997 were exercised, determined by
multiplying the number of Shares underlying the options by the difference
between the per share option exercise price and the estimated fair market
value as of November 30, 1997.
57
COMPENSATION PURSUANT TO PLANS AND OTHER ARRANGEMENTS
Severance Benefit Plans. Effective December 1, 1992, the Company established
------------------------
the Sealy Executive Severance Benefit Plan (the "Executive Severance Plan") for
employees in certain salary grades. Benefit eligibility includes, with certain
exceptions, termination as a result of a permanent reduction in work force or
the closing of a plant or other facility, termination for inadequate job
performance, termination of employment by the participant following a reduction
in base compensation, reduction in salary grade which would result in the
reduction in potential plan benefits or involuntary transfer to another
location. Benefits include cash severance payments calculated using various
multipliers varying by salary grade, subject to specified minimums and maximums
depending on such salary grades. Such cash severance payments are made in equal
semi-monthly installments calculated in accordance with the Executive Severance
Plan until paid in full. Certain executive-level officers would be entitled to
a minimum of one-year's salary and a maximum of two-year's salary under the
Executive Severance Plan. However, if a Participant becomes employed prior to
completion of the payment of benefits, such semi-monthly installments shall be
reduced by the Participant's base compensation for the corresponding period from
the Participant's new employer. Participants receiving cash severance payments
under the Executive Severance Plan also would receive six months of contributory
health and dental coverage and six months of group term life insurance coverage.
The Company currently follows the terminal accrual approach to accounting for
severance benefits under the Executive Severance Plan and records the estimated
cost of these benefits as expense at the date of the event giving rise to
payment of the benefits.
Executive Employment Agreements. Effective February 27, 1996, the Company
-------------------------------
entered into an employment agreement and related reimbursement letter agreement
(collectively, the "Jones Agreement") with Mr. Jones, pursuant to which Mr.
Jones became employed as President and Chief Executive Officer of the Company
for an initial term ending March 31, 1999 and continuing on a year-to-year basis
thereafter until retirement or 90 days prior written notice of either party of
intent to terminate at the end of such renewal period. Pursuant to the Jones
Agreement, Mr. Jones' minimum base salary is $500,000 annually and he is
eligible to receive a cash bonus in an amount to be determined by the Board of
Directors or a committee thereof, with a guaranteed minimum bonus of 40% of
salary payments for the fiscal year ending December 1, 1996 and he received a
$250,000 payment upon commencing employment.
Pursuant to the terms of the Jones Agreement and a related Restricted Stock
Agreement and Stock Option Agreement, Mr. Jones received an aggregate of 67,635
Shares based on the following vesting schedule: March 4, 1997 - 16,900 Shares;
March 4, 1998 - 16,900 Shares; March 4, 1999 - 16,900 Shares; and March 4, 2000
- - 16,935 Shares. Mr. Jones also received ten-year options to acquire up to
400,000 Shares at an exercise price of $10.63 per Share, the number and exercise
price of which will be equitably adjusted for special large and non-recurring
dividends, and with the following vesting schedule: March 4, 1997 - 100,000
options; March 4, 1998 - 100,000 options; March 4, 1999 - 100,000 options; and
March 4, 2000 - 100,000 options.
Mr. Jones also entered into a Stockholder's Agreement with the Company (the
"Jones Stockholder's Agreement") in connection with the Employment Agreement,
which provided that, prior to March 4, 2001, Mr. Jones could sell any Company
Stock (as defined) that he owns, including the Restricted Stock referenced
above, only after the Company's first registered public offering of its common
stock ("Initial IPO") or approval by the Board of Directors. After March 4,
2001, the Company shall have certain rights of first refusal with respect to any
proposed transfers of Mr. Jones' Company Stock (other than to certain permitted
transferees) if no Initial IPO has occurred. In addition, if Mr. Jones'
employment is terminated prior to an Initial IPO other than by reason of his
resignation, then the Jones Stockholder's Agreement grants to Mr. Jones or his
representative the right to cause the Company to repurchase all of Mr. Jones'
Company Stock at the "fair market value" (determined in accordance with the
Jones Stockholder's Agreement). In the event that Mr. Jones' employment is
terminated by reason of his resignation prior to an Initial IPO, then the
Company shall have the option to repurchase Mr. Jones' Company Stock for the
"fair market value."
Effective October 31, 1992, the Company entered into an employment agreement
and related reimbursement letter agreement (collectively, the "Employment
Agreement") with Mr. Beggs, pursuant to which Mr. Beggs was employed as
Chairman, President and Chief Executive Officer of the Company for a period (the
"Employment Period") commencing on August 24, 1992 and continuing through
November 30, 1997 (the "Expiration Date"). Pursuant to the Employment
Agreement, Mr. Beggs received a minimum base salary of $500,000 annually.
58
Pursuant to the Employment Agreement, Mr. Beggs was granted an aggregate of
200,000 Shares, 100,000 of which were issued as of October 31, 1992 subject to
certain forfeiture provisions which lapsed as of November 30, 1995 and 10,000
issued at November 30, 1995. In addition, the following number of additional
Shares were issuable had he remained employed by the Company through the dates
indicated: November 30, 1996 --40,000 shares; and November 30, 1997 -- 50,000
shares. Mr. Beggs also entered into a Stockholder's Agreement with the Company
(the "Stockholder's Agreement") in connection with the Employment Agreement,
which provided that, prior to the Expiration Date, Mr. Beggs could sell his
Shares only after an Initial IPO or approval by the Board of Directors and,
after the Expiration Date, the Company shall have certain rights of first
refusal with respect to any proposed transfers of Mr. Beggs' Shares (other than
to certain permitted transferees). In addition, Mr. Beggs was granted an award
of 1,000,000 Performance Shares, representing the right to receive up to
1,000,000 Shares pursuant to, and subject to the terms of, the Plan. Mr. Beggs
subsequently withdrew from the Performance Share Plan in connection with his
termination of employment with the Company.
Pursuant to the Employment Agreement, Mr. Beggs received relocation expenses
and was entitled to health and life insurance and certain other benefits. The
Company purchased Mr. Beggs' previous residence from him for $712,500 and sold
such residence for $690,000 in February 1993. Mr. Beggs borrowed $157,673 from
the Company (the "Equity Loan") upon the purchase of a new home in the Cleveland
area, reflecting the loss of equity in his previous residence. Such Equity Loan
was interest free to the extent allowed under applicable tax laws and otherwise
bears interest at the applicable federal rate. In accordance with the terms of
the Employment Agreement, $20,000 of the Equity Loan was forgiven on each of
November 30, 1995, 1994 and 1993. In addition, $2,442, $3,256 and $4,070 in
interest related to such Equity Loan was also forgiven on November 30, 1995,
1994 and 1993, respectively, and the Company paid Mr. Beggs an additional
$45,383, $47,029 and $44,034, as additional compensation for his tax liability
as a result of such forgiveness of indebtedness in each period, respectively.
The balance of the Equity Loan was to be paid in two equal annual payments of
principal on November 30, 1996 and 1997.
The Employment Agreement provided that if, prior to the Expiration Date, Mr.
Beggs' employment was terminated by the Company other than for cause (as defined
in the Employment Agreement), death or disability or if Mr. Beggs terminated his
employment for good reason, he would continue to receive his base salary until
the later of November 30, 1997 or one year, and he would also receive
forgiveness of the Equity Loan, the payment of a portion of any then-applicable
bonus on a pro-rata basis and the issuance of the remainder of the unissued
Shares noted above. In addition, it provided that if Mr. Beggs' employment
terminated prior to the Expiration Date under certain circumstances, then the
Stockholder's Agreement grants to Mr. Beggs or his representative the right to
cause the Company to repurchase all of Mr. Beggs' Shares at their "fair market
value" (determined in accordance with the Stockholder's Agreement). It further
provided that in the event that Mr. Beggs' employment terminated prior to the
Expiration Date for "cause" or if he voluntarily terminates his employment other
than for "good reason," then the Company had the option to repurchase Mr. Beggs'
Shares for their "fair market value."
Mr. Beggs' last day of employment was March 15, 1996. Mr. Beggs and the
Company entered into a settlement agreement dated March 1, 1996, which provided
that it superseded all previous agreements. Pursuant to its terms, Mr. Beggs
will continue to receive his base salary through November 30, 1997 and, in
January, 1997, received a bonus equal to 60% of the salary payments for the
period December 1, 1995 to March 15, 1996. The remaining Equity Loan balance of
$40,000 has been forgiven and the Company paid Mr. Beggs an amount necessary to
offset any tax liability to him as a result of such forgiveness of indebtedness.
In exchange for Mr. Beggs' transferring the 110,000 Shares which had been issued
to him and relinquishing any rights to the remaining 90,000 shares that would
have been issued to him had Mr. Beggs remained employed, the Company paid Mr.
Beggs $2,126,000.
Mr. Beggs withdrew from the Performance Share Plan and in exchange was deemed
to have been vested in 800,000 Performance Share Units. Instead of remaining as
a participant and converting his Units into Shares within the Plan at the
conclusion of the fiscal year ending December 1, 1996, the Company agreed to pay
Mr. Beggs an amount determined by multiplying the number of Shares into which
Performance Share Units would have been converted in accordance with the formula
then set forth in the Performance Share Plan by the higher of (a) the per Share
value as of November 30, 1996 as determined pursuant to the Plan or (b) $10.63
per Share plus interest at the rate of 6% per annum from March 15, 1996 to date
of payment. As a result, the Company owes Mr. Beggs $2,578,902.
59
Remuneration of Directors. Effective upon the Recapitalization, the Company
--------------------------
will reimburse directors for any out-of-pocket expenses incurred by them in
connection with services provided in such capacity. In addition, the Company may
compensate a directors for services provided in such capacity.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994,
June 27, 1995 and as of May 1, 1996. The 1993 Plan provides for the one-time
automatic grant of ten-year options to acquire up to 10,000 Shares to all
current and future directors who are not employed by the Company, by
Zell/Chilmark or by their respective affiliates ("Non-Employee Directors").
Options granted under the 1993 Plan vest immediately and are initially
exercisable at a price equal to the fair market value of the Shares on the date
of grant. For options granted prior to March 1, 1994, the exercise price of
options granted pursuant to this Plan increased on the first anniversary date of
such grant by 4%, which became the fixed exercise price for all such options.
Options issued thereafter, are exercisable over their term at the fair market
value on the date of grant. Pursuant to the 1993 Plan, the Company granted
options to acquire up to 50,000 Shares to Non-Employee Directors in fiscal year
1993 at an initial exercise price of $9.05 per Share, which therefore have a
fixed exercise price of $9.41 per Share. No options under the 1993 Plan have
been exercised. The 1993 Plan was amended on June 27, 1995 to provide for the
grant of an additional option to purchase 5,000 Shares to each eligible director
and thereafter providing for the automatic annual grant of an option to each
eligible director to purchase an additional 5,000 Shares at fair market value on
the date of grant. Pursuant to the 1993 Plan, the Company granted options to
acquire up to 5,000 Shares to each eligible director in fiscal 1995, 1996 and
1997 with a fixed exercise price of $15.95, $10.63 and $9.60 per share,
respectively. The 1993 Plan was amended effective May 1, 1996 to provide that
as of the record date of any special, large and non-recurring cash dividend to
be paid on common shares, the option price per share will be automatically
decreased and the number of options automatically increased to the maximum
extent allowable without the Company having to account for additional expense.
The options outstanding (net of forfeitures) and their related strike prices at
November 30,1997 adjusted for the dividends declared on May 17,1996 and February
28, 1997 are 60,780 Shares at $6.21, 30,384 Shares at $10.52, 26,872 Shares at
$7.01, and 20,000 Shares at $9.60 for the 1993, 1995, 1996 and 1997 grants,
respectively. As of November 30, 1997 no options under the 1993 Plan have been
exercised.
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Effective with the Recapitalization, the issued and outstanding capital stock
of the Company consists of 19,518,953 shares of Class A common stock, par value
$0.01 per share ("Class A common"), 7,791,327.6440 shares of Class B Common
stock, par value $0.01 per share ("Class B Common"), 2,168,772.5555 shares of
Class L common stock, par value $0.01 per share ("Class L Common"), and
865,703.0716 shares of Class M common stock, par value $0.01 per share ("Class M
Common" and collectively with the Class A Common, Class B Common and Class L
Common, "Common Stock"). The shares of Class A Common and Class L Common each
entitle the holder thereof to one vote per share on all matters to be voted upon
by the stockholders of the Company, including the election of directors, and are
otherwise identical, except that the shares of Class L. Common are entitled to a
preference over Class A Common with respect to any distribution by the Company
to holders of its capital stock equal to the original cost of such share
($40.50) plus an amount which accrues on a daily basis at a rate of 10% per
annum, compounded annually. The Class B Common is identical to the Class A
Common and the Class M Common is identical to the Class L Common except that the
Class B Common and the Class M common are nonvoting. The Class B Common and the
Class M Common are convertible into Class A Common and Class L Common,
respectively, automatically upon consummation of an initial public offering by
the Company. The Board of Directors of the Company is authorized to issue
preferred stock, par value $0.01 per share, with such designations and other
terms as may be stated in the resolutions providing for the issue of any such
preferred stock adopted from time to time by the Board of Directors.
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each person (other than
directors and executive officers of the company) known to the Company to own
more than 5% of the outstanding voting common stock of the Company. To the
knowledge of the Company, each of such stockholders has sole voting and
investment power as to the shares shown unless otherwise noted. Beneficial
ownership of the securities listed in the table has been determined in
accordance with the applicable rules and regulations promulgated under the
Exchange Act.
SHARES BENEFICIALLY OWNED
-------------------------
Class A Common Class B Common Class L Common Class M Common
-------------- --------------- -------------- --------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
--------- ----------- ------------ ----------- ------------ ----------- ------------ -----------
PRINCIPAL STOCKHOLDERS:
Bain Funds /(1)/ /(2)/ 9,450,000 45.4% 612,284.54 7.9% 1,050,000 45.4% 68,031.62 7.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harvard Private Capital 4,000,000 19.2 -- -- 444,444.4444 19.2 -- --
Holdings, Inc.
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Sealy Investors 1, LLC/(2)/ 973,989 4.7 5,086,617.06 65.3 108,221 4.7 565,179.6733 65.3
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 2, LLC/(2)/ 973,989 4.7 2,056,314.03 26.4 108,221 4.7 228,479.3367 26.4
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 3, LLC/(2)/ 973,989 4.7 36,112.01 * 108,221 4.7 4,012.4456 *
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Zell/Chilmark Fund, L.P. 2,862,000 13.7 -- -- 318,000 13.7 -- --
Two North Riverside Drive
Suite 1500
Chicago, IL 60606
61
* Less than one percent
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds
and Messrs. Bekenstein, Edgerley and Krupka.
(2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity Associates,
L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of Sealy
Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and
BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with
SI1 and SI2, the "LLCs") are BancBoston Investments, Inc. and BCPV. BCPV is
the administrative member of each LLC and beneficially owns 1% of the
equity of each LLC. Accordingly, BCPV may be deemed to beneficially own
certain shares owned by the LLCs, although BCPV disclaims such beneficial
ownership.
The following table sets forth certain information regarding the beneficial
ownership of each class of common stock held by each director of the Company,
each Named Executive Officer and all of the Company's directors and executive
officers as group. To the knowledge of the Company, each of such stockholders
has sole voting and investment power as to the shares shown unless otherwise
noted. Beneficial ownership of the securities listed in the table has been
determined in accordance with the applicable rules and regulations promulgated
under the Exchange Act.
SHARES BENEFICIALLY OWNED
Class A Common Class B Common Class L Common Class M Common
-------------- -------------- -------------- --------------
Number Percentage Number Percentage Number Percentage Number Percentage
Shares of Class Shares of Class Shares of Class Shares of Class
------ ---------- ------ ---------- ------ ---------- ------ ----------
DIRECTORS & EXECUTIVE
OFFICERS:
Josh Bekenstein/(1)/ /(3)/ 9,450,000 45.4% -- -- 1,050,000 45.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Paul Edgerly/(1)/ /(3)/ 9,450,000 45.4 -- -- 1,050,000 45.4 -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Michael Krupka/(1)/ /(3)/ 9,450,000 45.4 -- -- 1,050,000 45.4 -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
John M. Sallay/(4)/ 4,000,000 19.2 -- -- 444,444.4444 19.2 -- --
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Ronald Jones/(5)/ 939,996 4.6 -- -- 104,444 4.6 -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Gary T. Fazio/(6)/ 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Douglas Fellmy 75,285 * -- -- 8,365 * -- --
c/o Sesaly Corporation
1228 Euclid Avenue
Cleveland, OH 44115
David McIlquham 41,994 * -- -- 4,666 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Lawrence J. Rogers 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
All directors and executive 14,944,630 71.8 -- -- 1,660,514.4444 71.8 -- --
officers as a group
(15 persons)
* Less than one percent
62
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain
CapitalFund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds
and Messrs. Bekenstein, Edgerley and Krupka.
(2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity Associates,
L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of Sealy
Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and
BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with
SI1 and SI2, the "LLCs") are BancBoston Investments, Inc. and BCPV. BCPV is
the administrative member of each LLC and beneficially owns 1% of the
equity of each LLC. Accordingly, BCPV may be deemed to beneficially own
certain shares owned by the LLCs, although BCPV disclaims such beneficial
ownership.
(3) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of Bain
Capital Investors V., Inc., the sole general partner of BCPV, and are
limited partners of BCPV, the sole general partner of Fund V and Fund V-B.
Accordingly, Messrs, Bekenstein, Edgerley and Krupka may be deemed to
beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs.
Bekenstein, Edgerley and Krupka are each general partners of BCIP and BCIP
Trust and, accordingly, may be deemed to beneficially own shares owned by
such funds. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(4) Mr. Sallay is a Managing Director of HPC, an affiliate of Harvard Private
Capital Holdings, Inc. ("Harvard"). Accordingly, Mr. Sallay may be deemed
to beneficially own shares owned by Harvard. Mr. Sallay disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest.
(5) Includes 891,630 shares of Class A Common and 99,070 shares of Class L
Common issuable upon exercise of outstanding and currently exercisable
options.
(6) Amounts shown reflect shares issuable upon exercise of outstanding and
currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In Fiscal 1997, the Human Resources Committee (which functions as the
Compensation Committee) of the Board of Directors consisted of Mr. Johnston and
former directors Mr. Rod Dammeyer (an officer of Zell/Chilmark) and Mr. Rolf H.
Towe.
Pursuant to the Stock Purchase Agreement (defined below), Zell/Chilmark,
MBLP and the Company in 1993 entered into a registration rights agreement
relating to the Acquired Shares, including the 27,630 Shares purchased by Mr.
Towe. Pursuant to the Stock Purchase Agreement, prior to December 18, 1997, the
holders of a majority of such Acquired Shares had the right to demand, up to
five times but no more than once every six months, registration of their
Acquired Shares under the Securities Act of 1933 as amended. In addition, under
certain conditions, the holders of the Acquired Shares had a right to include
some or all of their Acquired Shares in any subsequent registration statement
filed by the Company with respect to the sale of Shares. The Company agreed to
bear all expenses associated with any registration statement relating to the
Acquired Shares other than any underwriting discounts or commissions, brokerage
commissions and fees.
MANAGEMENT SUBSCRIPTION AND BENEFIT ARRANGEMENTS. See "Management --Compensation
Pursuant to Plans and Other Arrangements -- Severance Arrangements" for a
description of the Company's severance arrangements with certain executive
officers. See "Management -- Compensation Pursuant to Plans and Other
Arrangements -- Executive Employment Agreements" for a description of the
Company's employment arrangements with Mr. Beggs.
STOCK REPURCHASE AGREEMENTS. Certain officers, key employees of the Company and
certain former employees of the Company (collectively, the "Management
Investors") prior to December 18, 1997 were the beneficial owners of 63,830
Shares, (the "Management Investors' Shares"). Such Shares were acquired in
connection with the LBO pursuant to subscription agreements between the Company
and such individuals (the "Subscription Agreements") or subsequently acquired as
stock bonuses pursuant to the same Subscription Agreements. The Subscription
Agreements provided that the Management Investors' Shares were subject to put
options whereby the Company may be required to redeem such Shares at fair market
value in the event of a Management Investor's death, disability, or termination
of employment under certain circumstances, prior to January 1, 1994, at the
option of the Management Investor or his estate. Under certain circumstances,
such
63
Shares also were subject to call options whereby the Company, at its
option, had the right to purchase such Shares from a Management Investor at fair
market value, so long as the Company had not effected a public offering of its
common stock, in the event of either (i) a Management Investor's voluntary
termination of employment on or before January 1, 1994, or (ii) a Management
Investor's termination for cause (as defined). Due to the possibility of
repurchase in connection with the put options, such Management Investors' Shares
were not considered to be part of the Company's stockholders' equity for periods
prior to January 1, 1994. The Subscription Agreements also grant to the
Management Investors certain registration rights in the event that the Company
(or, in certain circumstances, other investors in the Company) registers any
common stock under the Securities Act.
FULCRUM. In connection with the LBO, The Fulcrum III Limited Partnership and The
Second Fulcrum III Limited Partnership (together, the "Fulcrum Partnerships"),
purchased, after giving effect to the reverse stock split, 961,400 Shares
pursuant to a stock subscription agreement with the Company (the "Fulcrum Stock
Subscription Agreement") which provides that, under certain circumstances, the
Company had a right of first refusal in the event of a proposed sale of such
Shares by the Fulcrum Partnerships. The Fulcrum Subscription Agreement also
granted to the Fulcrum Partnerships certain rights to demand the registration of
their Shares and certain registration rights in the event that the Company (or,
in certain circumstances, other investors in the Company) registers any common
stock under the Securities Act. In addition, the Fulcrum Partnerships held
Restructure Warrants to acquire up to an aggregate of 3,532,684 Shares.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Sealy Corporation and
its subsidiaries are included in Part II, Item 8:
Sealy Corporation
Report of Independent Auditors
Consolidated Balance Sheets at November 30, 1997 and December 1,
1996
Consolidated Statements of Operations for the years ended November
30, 1997, December 1, 1996, and November 30, 1995.
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1997, December 1, 1996, and November 30, 1995.
Consolidated Statements of Cash Flows for the years ended November
30, 1997, December 1, 1996, and November 30, 1995.
Notes to consolidated financial statements
(a)(2) The exhibits to this report are listed in section (c) of Item 14 below.
(b) A Form 8-K was filed December 30, 1997 to report merger of the Company
with Sandman Merger Corporation, the Company's tender for all of its 10
1/4% Senior Subordinated Notes due in 2003, a related solicitation of
consents to modify certain terms of those notes, as well as to report
actions by Sealy Mattress Company, a wholly owned subsidiary of the
Company, entering into senior credit agreements providing for loans of
up to $550 million, and issuing $253 million in notes December 15, 2007.
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and among the Registrant, Sandman Merger Corporation
and Zell/Chilmark Fund, L.P. (Incorporated herein by reference to the appropriate exhibit to the Form 8-K filed
December 30, 1997 (File No. 1-8738)).
2.2 First Amendment to the Agreement and Plan of Merger, dated as of December 18, 1997, by and among the Registrant,
Sandman Merger Corporation and Zell/Chilmark Fund, L.P. (Incorporated herein by reference to the appropriate
exhibit to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
3.1 Restated Certificate of Incorporation of Sealy Corporation dated as of November 5, 1991. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738)).
3.2 By-Laws of Sealy Corporation adopted as of November 4, 1991. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-
8738)) .
4.1 Warrant Agreement, dated as of November 6, 1991 between Sealy Corporation and Sealy, Inc., Warrant Agent, including
the form of Series A and Series B Warrant. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.2 Form of Series A and Series B Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.1).
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1991 (File No. 1-8738)).
65
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
4.3 Warrant Agreement, dated as of August 1, 1989 between GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged
with and into Sealy Corporation) and First Chicago Trust Company of New York, Warrant Agent, including the form of
Merger Warrant (Incorporated herein by reference to Exhibit 4.1 to Annual Report on Form 10-K of The Ohio Mattress
Holding Company and The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March
2, 1990.)
4.4 Form of Merger Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.3) (Incorporated herein
by reference to Exhibit 4.2 to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy Holdings, Inc. (merged
with and into Sealy Corporation) for the year ended November 30, 1990, File No. 33-29246, filed February 28, 1991.)
4.5 Indenture dated as of November 1, 1991, among Sealy Corporation, certain subsidiaries of Sealy Corporation listed
on the signature pages thereto and Ameritrust company National Association. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30,
1991 (File No. 1-8738.)
4.6 Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy Holdings,
Inc. and merged with and into Sealy Corporation) and the purchasers listed therein. (Incorporated herein by
reference to Exhibit 4.4 to Registration Statement of The Ohio Mattress Holding Company and The Ohio Mattress
Company of Form S-4, File no. 33-29246, filed June 13, 1989.)
4.7 Management Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy
Holdings, and merged with and into Sealy Corporation) and the management purchasers listed therein. (Incorporated
herein by reference to Exhibit 4.5 to Registration Statement of The Ohio Mattress Holding Company on form S-4, File
No. 33-29246, filed June 13, 1989.)
4.8 First Supplemental Indenture, dated as of February 12, 1993, by and among Sealy Corporation, certain subsidiaries
of Sealy Corporation listed on the signature pages thereto as Ameritrust Company National Association (n.k.a.
Society National Bank). (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the
fiscal year ended November 30, 1992, File No. 1-8738.)
4.9 Indenture, dated as of May 7, 1993, by and between Sealy Corporation and Society National Bank relating to the
Sealy Corporation's 9 1/2% Senior Subordinated Notes. (Incorporated herein by reference to the appropriate exhibit
to the Form 8-K Current Report of Sealy Corporation dated May 7, 1993).
4.10 Form of 9 1/2% Senior Subordinated Note Due 2003. (Incorporated herein by reference to the appropriate exhibit to
the Form 8-K Current Report of Sealy Corporation dated May 7, 1993.)
4.11 Restated Secured Credit Agreement, dated as of May 27, 1994, by and among Sealy Corporation, Certain Banks and
Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America (formerly Continental Bank
N.A.) and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the
appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated May 31, 1994, File No. 1-8738.)
4.12 Amendment No. 1 to Warrant Agreement between Sealy Corporation and Society National Bank as Warrant Agent, dated
April 1, 1995. (Incorporated herein by reference to the appropriate exhibit to the Form 10-Q, Quarterly Report of
Sealy Corporation dated August 31, 1995 (File No. 1-8738)).
4.13 First Amendment and consent to Restated Secured Credit Agreement, dated May 27, 1994 by and among Sealy
Corporation, Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America
and General Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate
exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)) .
4.14 Second Amendment to Restated Secured Credit Agreement, dated May 27, 1994 by and among Sealy Corporation, Certain
Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America and General Electric
Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form
10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
66
EXHIBIT
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4.15 Third Amendment to the Restated Secured Credit Agreement, dated as of May 27, 1994, by and among Sealy Corporation,
Certain Banks and Other Financial Institutions and Banque Paribas, Citicorp USA, Inc., Bank of America and General
Electric Capital Corporation, as Managing Agents. (Incorporated herein by reference to the appropriate exhibit to
the Form 10-Q Quarterly Report of Sealy Corporation dated June 2, 1996 (File No. 1-8738)).
4.16 Supplemental Indenture dated as of February 21, 1997, by and between Sealy Corporation and Mellon Bank, F.S.B. (as
successor trustee to Key Bank National Association, formerly known as Society National Bank). (Incorporated herein
by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
December 1, 1996 (File No. 1-8738)).
4.17 $275,000,000 Second Restated Credit Agreement dated as of February 25, 1997 among Sealy Corporation, as Borrower,
Various Financial Institutions, as Banks, Banque Paribas, as Documentation Agent, Nationsbank, N.A., as Syndication
Agent, and Bank of America Illinois, as Administrative Agent. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-
8738)).
4.18 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors named therein and The
Bank of New York, as trustee, with respect to the Seriea A and Series B 9 7/8% Senior Subordinated Notes due 2007.
(Incorporated herein by reference, Exhibit 4.1, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
4.19 Indenture, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors named therein and The
Bank of New York, as trustee, with respect to the Series A and Series B 10 7/8% Senior Subordinated Discount Notes
due 2007. (Incorporated herein by reference, Exhibit 4.2, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
4.20 Second Supplemental Indenture, dated as of December 5, 1997, by and between the Registrant and The Bank of New
York, as trustee. (Incorporated herein by reference, Exhibit 4.3, to the Form 8-K filed December 30, 1997 (File No.
1-8738)).
*10.1 Sealy Profit Sharing Plan, Amended and Restated Date: December 1, 1989. (Incorporated herein by reference to the
appropriate exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.2 Sealy Benefit Equalization Plan, dated December 1, 1994. (Incorporated herein by reference to the appropriate
exhibit to the Form 10-K for the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.3 Sealy Trust Agreement dated June 1, 1990. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
*10.4 The Ohio Mattress Holding Company 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.16 to
Annual Report on Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress Company for the year ended
November 30, 1989, File No. 33-29246, filed March 2, 1990).
*10.5 Sealy Corporation Bonus Program. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for
the fiscal year ended November 30, 1995 (File No. 1-8738)).
10.6 Severance Agreement dated March 1, 1996 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated herein
by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated March 3, 1996
(File No. 1-8738)).
*10.7 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.8 Sealy Corporation Performance Share Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.9 Employment Agreement dated as of October 31, 1992, by and between Sealy Corporation and Lyman M. Beggs.
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738)) .
67
EXHIBIT
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*10.10 Letter Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal
year ended November 30, 1992 (File No. 1-8738)).
*10.11 Stockholder Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs.
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.12 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation and Sam F. Smith, Jr. (Incorporated herein
by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
10.13 Sealy Corporation 1993 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to the
appropriate exhibit to the Form S-1 Registration Statement of Sealy Corporation (File No. 33-59134)). (As amended
by Amendment No. 1 dated April 6, 1994.)
10.14 Amendment No. 2 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan, dated June 27, 1995.
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
10.15 Amendment No. 3 to Sealy Corporation 1993 Non-Employee Director Stock Option Plan dated as of May 1, 1996.
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.16 Employment Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated
herein by reference to the appropriate exhibit to the Form 10-Q Quarterly Report of Sealy Corporation dated March
3, 1996 (File No. 1-8738)).
*10.17 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.18 Sealy Corporation Bonus Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's
Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.19 Amendment No. 1 to Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No.
1-8738)).
*10.20 Amendment No. 1 to Sealy Corporation Performance Share Plan. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No.
1-8738)).
*10.21 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.22 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.23 1996 Transitional Restricted Stock Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.24 Sealy Corporation 1997 Stock Option Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.25 Stock Option Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.26 Stockholder Agreement dated March 4, 1996 by and among Sealy Corporation and Ronald L. Jones. (Incorporated herein
by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended December 1, 1996 (File No. 1-8738)).
*10.27 Restricted Stock Agreement dated March 4, 1996 by and between Sealy Corporation and Ronald L. Jones. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
10.28 Dealer Manager Agreement, dated as of November 18, 1997, among Sandman Merger
Corporation, the Registrant and Goldman, Sachs & Co. (Incorporated herein by reference, Exhibit
10.1, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
10.29 Purchase Agreement, dated as of December 11, 1997, by and among Sealy Mattress Company,
the Guarantors named therein, Goldman, Sachs & Co. (Incorporated herein by reference,
Exhibit 10.2, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
10.30 Registration Rights Agreement, dated as of December 18, 1997, by and among Sealy Mattress Company, the Guarantors
named therein, Goldman, Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated. (Incorporated
herein by reference, Exhibit 10.3, to the Form 8-K filed December 30, 1997 (File No. 1-8738)) .
68
EXHIBIT
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10.31 Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the Guarantors named therein,
Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York,
as administrative agent, Bankers Trust Company, as Documentation agent, and the other institutions named therein.
(Incorporated herein by reference, Exhibit 10.4, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
10.32 AXEL Credit Agreement, dated as of December 18, 1997, among Sealy Mattress Company, the Guarantors named therein,
Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New York,
as administrative agent, Bankers Trust Company, as documentation agent, and the other institutions named therein.
(Incorporated herein by reference, Exhibit 10.5, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.33 Amended and Restated Employment Agreement, dated as of August 1, 1997, by and between Sealy Corporation and Ronald
L. Jones. (Incorporated herein by reference, Exhibit 10.6, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.34 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Bruce G. Barman.
(Incorporated herein by reference, Exhibit 10.7, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.35 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Jeffrey C. Claypool.
(Incorporated herein by reference, Exhibit 10.8, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.36 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Gary T. Fazio.
(Incorporated herein by reference, Exhibit 10.9, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.37 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Douglas E. Fellmy.
(Incorporated herein by reference, Exhibit 10.10, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.38 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and David J. McIlquham.
(Incorporated herein by reference, Exhibit 10.11, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.39 Employment Agreement, dated as of August 25, 1997, by and between Sealy Corporation and Lawrence J. Rogers.
(Incorporated herein by reference, Exhibit 10.12, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.40 Change of Control Agreement, dated as of September 3, 1997 by and between Sealy Corporation and John G. Bartik.
(Incorporated herein by reference, Exhibit 10.13, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.41 Change of Control Agreement, dated as of September 3, 1997 by and between Sealy Corporation and James F.
Goughenour. (Incorporated herein by reference, Exhibit 10.14, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.42 Change of Control Agreement, dated as of September 3, 1997 by and between Sealy Corporation and Richard F.
Sowerby. (Incorporated herein by reference, Exhibit 10.15, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.43 Change of Control Agreement, dated as of September 3, 1997 by and between Sealy Corporation and Ronald H. Stolle.
(Incorporated herein by reference, Exhibit 10.16, to the Form 8-K filed December 30, 1997 (File No. 1-8738)) .
*10.44 Change of Control Agreement, dated as of September 3, 1997 by and between Sealy Corporation and Kenneth L. Walker.
(Incorporated herein by reference, Exhibit 10.17, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
*10.45 Amendment to Amended and Restated Employment Agreement and Termination of Stockholders Agreement, dated as of
December 17, 1997, between Ronald L. Jones and the Registrant. (Incorporated herein by reference, Exhibit 10.18,
to the Form 8-K filed December 30, 1997 (File No. 1-8738)) .
69
EXHIBIT
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*10.46 Amendment to Employment Agreements, dated as of December 17, 1997, between the employees named therein and the
Registrant. (Incorporated herein by reference, Exhibit 10.19, to the Form 8-K filed December 30, 1997 (File No. 1-
8738)).
*10.47 Form of Amendment to Change of Control Agreements, dated as of December 17, 1997. (Incorporated herein by
reference, Exhibit 10.20, to the Form 8-K filed December 30, 1997 (File No. 1-8738)).
21.1 List of subsidiaries of Sealy Corporation (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
27.1 Financial Data Schedule
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with and into Sealy Corporation dated as of
November 5, 1991. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
99.2 Sealy Corporation Executive Severance Benefit Plan dated January 25, 1993. (Incorporated herein by reference to
the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30,
1992 (File No. 1-8738)).
- --------------------
* Management contract or compensatory plan or arrangement identified pursuant to
Item 14(a) of this Form 10-K.
70
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, SEALY CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SEALY CORPORATION
SIGNATURE TITLE
--------- -----
By: /s/ Ronald L. Jones President and Chief Executive Officer
----------------------------- (Principal Executive Officer)
Ronald L. Jones
Date: March 2, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
/s/ Richard F. Sowerby Vice President - Controller March 2, 1998
- ----------------------------- (Principal Accounting Officer)
Richard F. Sowerby
/s/ Josh Bekenstein Director March 2, 1998
- -----------------------------
Josh Bekenstein
/s/ Paul Edgerley Director March 2, 1998
- -----------------------------
Paul Edgerley
/s/ James W. Johnston Director March 2, 1998
- ------------------------------
James W. Johnston
/s/ Ronald L. Jones Director March 2, 1998
- ------------------------------
Ronald L. Jones
/s/ Michael Krupka Director March 2, 1998
- -------------------------------
Michael Krupka
/s/ John M. Sallay Director March 2, 1998
- -------------------------------
John M. Sallay
/s/ Jonas Steinman Director March 2, 1998
- -------------------------------
Jonas Steinman
71