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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended November 26, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d)
Securities Exchange Act of 1934
For the Transition Commission file
Period from to number
1-8738
SEALY CORPORATION
DELAWARE 36-3284147
(State of (I.R.S. ID No.)
incorporation)
Sealy Drive 27370
One Office Parkway (Zip Code)
Trinity, North Carolina
Registrant's telephone number, including area code
(336) 861-3500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months 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 26, 2001: not applicable.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of the registrant's common stock outstanding as of
January 28, 2001 is approximately: 30,692,391.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
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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 the world and
manufactures and markets a complete 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), STEARNS & FOSTER(R) and BASSETT(R) brands
and account for approximately 98% of the Company's total net sales for the
year ended November 26, 2000. The Company has a component 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.
Conventional Bedding
Industry and Competition. According to industry sales data compiled by the
International Sleep Products Association ("ISPA"), a bedding industry trade
group, over 700 manufacturers of mattresses and foundations make up the U.S.
conventional bedding industry, generating wholesale revenues of $4.3 billion
during calendar year 1999. According to ISPA, approximately 71% 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 the
average time between consumer purchases of conventional mattresses is 7 to 8
years. Factors such as disposable income, sales of homes, a trend toward more
bedrooms per home, growth in the U.S. population, and heightened consumer
awareness of the bedding category also have an 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, Stearns & Foster and Bassett.
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 Serta, Inc. and
Simmons 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, as well as the high quality
and innovative product offerings.
Products. The Company manufactures a complete line of conventional bedding
options in various sizes ranging in retail price from under $200 to
approximately $4,000 per queen size set. Sealy Posturepedic brand mattress is
the largest selling mattress brand in North America. Approximately 96% of the
Sealy brand, Stearns & Foster brand and Bassett 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. The
Bassett brand, licensed from Bassett Furniture Industries beginning in the
fourth quarter of 2000, is sold primarily to Bassett Furniture Direct and
other furniture store retailers.
Customers. The Company serves over 7,400 retail outlets (approximately
3,200 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 27% of
the Company's net sales for the year ended November 26, 2000 and no single
customer accounted for over 10% of the Company's net sales.
1
Sales and Marketing. The Company's sales depend primarily on its ability to
provide quality products with recognized brand names at competitive prices.
Additionally, the Company works to build brand loyalty with its ultimate
consumers, principally through targeted 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 the most
comprehensive training and development programs for its sales force, including
its University of Sleep 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 raw materials and certain components from
a 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 component parts
manufacturing capacity. 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 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 five days 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 28 bedding manufacturing facilities and three
component manufacturing facilities in 19 states, three Canadian provinces,
Puerto Rico, Mexico, Argentina (acquired in August, 2000) and Brazil (began
operations in December, 2000). 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 High Point, North Carolina 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 products and
processes. The Company has developed and patented a computerized model of an
adult person, known as Dataman, which is used in testing the support level of
its mattresses. In addition, the Company has developed very advanced and
proprietary methods (Digital Image Analysis) of dynamically measured spinal
morphology on any human subject in any sleep position. This sophisticated
technology is expected to enhance Sealy's Posturepedic brand leadership and
market position.
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
2
unit requirements. The Components Division also supplies approximately 50% of
the Company's Sealy foundation parts requirements under a license of the Wire
Patents. 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 several years, the Company has made substantial commitments
to ensure that the coil-making equipment at its component plants remains
state-of-the-art, installing over 50 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 substantially all.
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 competitive advantage. The Company believes that it is the
only conventional bedding manufacturer in the United States with substantial
innerspring and formed wire component-making capacity.
International
The Company has wholly-owned subsidiaries in Canada, Mexico, Puerto Rico
and Brazil and a majority-owned subsidiary in Argentina acquired in August,
2000 which have marketing and manufacturing responsibilities for those
markets. The Company has three manufacturing facilities in Canada and one each
in Mexico, Puerto Rico, Argentina and Brazil which comprise all of the
company-owned manufacturing operations at November 26, 2000. In 2000, the
Company formed a joint venture with its Australian licensee to import,
manufacture, distribute and sell Sealy products in South East Asia.
The Company also utilizes licensing agreements in certain international
markets. Licensing agreements allow the Company to reduce exposure to
political and economic risk abroad by minimizing investments in those markets.
Eleven foreign license agreements exist in Thailand, Japan, the United
Kingdom, Australia, New Zealand, South Africa, Israel, Jamaica, Saudi Arabia,
Bahamas and the Dominican Republic. In addition, the Company uses a Korean
contract manufacturer to help service the Korean market, and distributes
products directly to many small international markets. An international test
market is currently in place in Spain.
Licensing
At November 26, 2000, there are 16 separate license arrangements in effect
with five domestic and eleven foreign independent licensees. Sealy New Jersey
(a bedding manufacturer), Klaussner Corporation Services ("Klaussner", a
furniture manufacturer), Kolcraft Enterprises, Inc. (a crib mattress
manufacturer), Pacific Coast Feather Company (a pillow, comforter and mattress
pad manufacturer), and Dorel Industries (a futon 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 Stearns & Foster brand products in the United States. Sealy entered into a
long-term license agreement with 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 Furniture(TM) logo. On April 1, 1998, 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.
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 years ended November 26, 2000, November 28,
1999 and November 29, 1998, the licensing division
3
as a whole generated royalties of approximately $10.0 million, $9.9 million
and $7.2 million, respectively, which were accounted for as a reduction of
selling, general and administrative expenses in the Consolidated Financial
Statements included herein.
See the International section for international licensees.
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. In fiscal 2000, the Company amended its
warranty policy to no longer require the mattress to be periodically flipped.
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. The Company also
licenses the Bassett name under a fifteen year agreement.
Employees
As of November 26, 2000, the Company had 6,077 full-time employees.
Approximately 67% of the Company's employees at its 29 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. The Company has only experienced two work
stoppages in the last nine years due to labor disputes. Due to the ability to
shift production from one plant to another, these lost workdays have not had a
material adverse effect on our financial results. The Company has not
encountered any significant organizing activity at its non-union facilities in
that time frame.
Seasonality/Other
The Company's business is not materially seasonal. See Note 12 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).
Item 2. Properties
The Company's principal executives offices are located on Sealy Drive at
One Office Parkway, Trinity, North Carolina, 27370. Corporate, licensing and
marketing services are provided to the Company by Sealy, Inc. (a wholly owned
subsidiary of the Company), an Ohio Corporation.
The Company administers component operations at its Rensselaer, Indiana
facility. The Company leases an information technology facility in Cleveland,
Ohio. The Company's leased facilities are occupied under leases, which expire
from 2001 to 2008, including renewal options.
4
The following table sets forth certain information regarding manufacturing
facilities operated by the Company at January 28, 2001:
Approximate
Location Square Footage Title
- -------- -------------- --------
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)
Lake Wales 179,700 Owned(a)
Georgia Atlanta 292,500 Owned(a)
Illinois Batavia 212,700 Leased
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 High Point 151,200 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(b) 225,000 Owned(a)
Texas Brenham 220,000 Owned(a)
North Richland Hills 124,500 Owned(a)
Canada
Alberta Edmonton 144,500 Owned(a)
Quebec Saint Narcisse 76,000 Owned(a)
Ontario Toronto 80,200 Leased
Argentina Buenos Aires 85,000 Owned
Brazil Sorocaba 92,000 Owned
Puerto Rico Carolina 58,600 Owned(a)
Mexico Toluca 157,100 Owned
---------
4,407,000
=========
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(a) The Company has granted a mortgage or otherwise encumbered its interest in
this facility as collateral for secured indebtedness.
(b) Subsequent to year end, the Company announced a plan to close this
facility.
The Company considers its present facilities to be generally well
maintained and in sound operating condition.
5
Regulatory Matters
The Company's principal wastes are wood, cardboard and other non-hazardous
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
The Company is currently conducting an environmental cleanup at a formerly
owned facility in South Brunswick, New Jersey pursuant to the New Jersey
Industrial Site Recovery Act. The Company and one of its subsidiaries are
parties to an Administrative Consent Order issued by the New Jersey Department
of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that its manufacturing processes were the source
of contamination. The Company sold the property in 1997. The Company and its
subsidiary retained primary responsibility for the required remediation. The
Company has completed essentially all soil remediation with the New Jersey
Department of Environmental Protection approval, and have concluded a pilot
test of groundwater remediation system.
The Company is also remediating soil and groundwater contamination at an
inactive facility located in Oakville, Connecticut. Although the Company is
conducting the remediation voluntarily, it obtained Connecticut Department of
Environmental Protection approval of the remediation plan. The Company has
completed essentially all soil remediation under the remediation plan and is
currently monitoring groundwater at the site. The Company believes the
contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility.
While the Company cannot predict the ultimate timing or costs of the South
Brunswick and Oakville remediation, based on facts currently known, the
Company believes that the accruals recorded are adequate and does not believe
the resolution of these matters will have a material adverse effect on the
financial position or future operations of the Company; however, in the event
of an adverse decision, these matters could have a material adverse effect.
The Company has been identified as a potential responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
with regard to two waste disposal sites and under analogous state legislation
with regard to a third. Although liability under these statutes is generally
joint and several, as a practical matter, liability is usually allocated among
all financially responsible parties. Based on the nature and quantity of the
Company's wastes, the Company believes that liability at each of these sites
in unlikely to be material.
Item 4. Submission of Matters to a Vote of Security Holder
None.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for any class of common
equity of the Company.
As of January 28, 2001 there are 20 holders of record of the Company's
Class A shares, 7 holders of record of the Company's Class B shares, 20
holders of record of the Company's Class L shares and 7 holders of record of
the Company's Class M shares.
No dividend or other distribution with respect to common stock was paid
during the most recent two fiscal years. Any payment of future dividends and
the amounts thereof will be dependent upon the Company's earnings, fiscal
requirements and other factors deemed relevant by the Company's Board of
Directors. The Company currently does not intend to pay any cash dividends in
the foreseeable future; rather, the Company intends to retain earnings to
provide for the operation and expansion of its business. Certain restrictive
covenants contained in the Company's Senior Credit Agreements currently limit
its ability to make dividend or other payments.
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial and other
data of the Company for the years ended November 26, 2000, November 28, 1999,
November 29, 1998, November 30, 1997, and December 1, 1996.
The selected consolidated financial and other data set forth in the
following tables has been derived from the Company's audited consolidated
financial statements. The report of PricewaterhouseCoopers LLP, independent
accountants, covering the Company's Consolidated Financial Statements for the
years ended November 26, 2000, November 28, 1999 and November 29, 1998 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.
7
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Year Ended Year Ended Year Ended Year Ended Year Ended
November 26, November 28, November 29, November 30, December 1,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
(dollars and shares in millions, except per share data)
Statement of Operations
Data:
Net sales............. $1,101.5 $ 985.7 $ 891.3 $ 804.8 $ 697.6
Costs and expenses.... 1,044.1 953.3 913.9 764.2 672.8
Income (loss) before
income tax,
Extraordinary item
and cumulative effect
of change in
accounting principle. 57.4 32.4 (22.6) 40.6 24.8
Extraordinary loss(a). -- -- 14.5 2.0 --
Cumulative effect of
change in accounting
principle(b)......... -- -- -- 4.3 --
Net income (loss)..... 30.1 15.8 (33.8) 11.7 (0.5)(c)
Liquidation preference
for common
L & M shares(d)...... 14.8 13.5 11.7 -- --
-------- ------- ------- ------- -------
Net income (loss)
available to common
shareholders......... $ 15.3 $ 2.3 $ (45.5) $ 11.7 $ (0.5)
Other Data:
Depreciation and
amortization of
Intangibles.......... $ 27.1 $ 25.6 $ 24.3 $ 24.1 $ 26.6
Income from
operations........... 123.4 97.4 44.9 72.0 53.6
EBITDA(e)............. 150.3 123.0 69.2 96.1 80.2
Adjusted EBITDA(f).... 157.3 138.3 113.1 102.7 86.8
Capital expenditures.. 24.1 16.1 33.1 29.1 12.0
Interest expense, net. 65.8 65.0 67.5 31.4 28.8
Ratio of EBITDA to
interest expense,
net.................. 2.3x 1.9x 1.0x 3.1x 2.8x
Ratio of earnings to
fixed charges(g)..... 1.8x 1.5x -- 2.2x 1.8x
Weighted average
number of shares
outstanding--
diluted(h)........... 34,235 32,972 30,472 30,234 29,379
Net income (loss) per
common share--
diluted(h):
Income (loss) before
extraordinary item
and cumulative effect
of change in
accounting principle. $ 0.88 $ 0.48 $ (0.63) $ 0.60 $ (0.02)
Extraordinary item.... -- -- (0.48) (0.07) --
Cumulative effect of
change in accounting
principle............ -- -- -- (0.14) --
-------- ------- ------- ------- -------
Net income (loss)..... 0.88 0.48 (1.11) 0.39 (0.02)
Liquidation preference
for common
L & M shares......... (0.43) (0.41) (0.38) -- --
-------- ------- ------- ------- -------
Net income (loss)
available to common
shareholders......... $ 0.45 $ 0.07 $ (1.49) $ 0.39 $ (0.02)
======== ======= ======= ======= =======
8
November 26, November 28, November 29, November 30, December 1,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
(dollars in millions)
Balance Sheet Data:
Total assets.......... $830.0 $771.0 $751.1 $721.1 $739.9
Long-term obligations. 651.8 676.2 682.3 330.0 269.5
Total debt............ 686.2 690.3 690.8 330.0 288.1
Stockholders' equity
(deficit)............ (93.3) (121.4) (138.8)(i) 205.1 293.0
- --------
(a) During 1998 and 1997, the Company recorded extraordinary losses of $5.4
million and $2.0 million, net of income tax benefit of $3.6 million and
$1.4 million, respectively, representing the remaining unamortized debt
issuance costs related to long term obligations repaid as a result of the
debt refinancing. Also, during 1998 the Company recorded an extraordinary
loss of $9.1 million, net of income taxes of $6.1 million, representing
premiums paid to existing note holders and consent fees paid in connection
with the retirement of debt.
(b) 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.
(c) 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.
(d) Shares of L and M common are entitled to a preference over class A and B
common with respect to any distribution by the Company to holders of its
capital stock equal to the original costs of such shares ($40.50) plus an
amount which accrues on a daily basis at a rate of 10% per annum,
compounded annually.
(e) EBITDA is calculated by adding interest expense, net, income tax expense
(benefit) and depreciation and amortization of intangibles to income
(loss) before extraordinary item and cumulative effect of change in
accounting principle. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to incur and service 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.
(f) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as
described above) certain items of income and expense consisting of: (i)
stock-based compensation plans, (ii) any expenses related to addressing
the Company's "Year 2000" information systems issue and EITF 97-13
reengineering efforts, (iii) High Point relocation, (iv) compensation
associated with the Recapitalization, (v) loss on net assets held for sale
and other write-downs in 1998 only, (vi) loss on write-off of Montgomery
Ward accounts receivable and related factoring expense incurred in
connection with bankruptcy of Montgomery Ward in 1996, (vii) executive
severance and transition costs, and (viii) other relief items including,
foreign currency losses, loss on disposal of certain assets, etc. Adjusted
EBITDA is presented because it conforms to the definition of "Consolidated
EBITDA" in the Notes Indenture (see "Description of Exchange Notes" and
"Certain Definitions" within such section). The Company believes that the
adjustment for these items is appropriate for such periods in order to
provide an appropriate analysis of recent historical results. The
following is a reconciliation of EBITDA to Adjusted EBITDA:
9
Fiscal Year
---------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ -----
(dollars in millions)
EBITDA.................................... $150.3 $123.0 $ 69.2 $ 96.1 $80.2
------ ------ ------ ------ -----
Adjustments:
Stock-based compensation................ 6.8 6.7 -- 1.6 4.7
EITF 97-13 reengineering efforts........ -- 5.0 4.1 1.0 --
High Point relocation................... -- 2.0 7.5 -- --
Compensation associated with
Recapitalization....................... -- -- 18.9 -- --
Loss on net assets held for sale and
other write- downs..................... -- -- 10.6 -- --
Montgomery Ward bad debt and factoring
losses................................. -- -- -- 4.0 --
Executive severance and transition...... -- -- -- -- 1.9
Other relief items--including foreign
currency losses, loss on disposal of
certain assets, etc.................... 0.2 1.6 2.8 -- --
------ ------ ------ ------ -----
Total adjustments..................... 7.0 15.3 43.9 6.6 6.6
------ ------ ------ ------ -----
Adjusted EBITDA......................... $157.3 $138.3 $113.1 $102.7 $86.8
====== ====== ====== ====== =====
(g) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes 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. For the year ended November 29, 1998, earnings
were insufficient to cover fixed charges by $22.6 million.
(h) Restated from previously published results due to the adoption of
Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share", in fiscal 1998.
(i) Reflects the Recapitalization of the Company as discussed in Note 2 of the
Notes to the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year Ended November 26, 2000 Compared With Year Ended November 28, 1999
Net Sales. Net sales for the year ended November 26, 2000, were $1,101.5
million, an increase of $115.8 million, or 11.8% from the year ended November
28, 1999. This increase is attributable to an 8.4% increase in unit volume, a
2.1% increase in average unit selling price and a 1.3% increase due to
acquisitions during the current year. The Company saw continued strong growth
in domestic sales for both Sealy and Stearns & Foster brands as well as strong
growth in international countries. Average unit selling price increased due
mainly to strength in Stearns & Foster and Posturepedic Crown Jewel brands
which have higher price points. The Company expects 2001 results to be
moderated by the slowing economy, particularly consumer spending and retail
sales especially in the first half. Most industry observers are forecasting
sales growth of 2.5 to 4.0 percent for the industry in 2001. The Company
believes it can continue to exceed the industry growth rate and increase its
market share.
Cost of Goods Sold. Cost of goods sold for the year, as a percentage of net
sales, decreased 0.4 percentage points to 54.8%. This decrease is primarily
attributable to an increase in sales of higher priced units, which have higher
gross margins than average, improved plant efficiencies and higher overhead
absorption from increased sales volume.
Selling, General, Administrative. Selling, general, and administrative
expense increased $30.0 million to $354.6 million, or 32.2% of net sales,
compared to $324.6 million, or 32.9% of net sales. This increase is primarily
due to increased marketing expenses of $16.6 million associated with sales
volume. Delivery costs
10
increased $6.6 million due to an overall increase in sales volume and higher
fuel costs. In addition, other administrative costs have increased $11.5
million due to costs associated with restoring normal staffing levels after
the relocation of the corporate headquarters as well as cost increases
associated with increases in business activity and integration costs
associated with acquisitions. These increases were partially offset by
decreases in relocation expenses of $2.0 million as the Company incurred
additional costs associated with the move of Corporate Headquarters to High
Point, North Carolina during the first two quarters of 1999. Royalty revenue
increased $1.4 million as the Company's licensee's expanded their sales of
Sealy branded products. In addition, foreign currency losses decreased from
1999 by $1.3 million mainly due to the devaluation of the Brazilian Real in
the first quarter of 1999.
Stock Based Compensation. The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of fair
market value or original cost. The Company recorded a $6.8 million and $6.7
million charge during fiscal 2000 and 1999, respectively, to revalue this
obligation to reflect an increase in the fair market value of the securities.
Interest Expense. Interest expense, net of interest income, increased $0.8
million. This is primarily due to increased rates on floating rate debt of
$2.4 million, which was partially offset by lower debt levels due to current
year payments. Additionally, the Company received $1.2 million in interest in
the second quarter associated with a favorable conclusion of an IRS
examination.
Income Taxes. The Company's effective income tax rates for Fiscal 2000 and
1999 differ from the Federal statutory rate principally because of the
application of purchase accounting, the effect of certain foreign tax rate
differentials, and state and local taxes. The Company's effective tax rate for
Fiscal 2000 was approximately 47.5% compared to 51.1% for Fiscal 1999. The
lower effective tax rate in 2000 is primarily due to increased pretax income
in 2000 compared to 1999, the tax impact of foreign earnings and lower state
taxes.
Year Ended November 28, 1999 Compared With Year Ended November 29, 1998
Net Sales. Net sales for the year ended November 28, 1999, were $985.7
million, an increase of $94.4 million, or 10.6% from the year ended November
29, 1998. This increase is attributable to a 7.0% increase in unit volume, and
a 3.6% increase in average unit selling price. The increase in unit volume is
due to the successful launches of the Sealy Posturepedic Golden Anniversary
("Golden Anniversary") product at high unit volume price points and the
Posturepedic Crown Jewel Dual Support System ("DSS") premium product line, as
well as continued strong increases in the Stearns & Foster lines. The increase
in average unit selling price is primarily attributable to the introduction of
the Posturepedic Crown Jewel DSS line and a strong increase in the Stearns &
Foster brand.
Cost of Goods Sold. Cost of goods sold for the year, as a percentage of net
sales, decreased 1.3 percentage points to 55.2%. This decrease is primarily
attributable to an increase in sales of higher priced units, which have higher
gross margins than average, improved plant efficiencies and higher overhead
absorption from increased sales, partially offset by increased performance
based compensation.
Selling, General, Administrative. Selling, general, and administrative
expense increased $24.3 million due to increased operating expense and Year
2000 costs of $27.6 million and $1.3 million respectively, partially offset by
reduced costs associated with Corporate Headquarters and Research &
Development relocation to High Point, North Carolina of $4.6 million. Selling,
general and administrative costs decreased, as a percent of sales, to 33.0% in
1999 from 33.7% in 1998 primarily due to the leverage of fixed costs over the
increased sales. Increased operating costs were primarily due to increases in
marketing spending of $19.9 million, increased performance based compensation
of $2.5 million, increased depreciation of $1.5 million, increased delivery
expenses of $1.5 million, increased bad debt expense of $0.5 million, along
with increased general administrative costs of $1.7 million. Increased
marketing spending was due to increased sales volume, along with increased
spending rate primarily associated with launch of the new Posturepedic Crown
Jewel DSS and Golden
11
Anniversary product lines. Increased depreciation was due to capital spending
on upgraded business systems and new corporate and plant facilities. Increased
delivery expenses were due to increased sales volume.
Stock Based Compensation. The Company has an obligation to repurchase
certain securities of the Company held by an officer at the greater of fair
market value or original cost. The Company recorded a $6.7 million charge
during fiscal 1999 to revalue this obligation to reflect an increase in the
fair market value of the securities.
Interest Expense. Interest expense, net of interest income, decreased $2.5
million primarily due to lower average outstanding debt levels as a result of
increased operating cash flows during the year as well as lower average
interest rates associated with the floating rate debt.
Income Taxes. The Company's effective income tax rates for Fiscal 1999 and
1998 differ from the Federal statutory rate principally because of the
application of purchase accounting, the effect of certain foreign tax rate
differentials, and state and local taxes. The Company's effective tax rate for
Fiscal 1999 was approximately 51.1% compared to 14.7% for Fiscal 1998. The
higher effective tax rate in 1999 is primarily due to the tax impact of
foreign earnings and pretax income in 1999 compared to a pretax loss in 1998.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations and
borrowings under its Revolving Credit Facility. The Company's principal use of
funds consists of payments of principal and interest on its Senior Credit
Agreements, capital expenditures and interest payments on its outstanding
Notes. The Company made capital expenditures aggregating $24.1 million and
$16.1 million during Fiscal 2000 and 1999, respectively. The increase in
capital spending in Fiscal 2000 was primarily attributable to the Company's
construction of a new plant in Brazil, expansion of the existing plant in
Mexico and the purchase of manufacturing equipment for domestic facilities.
The Company has funded Fiscal 2000 capital expenditures with cash generated by
operations. The Company expects fiscal 2001 capital expenditures to be
approximately $10.9 million more than fiscal year 2000. This increase is
primarily due to projected spending on the expansion of domestic bedding
plants and the corporate headquarters facility, the purchase of more efficient
manufacturing equipment and upgrades to information technology systems.
The Company has acquired 70% of the outstanding capital stock of Rozen
S.R.L. (located in Argentina) and certain operating assets of Premier Bedding
Group, LLC. These acquisitions totaled $19.9 million in cash and were funded
through operating cash flow.
On September 6, 2000 the Revolving Credit Facility and Tranche A Term Loan
lenders approved Amendment Three to the Credit Agreement. The amendment makes
adjustments to restrictions on acquisitions and capital expenditures in the
Company's Credit Agreement which will allow the Company to take advantage of
potential growth opportunities.
Subsequent to year end, the Company commenced a plan to shutdown its
Memphis facility. The Company plans to cease operations early in the second
quarter of 2001 and take a restructuring charge in the first quarter of 2001.
The Company believes this charge will not be material.
Subsequent to year end, the Company entered into an agreement to secure an
additional revolving credit facility with a separate banking group. This
facility will provide for borrowing in Canadian currency up to C$25 million.
The Company expects to close on the facility late in the first quarter of
2001.
The Company is currently negotiating the purchase of an international
bedding manufacturer. If these negotiations are successful, the Company
expects to close that transaction in the second quarter of 2001.
The Company recorded charges of $6.8 million and $6.7 million in fiscal
2000 and 1999 respectively, to revalue the right of one executive to require
the Company to repurchase certain securities of the Company at
12
the greater of fair market value or original cost. The expense associated with
the right was recorded in stock based compensation expense. Subsequent to year
end, the Company satisfied the obligation through a draw of the Company's
Revolving Credit Facility and the delivery of a portion of the executive's
securities.
From time to time the Company makes investments in debt, preferred stock,
or other securities of manufacturers, retailers, and distributors of bedding
and related products both domestically and internationally to enhance business
relationships and build incremental sales. As of November 26, 2000, the
Company had $30.5 million in such investments.
Management believes that the Company will have the necessary liquidity
through cash flows from operations, and availability under the Revolving
Credit Facility for the next several years to fund its expected capital
expenditures, obligations under its credit agreement and subordinated note
indentures, environmental liabilities, and other needs required to manage and
operate its business.
The Senior Credit Agreements 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. At November 26, 2000, the Company had
approximately $93.3 million available under its Revolving Credit Facility with
Letters of Credit issued totaling approximately $6.7 million. The Company's
principal payments in fiscal 2001 under the Senior Credit Agreement amount to
$33.8 million. The Revolving Credit Facility expires in fiscal 2002. The
Company expects it will have the ability to renew the existing revolving
credit facility or have the ability to find new financing with comparable
terms. If the Company is unable to renew its existing arrangement or obtain
new financing, this could have an adverse affect on the Company's ability to
fund its operations.
Future principal debt payments are expected to be paid out of cash flows
from operations and borrowings on its current Revolving Credit Facility or a
new revolving credit agreement, if the current agreement is not renewed when
it expires in December, 2002.
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 0.25% 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,
1.25% in respect of the AXELs Series C and 1.50% 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 1.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.00% in respect of AXELs Series
B, 2.25% in respect of AXELs Series C and 2.50% in respect to AXELs Series D.
The Company's net weighted average borrowing cost was 9.7% and 9.3% for Fiscal
2000 and 1999 respectively.
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 March 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in March 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
13
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 Senior Subordinated Notes, which are guaranteed by the Parent, in
aggregate principal amount of $125.0 million were issued in the Offering and
mature on December 15, 2007. Interest on the Senior Subordinated Notes accrues
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.
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 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%
The Senior Subordinated Discount Notes, which are guaranteed by the Parent,
in aggregate principal amount of $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. 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.
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%
At November 26, 2000, the Company was in compliance with the financial
covenants of all debt agreements.
14
Foreign Operations and Export Sales
The Company has three manufacturing facilities in Canada, and one each in
Mexico, Argentina and Brazil, which comprise all of the Company's foreign-
owned manufacturing operations at November 26, 2000. In 2000, the Company
formed a joint venture with its Australian licensee to import, manufacture,
distribute and sell Sealy products in South East Asia. The Company uses a
Korean contract manufacturer to help service the Korean market, distributes
products directly in many small international markets, and has license
agreements in Thailand, Japan, the United Kingdom, Australia, New Zealand,
South Africa, Israel, Jamaica, Saudi Arabia, the Bahamas and the Dominican
Republic. An international test market is currently in place in Spain.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. The standard's effective date was
delayed to June 15, 2000, the Company's fiscal year 2001. In June 2000, the
FASB issued FAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--An Amendment of FASB Statement 133". The Company
is required to adopt FAS 133 and FAS 138, effective November 27, 2000. These
standards require that all derivatives be recorded on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in the fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at November 26, 2000, the
Company has determined that the initial adoption will result in an immaterial
gain that will be accounted for as a cumulative effect of an accounting
change.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", which, among other guidance, clarifies certain conditions to be
met in order to recognize revenue. SAB 101 is required to be adopted no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company will adopt SAB 101 in fiscal 2001 and does not expect any material
effect on its revenue recognition policy.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to
November 30, but no later than December 2. The fiscal years ended November 26,
2000, November 28, 1999 and November 29, 1998 were 52-week years.
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.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated purchases. Foreign currency forward, swap and option
15
contracts are used to hedge against the earnings effects of such fluctuations.
The result of a uniform 10% change in the value of the U.S. dollar relative to
currencies of countries in which the Company manufactures or sells its
products would not be material to earnings or financial position. This
calculation assumes that each exchange rate would change in the same direction
relative to the U.S. dollar.
The Company enters into forward, swap and option currency exchange
contracts in the regular course of business to manage its exposure against
foreign currency fluctuations, primarily on raw material purchase transactions
denominated in U.S. Dollars. In December 1999, the Company incurred $0.1
million to purchase an Average Rate Option Canadian Dollar Put in the amount
of Canadian $17.0 million with a strike price of Canadian $1.50. Additionally,
the Company incurred $0.1 million to purchase Mexican Peso Put Options for
57.4 million Mexican Pesos with strike prices ranging between 10.21 and 11.24
Mexican Pesos per U.S. Dollar. These options settled quarterly and expired at
the end of fiscal 2000.
Interest Rate Risk
Because the Company's obligations under the bank credit agreement bear
interest at floating rates, the Company is sensitive to changes in prevailing
interest rates. The Company uses derivative instruments to manage its long-
term debt interest rate exposure, rather than for trading purposes. A 10%
increase or decrease in market interest rates that effect the Company's
interest rate derivative instruments would not have a material impact on
earnings during the next fiscal year.
The Company has entered into interest rate swap and collar agreements to
reduce the impact of changes in interest rates on all or a portion of its
floating rate debt. The notional amounts of interest rate agreements are used
to measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The net cash paid for the interest rate swap and
collar agreements is recorded as a prepaid expense in the consolidated balance
sheet and charged to interest expense over the life of the agreement.
As of November 26, 2000, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
Notional Amount Range for
2000 (millions) LIBOR Rate Period
- ---- --------------- ----------- ---------
Interest Rate Collar...................... $200 6.50%-4.93% 1/98-1/01
Interest Rate Swap........................ $150 5.96% 9/99-9/02
16
Item 8. Financial Statements and Supplementary Data
SEALY CORPORATION
Consolidated Financial Statements
November 26, 2000 and November 28, 1999
(With Independent Accountants' Report Thereon)
17
Report of Independent Accountants
To the Board of Directors and
Stockholders of Sealy Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Sealy Corporation and its subsidiaries (the "Company") at November 26, 2000
and November 28, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended November 26, 2000 in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
January 9, 2001
18
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 26, November 28,
2000 1999
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 18,114 $ 10,845
Accounts receivable--Non-Affiliates (net of
allowance for doubtful accounts, 2000-$11,585;
1999-$10,036)...................................... 115,673 105,287
Accounts receivable--Affiliates (net of allowance
for doubtful accounts, 2000-$180; 1999-$87)........ 29,816 14,188
Inventories......................................... 51,872 44,681
Prepaid expenses.................................... 10,000 5,968
Deferred income taxes............................... 14,351 14,197
-------- --------
239,826 195,166
-------- --------
Property, plant and equipment--at cost:
Land................................................ 12,509 11,106
Buildings and improvements.......................... 75,964 69,269
Machinery and equipment............................. 118,885 108,776
Construction in progress............................ 20,162 9,475
-------- --------
227,520 198,626
Less accumulated depreciation....................... 70,437 60,525
-------- --------
157,083 138,101
-------- --------
Other assets:
Goodwill, patents and other intangibles--net of
accumulated amortization (2000-$101,835; 1999-
$89,272)........................................... 375,238 378,452
Investment in affiliates............................ 30,519 30,004
Debt issuance costs, net, and other assets.......... 27,349 29,230
-------- --------
433,106 437,686
-------- --------
$830,015 $770,953
======== ========
See accompanying notes to consolidated financial statements.
19
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
November 26, November 28,
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion-long-term obligations............... $ 34,373 $ 14,145
Accounts payable.................................... 57,687 43,153
Accrued expenses:
Customer incentives and advertising................ 38,257 32,301
Compensation....................................... 24,128 23,173
Interest........................................... 12,664 12,733
Stock based compensation (Note 8).................. 10,699 --
Other.............................................. 30,213 26,100
-------- --------
208,021 151,605
-------- --------
Long-term obligations, net of current portion........ 651,810 676,197
Other noncurrent liabilities......................... 38,169 41,185
Deferred income taxes................................ 23,801 23,355
Minority interest.................................... 1,504 --
Commitments and contingencies........................ -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; Authorized 100,000
shares; Issued, none............................... -- --
Class L common stock, $0.01 par value; Authorized,
6,000 shares;
Issued (2000-1,486; 1999-1,486).................... 15 15
Class M common stock, $0.01 par value; Authorized,
2,000 shares;
Issued (2000-1,549; 1999-1,549).................... 16 16
Class A common stock, $0.01 par value; Authorized
600,000 shares;
Issued (2000-16,535; 1999-16,535).................. 164 164
Class B common stock, $0.01 par value; Authorized
200,000 shares;
Issued (2000-11,935; 1999-11,935).................. 120 120
Additional paid-in capital.......................... 134,547 134,547
Accumulated deficit................................. (215,872) (246,012)
Common stock held in treasury, at cost.............. (85) (85)
Accumulated other comprehensive loss, foreign
currency translation adjustment.................... (12,195) (10,154)
-------- --------
(93,290) (121,389)
-------- --------
$830,015 $770,953
======== ========
See accompanying notes to consolidated financial statements.
20
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended
--------------------------------------
November 26, November 28, November 29,
2000 1999 1998
------------ ------------ ------------
Net sales--Non-affiliates............... $ 951,926 $940,666 $891,302
Net sales--Affiliates................... 149,616 45,041 --
---------- -------- --------
Total net sales........................ 1,101,542 985,707 891,302
---------- -------- --------
Cost and expenses:
Cost of goods sold--Non-affiliates..... 524,973 520,768 503,500
Cost of goods sold--Affiliates......... 78,881 23,401 --
---------- -------- --------
Total cost of goods sold............... 603,854 544,169 503,500
Selling, general and administrative
(including provisions for bad debts of
$3,634, $2,248 and $1,800,
respectively)......................... 354,592 324,612 300,356
Stock based compensation............... 6,797 6,664 --
Amortization of intangibles............ 12,865 12,881 13,029
Loss on net assets held for sale and
other write-downs..................... -- -- 10,634
Compensation associated with
recapitalization...................... -- -- 18,886
---------- -------- --------
Income from operations................. 123,434 97,381 44,897
Interest expense, net.................. 65,843 64,999 67,451
Minority interest...................... 219 -- --
---------- -------- --------
Income (loss) before income taxes and
extraordinary item................... 57,372 32,382 (22,554)
Income taxes (benefit).................. 27,232 16,561 (3,318)
---------- -------- --------
Income (loss) before extraordinary
item.................................. 30,140 15,821 (19,236)
Extraordinary item-loss from early
extinguishment of debt (net of income
tax benefit of $9,693 in 1998) (Note
2)..................................... -- -- 14,537
---------- -------- --------
Net income (loss)..................... 30,140 15,821 (33,773)
Liquidation preference for common L & M
shares (Note 2)........................ 14,808 13,461 11,716
---------- -------- --------
Net income (loss) available to common
shareholders......................... $ 15,332 $ 2,360 $(45,489)
========== ======== ========
Earnings (loss) per common share--Basic:
Before extraordinary item.............. $ 0.96 $ 0.50 $ (0.63)
Extraordinary item..................... -- -- (0.48)
---------- -------- --------
Net earnings (loss)--Basic............ 0.96 0.50 (1.11)
Liquidation preference for common L & M
shares................................. (0.47) (0.43) (0.38)
---------- -------- --------
Net earnings (loss) available to
common shareholders--Basic........... $ 0.49 $ 0.07 $ (1.49)
========== ======== ========
Earnings (loss) per common share--
Diluted:
Before extraordinary item.............. $ 0.88 $ 0.48 $ (0.63)
Extraordinary item..................... -- -- (0.48)
---------- -------- --------
Net earnings (loss)--Diluted.......... 0.88 0.48 (1.11)
Liquidation preference for common L & M
shares................................ (0.43) (0.41) (0.38)
---------- -------- --------
Net earnings (loss) available to
common shareholders--Diluted......... $ 0.45 $ 0.07 $ (1.49)
========== ======== ========
Weighted average number of common shares
outstanding:
Basic.................................. 31,485 31,473 30,472
Diluted................................ 34,235 32,972 30,472
See accompanying notes to consolidated financial statements.
21
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Class L Class M Class A Class B
-------------- ------------- --------------- -------------- Additional
Comprehensive Common Stock Common Stock Common Stock Common Stock Paid-in Accumulated Treasury
Income Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Stock
------------- ------ ------ ------ ------ ------- ------ ------ ------ ---------- ----------- --------
Balance at
November 30,
1997........... -- $-- -- $-- 29,932 $ 299 11 $ -- $ 257,320 $ (50,614) $ --
Accumulated
Other
Comprehensive
Loss, Foreign
Currency
Translation
Adjustment Total
------------- ----------
Balance at
November 30,
1997........... $ (1,939) $ 205,066
Net loss........ $(33,773) -- -- -- -- -- -- -- -- -- (33,773) --
Stock
compensation
related to
Recapitalization. -- -- -- -- -- -- -- -- 16,413 -- --
Treasury stock
repurchase..... 339 4 -- -- (26,885) (269) (11) -- (260,367) (177,446) --
Equity
issuances...... 1,830 18 866 9 16,472 164 7,791 78 121,048 -- --
Exercised stock
options........ -- -- -- -- 1,009 11 -- -- 116 -- --
Foreign currency
translation.... (9,898) -- -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- --------- ----
Balance at
November 29,
1998........... (43,671) 2,169 22 866 9 20,528 205 7,791 78 134,530 (261,833) --
========
Net loss........ -- (33,773)
Stock
compensation
related to
Recapitalization. -- 16,413
Treasury stock
repurchase..... -- (438,078)
Equity
issuances...... -- 121,317
Exercised stock
options........ -- 127
Foreign currency
translation.... (9,898) (9,898)
------------- ----------
Balance at
November 29,
1998........... (11,837) (138,826)
==========
Net Income...... 15,821 -- -- -- -- -- -- -- -- -- 15,821 --
Exercised stock
options........ -- -- -- -- 151 1 -- -- 17 -- --
Cancellation and
issuance of
common stock... (683) (7) 683 7 (4,144) (42) 4,144 42 -- -- --
Common stock
held in
treasury, at
cost........... -- -- -- -- -- -- -- -- -- -- (85)
Foreign currency
translation.... 1,683 -- -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- --------- ----
Balance at
November 28,
1999........... 17,504 1,486 15 1,549 16 16,535 164 11,935 120 134,547 (246,012) (85)
========
Net Income...... -- 15,821
Exercised stock
options........ -- 18
Cancellation and
issuance of
common stock... -- --
Common stock
held in
treasury, at
cost........... -- (85)
Foreign currency
translation.... 1,683 1,683
------------- ----------
Balance at
November 28,
1999........... (10,154) (121,389)
==========
Net Income...... 30,140 -- -- -- -- -- -- -- -- -- 30,140 --
Foreign currency
translation.... (2,041) -- -- -- -- -- -- -- -- -- -- --
-------- ----- --- ----- --- ------- ----- ------ ---- --------- --------- ----
Balance at
November 26,
2000........... $ 28,099 1,486 $15 1,549 $16 16,535 $ 164 11,935 $120 $ 134,547 $(215,872) $(85)
========
Net Income...... -- 30,140
Foreign currency
translation.... (2,041) (2,041)
------------- ----------
Balance at
November 26,
2000........... $(12,195) $ (93,290)
==========
See accompanying notes to consolidated financial statements.
22
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
--------------------------------------
November 26, November 28, November 29,
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income(loss)....................... $ 30,140 $ 15,821 $ (33,773)
Adjustments to reconcile net
income(loss) to net cash provided by
operating activities:
Depreciation........................... 14,201 12,772 11,290
Amortization of intangibles............ 12,865 12,881 13,029
Non-cash compensation.................. 6,797 6,664 --
Loss on disposal of assets and other
asset write-downs..................... 959 12 12,179
Minority interest...................... 219 -- --
Extraordinary item-early extinguishment
of debt............................... -- -- 24,230
Non-cash compensation associated with
Recapitalization...................... -- -- 16,413
Deferred income taxes.................. (866) (487) (19,265)
Non-cash interest expense:
Discount on Senior Subordinated Notes.. 10,345 9,306 8,050
Debt issuance costs.................... 4,167 4,205 4,056
Junior Subordinated Note............... 4,008 3,475 3,022
Other, net............................. (2,803) 77 (5,171)
Changes in operating assets and
liabilities:
Accounts receivable.................... (22,362) (12,714) (12,843)
Inventories............................ (3,562) (954) 2,280
Prepaid expenses....................... (4,032) 3,283 13,278
Accounts payable/accrued expenses/other
noncurrent liabilities................ 20,104 1,662 16,255
-------- -------- ---------
Net cash provided by operating
activities.......................... 70,180 56,003 53,030
-------- -------- ---------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................. (24,089) (16,084) (33,112)
Investment in affiliates............... -- (27,794) --
Purchase of business, net of cash
acquired.............................. (19,947) -- --
Proceeds from sale of property, plant
and equipment......................... 95 840 216
-------- -------- ---------
Net cash used in investing
activities.......................... (43,941) (43,038) (32,896)
-------- -------- ---------
Cash flows from financing activities:
Treasury stock repurchase, including
direct expenses....................... -- (85) (413,078)
Proceeds from long-term debt........... -- -- 462,653
Proceeds from issuance of long-term
public notes.......................... -- -- 200,447
Repayment of long-term obligations..... (14,170) (15,286) (211,125)
Net borrowings from current Revolving
Credit Facility....................... (4,800) 2,000 2,800
Net borrowings from prior Revolving
Credit Facility....................... -- -- (130,000)
Equity issuances....................... -- 17 121,444
Costs associated with tender offer of
prior debt............................ -- -- (15,361)
Debt issuance costs.................... -- -- (32,737)
-------- -------- ---------
Net cash used in financing
activities.......................... (18,970) (13,354) (14,957)
-------- -------- ---------
Change in cash and cash equivalents..... 7,269 (389) 5,177
Cash and cash equivalents:
Beginning of period.................... 10,845 11,234 6,057
-------- -------- ---------
End of period.......................... $ 18,114 $ 10,845 $ 11,234
======== ======== =========
Supplemental disclosures:
Taxes paid (received), net............. $ 28,719 $ 18,042 $ (7,171)
Interest paid, net..................... $ 47,302 $ 48,710 $ 40,929
Other non-cash activity:
Issuance of Junior Subordinated Notes
as part of Recapitalization
proceeds............................ $ -- $ -- $ 25,000
See accompanying notes to consolidated financial statements.
23
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Significant Accounting Policies
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
Business and Basis of Presentation
Sealy Corporation (the "Company" or the "Parent"), is engaged in the
consumer products 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. As described in Note 2, the Company incurred substantial debt and
issued new equity to certain equity investors in connection with a leveraged
recapitalization transaction effective December 18, 1997. The consolidated
financial statements of the Company reflect the Company's historical basis of
accounting with the leveraged recapitalization transaction presented as a
repurchase of stock and issuance of new equity.
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. Investments in 50% or less
owned companies are accounted for using the equity method. Investments in 50%
or greater owned affiliates are accounted for by the consolidation method of
accounting whereby the portion not owned by the Company is shown as "Minority
interest" in the financial statements.
Fiscal Year
The Company uses a 52-53 week fiscal year ending on the closest Sunday to
November 30, but no later than December 2. The fiscal years ended November 26,
2000, November 28, 1999 and November 29, 1998 were 52-week years.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. The standard's effective date was
delayed to June 15, 2000, the Company's fiscal year 2001. In June 2000, the
FASB issued FAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--An Amendment of FASB Statement 133". The Company
is required to adopt FAS 133 and FAS 138, effective November 27, 2000. These
standards require that all derivatives be recorded on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in the fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Based on the Company's
derivative positions at November 26, 2000, the Company has determined that the
initial adoption will result in an immaterial gain that will be accounted for
as a cumulative effect of an accounting change.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", which, among other guidance, clarifies certain conditions to be
met in order to recognize revenue. SAB 101 is required to be adopted no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company will adopt SAB 101 in fiscal 2001 and does not expect any material
effect on its revenue recognition policy.
24
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenue, net of estimated returns, when title passes
which is generally upon delivery of shipments.
Concentrations of Credit Risk
Cash and cash equivalents are, for the most part, maintained with several
major financial institutions in North America. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and therefore, bear minimal risk.
The Company purchases raw materials and certain components from a 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 component parts manufacturing capacity.
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 amount of assets and liabilities and disclosures
on contingent assets and liabilities at year end and the reported amounts of
revenue and expenses during the reporting period. Actual results may differ
from these estimates.
Reclassification
Certain reclassifications of the 1999 and 1998 financial statements and
related footnotes have been made to conform with the 2000 presentation.
Foreign Currency
Subsidiaries located outside the U.S. generally use the local currency as
the functional currency. Assets and liabilities are translated at exchange
rates in effect at the balance sheet date and income and expense accounts at
average exchange rates during the year. Resulting translation adjustments are
recorded directly to a separate component of shareholders' equity and are not
tax-effected since they relate to investments which are permanent in nature.
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.
Inventory
The cost of inventories is determined by the "first-in, first-out" (FIFO)
method, which approximates current cost. The cost of inventories includes raw
materials, direct labor and manufacturing overhead costs. The Company provides
inventory reserves for excess, obsolete or slow moving inventory based on
changes in
25
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
customer demand, technology developments or other economic factors. These
reserves were not material at November 26, 2000 or November 28, 1999.
Supply Agreements
The Company from time to time enters into long-term supply agreements with
its customers. Any initial cash outlay by the Company is capitalized and
amortized to expense over the life of the contract and is ratably recoverable
upon contract termination. Such capitalized amounts are included in "Prepaid
expenses" and "Debt issuance costs, net, and other assets" in the Company's
balance sheet.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost reduced by accumulated
depreciation. Depreciation expense is provided based on historical cost and
estimated useful lives ranging from approximately twenty to forty years for
buildings and building improvements and five to fifteen years for machinery
and equipment. The Company generally uses the straight-line method for
calculating the provision for depreciation.
Investments
From time to time the Company makes investments in debt, preferred stock,
or other securities of manufacturers, retailers, and distributors of bedding
and related products both domestically and internationally to enhance business
relationships and build incremental sales. These investments are included in
"Investment in affiliates" in the Company's balance sheet.
Amortization of Intangibles
The excess of the purchase cost over the fair value of assets acquired is
being amortized on a straight-line basis over 20 to 40 years. The Company
regularly assesses all of its long-lived assets for impairment when events or
circumstances indicate their carrying value may not be recoverable. The
Company believes that no impairment of goodwill existed at November 26, 2000
or November 28, 1999.
Other intangibles include patents, trademarks and licenses which are
amortized on the straight-line method over periods ranging from 5 to 20 years.
The costs related to the issuance of debt (gross costs of $32.7 million at
November 26, 2000, net of accumulated amortization of $12.4 million) are
capitalized and amortized to interest expense over the lives of the related
debt.
Earnings Per Common Share
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income per
common share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of stock options (see Note 11).
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
26
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising
expenses for the years ended November 26, 2000, November 28, 1999, and
November 29, 1998 amounted to $141.0 million, $127.7 million and $114.5
million, respectively. Accrued customer incentives and advertising at November
26, 2000 and November 28, 1999 was $38.3 million and $32.3 million,
respectively.
Research and Development
Product development costs are charged to operations during the period
incurred.
Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized, as appropriate, in accordance with American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". Remediation costs that relate to an
existing condition caused by past operations are accrued when it is probable
that the costs will be incurred and can be reasonably estimated.
Note 2: Recapitalization
On October 30, 1997, Sealy Corporation entered into an agreement and plan
of merger (the "Merger Agreement") with Sandman Merger Corporation, a
transitory Delaware merger corporation ("Sandman"), and Zell/Chillmark, 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 (85.3% 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 equal to $419.3 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 a junior
subordinated note of the Company ("Junior Note") and a retained voting common
stock interest in the Company of approximately 14.7%. Concurrent with the
Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company, a wholly owned subsidiary of the
Parent, issuing $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"), with net proceeds to the Company of $75.4 million, and by
entering into and borrowing $460 million under the Senior Credit Agreements.
After the Recapitalization, the issued and outstanding capital stock of the
Company consists 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
27
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Class A
Common and Class L Common 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. Class B Common
and Class M Common are otherwise identical, except that the shares of Class M
Common are entitled to a preference over Class B 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 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. As of November 26, 2000 and November 28, 1999, the aggregate
liquidation preference of Class L and Class M Common, including the preferred
yield of 10% compounded annually, amounted to $162.9 million and $148.1
million, respectively. 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 Recapitalization transaction resulted in an aggregate direct net charge
to APIC and retained deficit totaling $438.1 million primarily comprised of
the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge of $18.9 million, of which $16.4 million was
non-cash and credited directly to APIC, comprised of accelerated vesting of
stock options and restricted stock and other incentive based compensation
payments to employees in connection with the transaction. The Company recorded
a $14.5 million charge, net of income tax benefit of $9.6 million,
representing the write-off of the remaining unamortized debt issue costs
related to long-term obligations repaid in connection with the
Recapitalization as well as consent fees and premiums paid related to the
Tender Offer of the Parent Notes (each of which as defined in Note 4) in
connection with the Recapitalization.
Note 3: Inventories
The components of inventory as of November 26, 2000 and November 28, 1999
were as follows:
2000 1999
------- -------
(in thousands)
Raw materials................................................... $29,360 $25,066
Work in process................................................. 15,665 14,298
Finished goods.................................................. 6,847 5,317
------- -------
$51,872 $44,681
======= =======
28
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4: Long-Term Obligations
Long-term debt as of November 26, 2000 and November 28, 1999 consisted of
the following:
2000 1999
-------- --------
(in thousands)
Senior AXELs Credit Agreement............................. $325,875 $327,375
Senior Revolving Credit Agreement:
Tranche A Term Loan..................................... 82,271 94,625
Revolving Credit Facility............................... -- 4,800
Senior Subordinated Notes................................. 125,000 125,000
Senior Subordinated Discount Notes (net of discount:
2000--$24,852 and 1999--$35,197)......................... 103,148 92,803
Junior Subordinated Notes................................. 35,505 31,497
High Point Corporate Complex Mortgage..................... 13,874 14,242
Other..................................................... 510 --
-------- --------
686,183 690,342
Less current portion...................................... 34,373 14,145
-------- --------
$651,810 $676,197
======== ========
The Senior Credit Agreements provide 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 Recapitalization.
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 bears interest at a floating rate. See
Note 18 for further details regarding guarantees including consolidating
condensed financial statements for guarantors and non-guarantors. The Senior
Credit Agreements 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.
At November 26, 2000 the Company had approximately $93.3 million available
under its Revolving Credit Facility with Letters of Credit issued totaling
approximately $6.7 million. The Company's net weighted average borrowing cost
was 9.7% and 9.3% for Fiscal 2000 and 1999 respectively.
Indebtedness under the Senior Credit Agreements bears interest at a
floating rate. Indebtedness under the Revolving Credit Facility and the Term
Loans initially bears interest at a rate (subject to reduction based on
attainment of certain leverage ratio levels) 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
or (y) the Federal funds effective rate from time to time plus 0.50%) plus
0.25% in respect of the Tranche A Term Loans and the loans under the Revolving
Credit Facility (the "Revolving Loans"), 1.00% in respect of the AXELs Series
B, 1.25% in respect of the AXELs Series C and 1.50% 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 to twelve months), in each case plus 1.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.00% in respect of AXELs Series
B, 2.25% in respect of AXELs Series C and 2.50% in respect to AXELs Series D.
29
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 March 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in March 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 Senior Subordinated Notes, which are guaranteed by the Parent, 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"). Notes in aggregate principal amount of
$125.0 million were issued in the Offering and mature on December 15, 2007.
Interest on the Notes accrues 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 to Holders of
record on the immediately preceding June 1 and December 1.
The 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 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%
The Senior Subordinated Discount Notes, which are guaranteed by the Parent,
in aggregate principal amount of $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. 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.
30
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Principal Amount
----------------
2002........................ 105.437%
2003........................ 103.625%
2004........................ 101.812%
2005 and hereafter.......... 100.000%
The Junior Note had an initial principal balance outstanding of $25.0
million and matures on December 18, 2008. Interest on the Junior Note accrues
at 10% per annum if paid within ten days of the end of each calendar quarter
or at 12% if the Company elects to add accrued interest for such quarter to
the then outstanding principal balance. The Company has the option, at each
quarter end, to elect to pay the interest due for the quarter or add such
interest to the principal balance through the term of the Note. From
inception, the Company has elected to add accrued interest to the principal
balance increasing the total outstanding balance to $35.5 million at November
26, 2000.
At November 26, 2000, the annual maturities of the principal amounts of
long-term obligations were (in thousands):
2001................................. $34,373
2002................................. 41,691
2003................................. 34,295
2004................................. 77,874
2005................................. 89,161
Thereafter........................... 408,789
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 with respect to
validly tendered Parent Notes and related consents was 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.
On March 30, 1998, the Company announced a call for redemption of all
remaining outstanding Parent Notes that were not tendered on December 17,
1997. The redemption price of 106.33%, plus accrued interest, or $2.5 million,
was paid on May 1, 1998, after which time interest ceased to accrue on the
Parent Notes.
Subsequent to year end, the Company entered into an agreement to secure an
additional revolving credit facility with a separate banking group. This
facility will provide for borrowing in Canadian currency up to C$25 million.
The Company expects to close on the facility late in the first quarter of
2001.
31
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5: 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 26, 2000.
Commitments Under
Fiscal Year Operating Leases
- ----------- -----------------
(in thousands)
2001.......................................................... $8,168
2002.......................................................... 6,673
2003.......................................................... 5,101
2004.......................................................... 3,694
2005.......................................................... 3,138
Thereafter.................................................... 5,891
-------
$32,665
=======
Rental expense charged to operations is as follows:
Year Ended Year Ended Year Ended
Nov. 26, 2000 Nov. 28, 1999 Nov. 29, 1998
------------- ------------- -------------
(in thousands)
Minimum rentals...................... $10,014 $ 9,053 $10,214
Contingent rentals (based upon
delivery equipment mileage)......... 1,924 1,376 1,430
------- ------- -------
$11,938 $10,429 $11,644
======= ======= =======
The Company has the option to renew certain plant operating leases, with
the longest renewal period extending through 2008. Most of the operating
leases provide for increased rent through increases in general price levels.
Note 6: Fair Value of 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 Senior
AXELs Credit Agreement and the Senior Revolving Credit Agreement approximates
fair value because the interest rate adjusts to market interest rates. The
fair value of long-term debt under the Senior Subordinated Notes and Senior
Subordinated Discount Notes, based on a quoted market price, was $116.0
million and $99.7 million, respectively, at November 26, 2000.
Note 7: Derivative Financial Instruments
The Company, as a result of its operating and financing activities, is
exposed to changes in interest and foreign currency exchange rates which may
adversely affect its results of operations and financial position. In seeking
to minimize the risks and/or costs associated with such activities, the
Company manages exposure to changes in interest rate and foreign currency
exchange rates through its regular operating and financing activities and
through the use of derivative financial instruments. Foreign currency forward,
swap and option contracts are used to hedge certain currency risks inherent in
the activities of the Company. Derivative instruments are also used to adjust
the Company's interest rate risk profile. The Company does not utilize
financial instruments for trading or other speculative purposes, nor does it
utilize leveraged financial instruments.
32
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's financial investment counterparties are high quality
investment or commercial banks with significant experience with such
instruments. The Company manages exposure to counterparty credit risk through
specific minimum credit standards and diversification of counterparties. These
counterparties expose the Company to the risk of nonperformance. However, the
Company does not anticipate nonperformance by other parties, and no material
loss would be expected from their nonperformance.
Interest Rate Instruments: The Company has entered into interest rate swap
and collar agreements to reduce the impact of changes in interest rates on a
portion of its floating rate debt. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The net cash paid for the
interest rate swap and collar agreements ($0.6 million) was recorded in
prepaid expenses in the consolidated balance sheet and charged to interest
expense over the life of the agreement.
As of November 26, 2000, the Company had the following interest rate
instruments in effect that provide protection on the three month LIBOR rate
upon which the Company's variable rate debt is based (actual rate paid is
LIBOR plus the respective margin):
Notional Amount Range for
2000 (millions) LIBOR Rate Period
- ---- --------------- ---------- ---------
Interest Rate Collar...................... $200 6.50%-4.93% 1/98-1/01
Interest Rate Swap........................ $150 5.96% 9/99-9/02
Foreign Exchange Instruments: The Company enters into forward currency
exchange contracts in the regular course of business to manage its exposure
against foreign currency fluctuations primarily on raw material purchase
transactions denominated in U.S. Dollars. In December 1999, the Company
incurred $0.1 million to purchase an Average Rate Option Canadian Put in the
amount of Canadian Dollar $17.0 million with a strike price of Canadian $1.50.
Additionally, the Company incurred $0.1 million to purchase Mexican Peso Put
Options for 57.4 million Mexican Pesos with strike prices ranging between
10.21 and 11.24 Mexican Pesos per U.S. Dollar. Both of these options settled
quarterly and expired at the end of fiscal 2000.
Note 8: Stock Option and Restricted Stock Plans
On December 18, 1997, the Company's Board of Directors adopted the 1998
Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A
Common Stock of the Company for issuance. Options under the 1998 Plan may be
granted either as Incentive Stock Options as defined in Section 422 of the
Internal Revenue Code or Nonqualified Stock Options subject to the provisions
of Section 83 of the Internal Revenue Code. The options vest 40% upon the
second anniversary, and 20% on the third, fourth and fifth anniversary dates
of the grant.
As a result of the Recapitalization effective on December 18, 1997, the
Human Resources Committee of the Company's Board of Directors removed all
restrictions on the then outstanding restricted 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. In addition,
a special transaction bonus was approved for key members of management.
Furthermore, 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
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
33
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 Transitional Plan. Those senior executives received nonqualified stock
options which were subsequently cancelled and exchanged on December 18, 1997
for fully-vested ten-year stock options to acquire 145,516 shares of the
Company's 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 Class A
Common Stock at an exercise price of $0.125 per share ("Recapitalization Stock
Options"). One executive has the right to require the Company to repurchase
certain securities of the Company at the greater of fair market value or
original cost. As a result of all recapitalization date activity, the Company
recorded an aggregate $18.9 million in compensation expense, and $3.6 million
in other non-current liabilities.
The Company recorded charges of $6.8 million and $6.7 million in fiscal
2000 and 1999 respectively, to revalue the right of one executive to require
the Company to repurchase certain securities of the Company at the greater of
fair market value or original cost. The expense associated with the right was
recorded in stock based compensation expense. Subsequent to year end, the
Company satisfied the obligation through a draw of the Company's Revolving
Credit Facility and the delivery of a portion of the executive's securities.
Accordingly, $10.7 million was included in current liabilities and $6.3
million is included in "Other noncurrent liabilities".
FAS No. 123 Disclosures: As permitted by FAS 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 ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and makes no charges
(except to the extent required by APB Opinion No. 25) against earnings with
respect to options granted. FAS 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.
2000 1999 1998
------- ------- --------
Net income (loss) (in thousands).......... As reported $30,140 $15,821 $(33,773)
Pro forma $29,552 $14,592 $(31,468)
Net earnings (loss) per share-Diluted..... As reported $ 0.88 $ 0.48 $ (1.11)
Pro forma $ 0.86 $ 0.44 $ (1.03)
The fair value for all options granted were estimated at the date of grant
or revaluation 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.
The risk free interest rates utilized for the grants are as follows:
Risk Free
Option Grant Date Interest Rate
- ----------------- -------------
Fiscal 1998..................................................... 5.55%
Fiscal 1999..................................................... 4.57%-6.17%
Fiscal 2000..................................................... 5.77%-6.09%
34
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 29, 1998.................... 3,611,156 $2.01
Granted........................................ 171,500 0.72
Exercised...................................... (150,570) 0.13
Canceled....................................... (69,000) 1.83
---------
Outstanding November 28, 1999.................... 3,563,086 2.02
Granted........................................ 151,500 7.80
Exercised...................................... -- --
Canceled....................................... (39,000) 0.56
---------
Outstanding November 26, 2000.................... 3,675,586 $2.27
=========
For various price ranges, weighted average characteristics of outstanding
stock options at November 26, 2000 were as follows:
Exercisable
Outstanding Options Options
---------------------------- ----------------
Remaining Weighted Weighted
Life Average Average
Range of Exercise prices Shares (Years) Price Shares Price
- ------------------------ --------- --------- -------- ------- --------
Class A
=======
$0.00-$0.13...................... 150,570 7.1 $ 0.13 150,570 $ 0.13
$0.50-$1.00...................... 2,126,000 7.4 0.52 799,000 $ 0.50
$4.18-$5.98...................... 1,134,000 7.3 4.22 444,000 4.18
$6.93-$9.60...................... 119,500 9.6 8.17 -- --
Class L
- -------
$0.00-$10.13..................... 145,516 7.1 $10.13 145,516 $10.13
35
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9: Income Taxes
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Income tax expense (benefit) consists of:
Year ended Year ended Year ended
Nov. 26, 2000 Nov. 28, 1999 Nov. 29, 1998
------------- ------------- -------------
(in thousands)
Current:
Federal.............................. $20,444 $11,058 $ 1,737
State and local...................... 2,455 2,250 948
Foreign.............................. 5,199 3,740 3,569
------- ------- -------
28,098 17,048 6,254
Deferred:
Federal.............................. (450) (471) (16,541)
State and local...................... (64) (473) (2,363)
Foreign.............................. (352) 457 (361)
------- ------- -------
(866) (487) (19,265)
------- ------- -------
Total................................ 27,232 16,561 (13,011)
Allocated to loss from early
extinguishment of debt.............. -- -- (9,693)
------- ------- -------
Income tax expense (benefit) before
extraordinary item.................. $27,232 $16,561 $(3,318)
======= ======= =======
Income before taxes from foreign operations amounted to $12.2 million, $9.0
million, and $6.4 million for the years ended November 26, 2000, November 28,
1999, and November 29, 1998, respectively.
The differences between the effective tax rate and the statutory U.S.
Federal tax rate are explained as follows:
Year ended Year ended Year ended
Nov. 26, 2000 Nov. 28, 1999 Nov. 29, 1998
------------- ------------- -------------
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................. 3.2% 4.2% (0.8%)
Foreign tax rate differential and
effects of foreign earnings
repatriation........................ (0.1%) 1.0% 0.8%
Other items, net..................... 2.9% (0.8%) 0.3%
---- ---- -----
Effective income tax rate before
permanent differences resulting from
purchase accounting................. 41.0% 39.4% (34.7%)
Permanent differences resulting from
purchase accounting, principally
goodwill............................ 6.5% 11.7% 20.0%
---- ---- -----
Effective income tax rate............ 47.5% 51.1% (14.7%)
==== ==== =====
36
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The Company's total deferred
tax assets and liabilities and their significant components are as follows:
2000 1999
----------------------- -----------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
(in thousands)
Accrued salaries and benefits.. $ 4,311 $ 6,804 $ 5,238 $ 5,516
Allowance for doubtful
accounts...................... 4,238 -- 3,636 --
Plant shutdown, idle
facilities, and environmental
costs......................... 1,105 1,322 1,515 1,322
Tax credit carryforward........ 476 -- 178 --
Accrued warranty reserve....... 2,997 -- 2,598 --
Book versus tax differences
related to property, plant,
and equipment................. -- (21,868) -- (19,613)
Book versus tax differences
related to intangible assets.. -- (10,217) -- (10,464)
All other...................... 1,224 158 1,032 (116)
-------- -------- ------- --------
$ 14,351 $(23,801) $14,197 $(23,355)
======== ======== ======= ========
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 at
November 26, 2000 and November 28, 1999.
Note 10: Retirement Plans
Substantially all employees are covered by defined contribution profit
sharing plans, where specific amounts (as annually established by the
Company's board of directors) are set aside in trust for retirement benefits.
Profit sharing expense was $8.4 million, $7.4 million, and $6.6 million for
the years ended November 26, 2000, November 28, 1999, and November 29, 1998,
respectively.
Note 11: Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
------- ------- --------
(in thousands)
Numerator:
- ----------
Income(loss) before extraordinary item............... $30,140 $15,821 $(19,236)
Extraordinary item, net.............................. -- -- 14,537
------- ------- --------
Net income(loss)..................................... 30,140 15,821 (33,773)
Liquidation preference for common L & M shares....... 14,808 13,461 11,716
------- ------- --------
Net income(loss) available to common shareholders.... $15,332 $ 2,360 $(45,489)
------- ------- --------
Denominator:
- ------------
Denominator for basic earnings per share--weighted
average shares...................................... 31,485 31,473 30,472
Effect of dilutive securities:
- ------------------------------
Stock options........................................ 2,750 1,499 --
------- ------- --------
Denominator for diluted earnings per share--adjusted
weighted-average shares and assumed conversions..... 34,235 32,972 30,472
======= ======= ========
37
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to the loss from continuing operations in 1998, the potentially
dilutive securities would have been antidilutive. Accordingly, they are
excluded from the calculation in dilutive earnings per share.
Note 12: Summary of Interim Financial Information (Unaudited)
Quarterly financial data for the years ended November 26, 2000 and November
28, 1999, is presented below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Amounts in thousands, except for
share data)
2000:
Net sales................................ $256,639 $264,055 $292,741 $288,107
Gross profit............................. 115,212 118,864 132,897 130,715
Net income............................... 5,557 7,568 12,439 4,576
Earnings per share--Basic................ 0.18 0.24 0.40 0.14
Earnings per share--Diluted.............. 0.16 0.22 0.36 0.14
1999:
Net sales................................ $222,326 $232,168 $273,333 $257,880
Gross profit............................. 99,751 103,218 123,639 114,930
Net income............................... 413 3,153 11,625 630
Earnings per share--Basic................ 0.01 0.10 0.37 0.02
Earnings per share--Diluted.............. 0.01 0.10 0.35 0.02
During the fourth quarter of Fiscal 1999, the Company recorded an after tax
charge of $4.0 million ($0.12 per share) to revalue the right of one executive
to require the Company to repurchase certain securities of the Company at the
greater of fair market value or original cost. That revaluation was recorded
as stock based compensation expense.
Note 13: Business Acquisitions
On August 10, 2000, the Company acquired 70% of the outstanding capital
stock of Rozen S.R.L. for $9.5 million, including costs associated with the
acquisition. Rozen, located in Buenos Aires, Argentina, manufactures and sells
bedding to retailers located in Argentina. Rozen also owns and operates
several retail sleep shops in the Buenos Aires area. As part of the purchase
price, $1.0 million is being held in escrow pursuant to the Purchase
Agreement. The Company recorded the acquisition using the purchase method of
accounting and, accordingly, the purchase price has been preliminarily
allocated to the assets acquired and liabilities assumed based on the
estimated fair market values. As a result of the preliminary purchase price
allocation, the Company recorded $4.7 million in goodwill to be amortized over
a 20 year period.
Cash paid............................... $9.5
Fair value of liabilities assumed....... 9.4
----
Purchase price.......................... 18.9
Fair value of assets acquired........... 14.2
----
Goodwill................................ $4.7
====
On September 1, 2000, the Company acquired certain operating assets of
Premier Bedding Group, LLC for $10.9 million. The business acquired
manufactures and sells bedding to retailers primarily in the United States
under the Bassett and Carrington Chase brand names. As part of the
acquisition, the Company acquired the
38
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exclusive right to manufacture, market and sell bedding under the previously
mentioned brand names through October, 2015. The Company recorded the
acquisition using the purchase method of accounting and, accordingly, the
purchase price has been preliminary allocated to the assets acquired based on
the estimated fair value. As a result of the preliminary purchase price
allocation, the Company has recorded $6.1 million of other intangibles
associated with a license agreement acquired. This intangible is being
amortized over a 15 year period.
Due to the immateriality of the acquisitions to the Company's balance sheet
and statement of operations, no pro forma disclosures are considered
necessary.
Note 14: Contingencies
The Company is currently conducting an environmental cleanup at a formerly
owned facility in South Brunswick, New Jersey pursuant to the New Jersey
Industrial Site Recovery Act. The Company and one of its subsidiaries are
parties to an Administrative Consent Order issued by the New Jersey Department
of Environmental Protection. Pursuant to that order, the Company and its
subsidiary agreed to conduct soil and groundwater remediation at the property.
The Company does not believe that its manufacturing processes were the source
of contamination. The Company sold the property in 1997. The Company and
subsidiary retained primary responsibility for the required remediation. The
Company has completed essentially all soil remediation with the New Jersey
Department of Environmental Protection approval, and have concluded a pilot
test of groundwater remediation system.
The Company is also remediating soil and groundwater contamination at an
inactive facility located in Oakville, Connecticut. Although the Company is
conducting the remediation voluntarily, it obtained Connecticut Department of
Environmental Protection approval of the remediation plan. The Company has
completed essentially all soil remediation under the remediation plan and is
currently monitoring groundwater at the site. The Company believes the
contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility.
While the Company cannot predict the ultimate timing or costs of the South
Brunswick and Oakville remediation, based on facts currently known, the
Company believes that the accruals recorded are adequate and does not believe
the resolution of these matters will have a material adverse effect on the
financial position or future operations of the Company; however, in the event
of an adverse decision, these matters could have a material adverse effect.
The Company has been identified as a potential responsible party pursuant
to the Comprehensive Environmental Response Compensation and Liability Act
with regard to two waste disposal sites and under analogous state legislation
with regard to a third. Although liability under these statutes is generally
joint and several, as a practical matter, liability is usually allocated among
all financially responsible parties. Based on the nature and quantity of our
wastes, the Company believes that liability at each of these sites in unlikely
to be material.
Note 15: Segment Information
The Company operates predominately in one industry segment, that being the
manufacture and marketing of conventional bedding. During 2000, 1999 and 1998
no one customer represented 10% or more of total net sales. Sales outside the
United States were $114,547, $92,059 and $87,322 for 2000, 1999 and 1998,
respectively. Additionally, long-lived assets (principally property, plant and
equipment, goodwill, patents and other investments) outside the United States
were $51,363 and $38,203 as of November 26, 2000 and November 28, 1999.
39
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16: Loss on Net Assets Held for Sale, Other Write-Downs and
Restructurings
During 1998, the Company recorded a loss on certain manufacturing assets of
$8.4 million as a result of the Company's on-going strategy to improve
operational efficiencies. This loss resulted from the rationalization of
certain manufacturing processes and the write-down of other idled assets.
These assets were written-down to their fair values and production was phased-
out over the first two quarters of 1999. The estimated fair values of these
assets are not material. The Company disposed of a majority of these assets
during 1999.
During 1998, the Company recorded a loss of $2.2 million for the write-down
of previously capitalized software development costs. Such costs were
originally capitalized as a result of the Company's on-going project to
upgrade its management information systems to improve manufacturing operations
and profitability analysis. As a result of a change in the direction of the
project, it was determined that certain software modules would not be
implemented.
Subsequent to year end, the Company commenced a plan to shutdown its
Memphis facility. The Company plans to cease operations early in the second
quarter of 2001 and take a restructuring charge in the first quarter of 2001.
The Company believes this charge will not be material.
Note 17: Related Party Transactions
During 1999, the Company contributed $29.7 million in cash and other assets
to Mattress Holdings International LLC ("MHI") in exchange for a non-voting
interest. MHI was formed to invest in domestic and international loans,
advances and investment in joint ventures, licensees and retailers and is
controlled by the Company's largest stockholder, Bain Capital, Inc. The
investment in MHI was made to fund its activities in order to enhance business
relationships and build incremental sales. In addition, the Company has
guaranteed the obligations of MHI under investment documents governing MHI's
investments and has indemnified MHI with respect to such investments. For
financial reporting purposes, the financial statements of MHI have been
consolidated into those of the Company.
During fiscal 2000 and 1999, the Company had sales of $140.8 and $117.6
million, respectively, of finished mattress products pursuant to multi-year
supply contracts to affiliated and related parties of Bain Capital, Inc. The
Company believes that the terms on which mattresses are supplied to related
parties are not materially less favorable than those that might reasonably be
obtained in a comparable transaction at such time in an arm's length basis
from a person that is not an affiliate or related party.
The Company paid Bain Capital, Inc. $2.0 million in management fees in
2000, 1999 and 1998 pursuant to a five year management services agreement.
Note 18: Guarantor/Non-Guarantor Financial Information
As discussed in Note 4, 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
40
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 26, 2000 and
November 28, 1999, consolidating condensed statements of operations and
cash flows for each of the years in the three-year period ended November
26, 2000.
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.
Separate financial statements of each of the Guarantor Subsidiaries are not
presented because Management believes that these financial statements would
not be material to investors.
41
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 26, 2000
(in thousands)
Consolidated
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 354 $ 6,672 $11,088 $ -- $ 18,114
Accounts receivable--
Non-Affiliates, net.... 34 5,603 87,155 22,881 -- 115,673
Accounts receivable--
Affiliates, net........ -- -- 29,816 -- -- 29,816
Inventories............. -- 1,744 42,643 7,485 -- 51,872
Prepaid expenses and
other assets........... 1,477 411 17,069 5,394 -- 24,351
-------- -------- -------- ------- --------- --------
1,511 8,112 183,355 46,848 -- 239,826
Property, plant and
equipment, at cost..... -- 9,547 198,203 19,770 -- 227,520
Less accumulated
depreciation........... -- 1,938 64,762 3,737 -- 70,437
-------- -------- -------- ------- --------- --------
-- 7,609 133,441 16,033 -- 157,083
Other assets:
Goodwill and other
intangibles, net....... -- 13,256 333,167 28,815 -- 375,238
Net investment in and
advances to (from)
subsidiaries and
affiliates............. (44,613) 529,908 (316,056) (39,788) (129,451) --
Investment in
affiliates............. -- -- -- 30,519 -- 30,519
Debt issuance costs, net
and other
assets................. 813 20,193 6,163 180 -- 27,349
-------- -------- -------- ------- --------- --------
(43,800) 563,357 23,274 19,726 (129,451) 433,106
-------- -------- -------- ------- --------- --------
Total assets............ $(42,289) $579,078 $340,070 $82,607 $(129,451) $830,015
======== ======== ======== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-
term obligations....... $ -- $ 33,813 $ 359 $ 201 $ -- $ 34,373
Accounts payable........ -- 634 45,567 11,486 -- 57,687
Accrued incentives and
advertising............ -- 1,451 33,482 3,324 -- 38,257
Accrued compensation.... -- 571 21,493 2,064 -- 24,128
Accrued interest........ -- 633 12,117 (86) -- 12,664
Stock based
compensation........... 10,699 -- -- -- -- 10,699
Other accrued expenses.. 82 915 25,028 4,188 -- 30,213
-------- -------- -------- ------- --------- --------
10,781 38,017 138,046 21,177 -- 208,021
Long-term obligations... 35,505 602,481 13,673 151 -- 651,810
Other noncurrent
liabilities............ 8,002 -- 28,798 1,369 -- 38,169
Deferred income taxes... (3,287) 732 21,333 5,023 -- 23,801
Minority interest....... -- -- -- 1,504 -- 1,504
Stockholders' equity.... (93,290) (62,152) 138,220 53,383 (129,451) (93,290)
-------- -------- -------- ------- --------- --------
Total liabilities and
stockholders'
equity................. $(42,289) $579,078 $340,070 $82,607 $(129,451) $830,015
======== ======== ======== ======= ========= ========
42
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
November 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 13 $ 6,220 $ 4,612 $ -- $ 10,845
Accounts receivable--Non
Affiliates, net........ 27 3,941 84,452 16,867 -- 105,287
Accounts receivable--
Affiliates,
net.................... -- -- 14,188 -- -- 14,188
Inventories............. -- 1,297 38,673 4,711 -- 44,681
Prepaid expenses and
other assets........... 3,412 314 12,799 3,640 -- 20,165
--------- -------- -------- ------- -------- --------
3,439 5,565 156,332 29,830 -- 195,166
Property, plant and
equipment, at cost..... -- 4,584 181,881 12,161 -- 198,626
Less accumulated
depreciation........... -- 1,571 55,709 3,245 -- 60,525
--------- -------- -------- ------- -------- --------
-- 3,013 126,172 8,916 -- 138,101
Other assets:
Goodwill and other
intangibles, net....... -- 13,653 338,711 26,088 -- 378,452
Net investment in and
advances to (from)
subsidiaries and
affiliates............. (84,313) 507,742 (338,993) (56,359) (28,077) --
Investment in
affiliates............. -- -- -- 30,004 -- 30,004
Debt issuance costs, net
and other assets....... 813 24,422 3,904 91 -- 29,230
--------- -------- -------- ------- -------- --------
(83,500) 545,817 3,622 (176) (28,077) 437,686
--------- -------- -------- ------- -------- --------
Total assets............ $ (80,061) $554,395 $286,126 $38,570 $(28,077) $770,953
========= ======== ======== ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-
term obligations....... $ -- $ 13,854 $ 291 $ -- $ -- $ 14,145
Accounts payable........ -- 318 36,493 6,342 -- 43,153
Accrued incentives and
advertising............ -- 1,200 28,507 2,594 -- 32,301
Accrued compensation.... -- 417 21,646 1,110 -- 23,173
Accrued interest........ -- 564 12,074 95 -- 12,733
Other accrued expenses.. 534 420 24,235 911 -- 26,100
--------- -------- -------- ------- -------- --------
534 16,773 123,246 11,052 -- 151,605
Long-term obligations... 31,497 630,749 13,951 -- -- 676,197
Other noncurrent
liabilities............ 11,491 -- 27,629 2,065 -- 41,185
Deferred income taxes... (2,194) 736 21,644 3,169 -- 23,355
Stockholders' equity.... (121,389) (93,863) 99,656 22,284 (28,077) (121,389)
--------- -------- -------- ------- -------- --------
Total liabilities and
stockholders' equity... $ (80,061) $554,395 $286,126 $38,570 $(28,077) $770,953
========= ======== ======== ======= ======== ========
43
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 26, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales--Non-
Affiliates............. $ -- $48,330 $816,037 $102,073 $(14,514) $ 951,926
Net sales--Affiliates... -- -- 149,616 -- -- 149,616
------- ------- -------- -------- -------- ---------
Total net sales..... -- 48,330 965,653 102,073 (14,514) 1,101,542
Costs and expenses:
Cost of goods sold--
Non-Affiliates....... -- 30,674 446,768 62,045 (14,514) 524,973
Cost of goods sold--
Affiliates........... -- -- 78,881 -- -- 78,881
------- ------- -------- -------- -------- ---------
Total cost of goods
sold............... -- 30,674 525,649 62,045 (14,514) 603,854
Selling, general and
administrative....... 180 14,570 311,617 28,225 -- 354,592
Stock based
compensation......... 6,797 -- -- -- -- 6,797
Amortization of
intangibles.......... -- 397 11,624 844 -- 12,865
Interest expense, net. 3,841 62,897 (646) (249) -- 65,843
Minority interest..... -- -- 219 -- -- 219
Loss (income) from
equity investees..... (33,751) (34,641) -- -- 68,392 --
Loss (income) from
non-guarantor equity
investees............ -- 636 (6,761) -- 6,125 --
Capital charge and
intercompany interest
allocation........... (3,939) (59,727) 64,124 (458) -- --
------- ------- -------- -------- -------- ---------
Income (loss) before
income taxes........... 26,872 33,524 59,827 11,666 (74,517) 57,372
Income taxes............ (3,268) (227) 25,186 5,541 -- 27,232
------- ------- -------- -------- -------- ---------
Net income (loss)....... $30,140 $33,751 $ 34,641 $ 6,125 $(74,517) $ 30,140
======= ======= ======== ======== ======== =========
44
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales--Non-
Affiliates............. $ -- $ 39,454 $837,474 $78,387 $(14,649) $940,666
Net sales--Affiliates... -- -- 45,041 -- -- 45,041
-------- -------- -------- ------- -------- --------
Total net sales....... -- 39,454 882,515 78,387 (14,649) 985,707
Costs and expenses:
Cost of goods sold--
Non-Affiliates........ -- 24,400 461,694 49,323 (14,649) 520,768
Cost of goods sold--
Affiliates............ -- -- 23,401 -- -- 23,401
-------- -------- -------- ------- -------- --------
Total cost of goods
sold................. -- 24,400 485,095 49,323 (14,649) 544,169
Selling, general and
administrative........ 184 11,000 294,728 18,700 -- 324,612
Stock based
compensation.......... 6,664 -- -- -- -- 6,664
Amortization of
intangibles........... -- 398 11,578 905 -- 12,881
Interest expense, net.. 3,648 60,730 1,166 (545) -- 64,999
Loss (income) from
equity investees...... (13,551) (12,721) -- -- 26,272 --
Loss (income) from
non-guarantor equity
investees............. -- (1,592) (2,735) -- 4,327 --
Capital charge and
intercompany interest
allocation............ (13,169) (56,332) 67,492 2,009 -- --
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes........... 16,224 13,571 25,191 7,995 (30,599) 32,382
Income taxes............ 403 20 12,470 3,668 -- 16,561
-------- -------- -------- ------- -------- --------
Net income (loss)....... $ 15,821 $ 13,551 $ 12,721 $ 4,327 $(30,599) $ 15,821
======== ======== ======== ======= ======== ========
45
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net sales............... $ -- $ 42,472 $792,878 $73,265 $(17,313) $891,302
Costs and expenses:
Cost of goods sold..... -- 26,973 448,186 45,538 (17,197) 503,500
Selling, general and
administrative........ 717 13,434 265,859 20,346 -- 300,356
Loss on net assets held
for sale and other
write-downs........... -- 229 10,158 247 -- 10,634
Compensation associated
with recapitalization. 17,114 332 -- 1,440 -- 18,886
Amortization of
intangibles........... -- 411 11,684 934 -- 13,029
Interest expense, net.. 4,967 62,504 245 (265) -- 67,451
Loss (income) from
equity investees...... 3,136 1,894 -- -- (5,030) --
Loss (income) from non-
guarantor equity
investees............. -- (27) (2,417) -- 2,444 --
Capital charge and
intercompany interest
allocation............ (10,279) (59,656) 69,935 -- -- --
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. (15,655) (3,622) (10,772) 5,025 2,470 (22,554)
Income taxes............ 3,581 (486) (8,878) 2,581 (116) (3,318)
-------- -------- -------- ------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (19,236) (3,136) (1,894) 2,444 2,586 (19,236)
Extraordinary item...... 14,537 -- -- -- -- 14,537
-------- -------- -------- ------- -------- --------
Net income (loss)....... $(33,773) $ (3,136) $ (1,894) $ 2,444 $ 2,586 $(33,773)
======== ======== ======== ======= ======== ========
46
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 26, 2000
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by
operating activities... $ -- $ 485 $ 59,223 $10,472 $ -- $ 70,180
---- -------- -------- ------- ---- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. -- (80) (21,709) (2,300) -- (24,089)
Proceeds from sale of
property, plant and
equipment............ -- -- 95 -- -- 95
Acquisition of
business, net of cash
acquired............. -- (10,834) -- (9,113) -- (19,947)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... -- 29,424 (36,841) 7,417 -- --
---- -------- -------- ------- ---- --------
Net proceeds provided
by (used in)
investing activities. -- 18,510 (58,455) (3,996) -- (43,941)
Cash flows from
financing activities:
Repayment of long-term
obligations, net..... -- (18,654) (316) -- -- (18,970)
---- -------- -------- ------- ---- --------
Net cash used in
financing activities... -- (18,654) (316) -- -- (18,970)
---- -------- -------- ------- ---- --------
Change in cash and cash
equivalents............ -- 341 452 6,476 -- 7,269
Cash and cash
equivalents:
Beginning of period... -- 13 6,220 4,612 -- 10,845
---- -------- -------- ------- ---- --------
End of period......... $ -- $ 354 $ 6,672 $11,088 $ -- $ 18,114
==== ======== ======== ======= ==== ========
47
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 28, 1999
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- -------- ------------ ------------ ------------ ------------
Net cash provided by
operating activities... $ -- $ 543 $ 54,810 $ 650 $ -- $ 56,003
---- -------- -------- -------- ---- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (250) (15,795) (39) -- (16,084)
Proceeds from sale of
property, plant and
equipment............. -- -- 840 -- -- 840
Investment in
affiliates............ -- -- -- (27,794) -- (27,794)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 68 14,573 (44,386) 29,745 -- --
---- -------- -------- -------- ---- --------
Net proceeds provided
by (used in) investing
activities............ 68 14,323 (59,341) 1,912 -- (43,038)
Cash flows from
financing activities:
Treasury stock
repurchase............ (85) -- -- -- -- (85)
Proceeds (repayment) of
long-term obligations,
net................... -- (14,875) 1,589 -- -- (13,286)
Equity issuances....... 17 -- -- -- -- 17
---- -------- -------- -------- ---- --------
Net cash provided by
(used in) financing
activities............. (68) (14,875) 1,589 -- -- (13,354)
---- -------- -------- -------- ---- --------
Change in cash and cash
equivalents............ -- (9) (2,942) 2,562 -- (389)
Cash and cash
equivalents:
Beginning of period.... -- 22 9,162 2,050 -- 11,234
---- -------- -------- -------- ---- --------
End of period.......... $ -- $ 13 $ 6,220 $ 4,612 $ -- $ 10,845
==== ======== ======== ======== ==== ========
48
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 29, 1998
(in thousands)
Combined
Sealy Combined Non-
Sealy Mattress Guarantor Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ $ (478) $ (1,923) $ 56,210 $ (176) $(603) $ 53,030
---------- --------- -------- ------- ----- ---------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. -- (203) (32,909) -- -- (33,112)
Proceeds from sale of
property, plant and
equipment............ -- -- 216 -- -- 216
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates........... 637,473 (607,445) (28,882) (1,749) 603 --
---------- --------- -------- ------- ----- ---------
Net proceeds provided
by (used in)
investing
activities.......... 637,473 (607,648) (61,575) (1,749) 603 (32,896)
Cash flows from
financing activities:
Treasury stock........ (413,078) -- -- -- -- (413,078)
Repayment of long-term
obligations, net..... (330,000) 642,122 12,653 -- -- 324,775
Equity issuances...... 121,444 -- -- -- -- 121,444
Costs associated with
tender offer of prior
debt................. (15,361) -- -- -- -- (15,361)
Debt issuance costs... -- (32,549) (188) -- -- (32,737)
---------- --------- -------- ------- ----- ---------
Net cash provided by
(used in) financing
activities............ (636,995) 609,573 12,465 -- -- (14,957)
---------- --------- -------- ------- ----- ---------
Change in cash and cash
equivalents........... -- 2 7,100 (1,925) -- 5,177
Cash and cash
equivalents:
Beginning of period... -- 20 2,062 3,975 -- 6,057
---------- --------- -------- ------- ----- ---------
End of period......... $ -- $ 22 $ 9,162 $ 2,050 $ -- $ 11,234
========== ========= ======== ======= ===== =========
49
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 42, 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 since 1984.
Mr. Bekenstein presently serves on the Board of Directors of a number of
public and private companies, including Waters Corporation and Bright Horizons
Childrens Centers, Inc. 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. He has been a director of the Company since December
1997.
Paul Edgerley. Mr. Edgerley, age 44, 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 Board of Directors of Anthony Crane Rental, LP, GS Industries,
Inc. and AMF Group, Inc. He has been a director of the Company since December
1997.
Joe L. Gonzalez. Mr. Gonzalez, age 44, has been a Limited Partner of J.P.
Morgan Partners since 1998. Previously, he was with KPMG from 1978 to 1998. He
serves on the Board of Directors of M2 Automotive, Inc., Airbase Services,
Inc., Quivox Systems and Mattress Discounters Corporation. He has been a
director of the Company since December 2000.
Andrew S. Janower. Mr. Janower, age 32, since 1998 has been a Vice
President of Charlesbank Capital Partners LLC, since its formation in July,
1998. Previously, he had been employed as an Associate by Harvard Private
Capital Group, Inc. Prior to joining Harvard Private Capital Group, Inc., Mr.
Janower was a Consultant at Bain & Company and a research associate at Harvard
Business School. He has been a director of the Company since December 1998.
James W. Johnston. Mr. Johnston, age 54, is President and Chief Executive
Officer of Stonemarker Enterprises, Inc., a consulting and investment company.
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 of R. J. Reynolds Tobacco Co. from 1995 to 1996 and Chairman of 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. He has been a director of the Company since March 1993.
Ronald L. Jones. Mr. Jones, age 58, has been Chairman since March 1998 and
Chief Executive Officer since March 1996. From October, 1988 until joining the
Company, Mr. Jones served as President of Masco Home Furnishings. From 1983 to
1988, Mr. Jones was with HON Industries, most recently serving as president.
He has been a director of the Company since March 1996.
Michael Krupka. Mr. Krupka, age 35, 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 Integrated Circuit Systems, Advanced
50
Telecom, Inc. and Mattress Discounters Corporation. He has been a director of
the Company since December 1997.
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:
David J. McIlquham. Mr. McIlquham, age 46, became President and Chief
Operating Officer in January, 2001. He had been Corporate Vice President Sales
and Marketing since April 1998 and was Corporate Vice President Marketing
since joining the Company in 1990 until 1998.
Bruce G. Barman. Dr. Barman, age 55, has been Corporate Vice President
Research and Development since joining the Company in March 1995. 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.
Jeffrey C. Claypool. Mr. Claypool, age 53, has been Corporate Vice
President Human Resources since joining the Company in September 1991.
Douglas E. Fellmy. Mr. Fellmy, age 51, has been Corporate Vice President
and General Manager Domestic Bedding since April 1998. Mr. Fellmy joined the
Company in 1971 and served in numerous capacities with the Company's
Components Division and from 1990 to 1998 was Vice President Operations.
James F. Goughenour. Mr. Goughenour, age 63, has been Corporate Vice
President Technology, Quality and Manufacturing Engineering since joining the
Company in July 1997. From 1979 until he joined the Company, Mr. Goughenour
had been with the HON Company, serving as Vice President.
Lawrence J. Rogers. Mr. Rogers, age 52, has been Corporate Vice President
and General Manager International since February 1994. Since joining the
Company in 1979, Mr. Rogers has served in numerous other capacities within the
Company's operations, including President of Sealy of Canada.
Kenneth L. Walker. Mr. Walker, age 52, has been Corporate Vice President,
General Counsel and Secretary since joining the Company in May 1997.
Previously, Mr. Walker served as Vice President, General Counsel and Secretary
of Varity Corporation, a manufacturer of automotive components, diesel engines
and farm machinery.
E. Lee Wyatt. Mr. Wyatt, age 48, has been Corporate Vice President
Administration and Chief Financial Officer since September 1999. From joining
the Company in October 1998 until September 1999, he was Corporate Vice
President Administration. From 1983 until he joined the Company, Mr. Wyatt was
with Brown Group Inc., a wholesaler and retailer of footwear, in numerous
positions, most recently as Senior Vice President Finance and Administration
of its Brown Shoe Company subsidiary.
Compliance With Section 16(a) Of The Exchange Act
The Company is not aware of any person that is subject to Section 16 of the
Securities Exchange Act of 1934 (The "Exchange Act") with respect to the
Company, that has failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during Fiscal 2000.
51
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 26, 2000, November 28, 1999, and November 29, 1998,
of those persons who served as (i) the chief executive officer during fiscal
2000, 1999, and 1998, and (ii) the other four most highly compensated
executive officers of the Company for fiscal 2000 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------- -----------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Award($) Options/SARS Compensation(a)
- ------------------ ---- -------- ---------- ------------ ---------- ------------ ---------------
Ronald L. Jones......... 2000 $641,170 $1,000,399 $24,414(b) -- -- $ 22,856
Chairman, Chief 1999 611,666 978,373 72,562(b) -- -- 22,376
Executive Officer 1998 571,252 632,458 965,602(b) -- 99,070(c) 1,136,150
and President 1,971,630(c)
Gary T. Fazio(d)........ 2000 252,594 161,796 2,553(b) -- -- 19,687
Corp. VP General Mgr. 1999 241,913 169,317 21,313(b) -- -- 18,901
Domestic Bedding 1998 227,542 110,234 435,318(b) -- 8,365(c) 111,899
180,000(c)
Douglas E. Fellmy....... 2000 240,803 154,253 -- -- -- 18,767
Corp. VP General Mgr. 1999 232,467 162,707 65,926(b) -- -- 18,106
Domestic Bedding 1998 219,067 106,129 336,785(b) -- 8,365(c) 111,267
180,000(c)
David J. McIlquham...... 2000 249,229 179,587 2,701(b) -- -- 19,424
Corp. VP Sales and 1999 237,188 166,010 48,509(b) -- -- 18,473
Marketing 1998 223,167 108,114 684,175(b) -- 180,000(c) 17,468
Lawrence J. Rogers...... 2000 229,792 168,593 -- -- -- 17,910
Corp. VP General Mgr. 1999 221,250 144,518 1,357(b) -- -- 17,235
International 1998 189,266 101,403 375,855(b) -- 8,365(c) 110,253
180,000(c)
- --------
(a) Represents amounts paid on behalf of each of the Named Executive Officers
for the following four respective categories of compensation: (i) Company
premiums for life and accidental death and dismemberment insurance (ii)
Company premiums for long-term disability benefits, (iii) Company
contributions to the Company's defined contribution plans and (iv) in
fiscal 1998 deferred compensation agreements with respective officers.
Amounts for each of the Named Executive Officers for each of the four
respective preceding categories is as follows: Mr. Jones: (2000-$2,664,
$1,292, $18,900, $0; 1999-$2,534, $1,292, $18,550, $0;1998-$2,364, $1,049,
$18,200, $1,114,537); Mr. Fazio: (2000-$1,045, $960, $17,682, $0; 1999-
$995, $912, $16,994, $0;1998-$883, $983, $15,928, $94,105); Mr. McIlquham:
(2000-$1,031, $947, $17,446, $0; 1999-$976, $895, $16,602, $0;1998-$866,
$980, $15,622, $0); Mr. Fellmy: (2000-$996, $915, $16,856, $0; 1999-$957,
$877, $16,272, $0;1998-$850, $976, $15,336, $94,105); Mr. Rogers (2000-
$952, $873, $16,085, $0; 1999-$916, $841, $15,478, $0;1998-$368, $385,
$15,395, $94,105)
(b) Represents amounts paid on behalf of each of the Named Executive Officers
for the following seven respective categories of other annual
compensation: (i) transaction bonus associated with the Recapitalization,
(ii) vesting of restricted stock associated with the Recapitalization,
(iii) compensation associated with vested stock options paid out in
connection with the Recapitalization, (iv) compensation recorded
associated with the exercise of stock options, (v) relocation expenses
incurred, (vi) car and financial planning allowances paid on behalf of the
Named executives and (vii) special bonuses. Amounts
52
for each of the Named Executive Officers for each of the seven respective
preceding categories is as follows: Mr. Jones: (2000-
$0,$0,$0,$0,$0,$24,414,$0;1999-$0, $0, $0, $0, $48,148, $24,414, $0; 1998-
$385,000, $162,326, $0, $334,361, $6,801, $67,139, $9,975); Mr. Fazio (2000-
$0,$0,$0,$0,2,553,$0,$0;1999-$0, $0, $0, $0, $21,313, $0, $0;1998-$306,750,
$0, $0, $28,232, $100,336, $0, $0); Mr. Fellmy (1999-$0, $0, $0, $28,232,
$37,694, $0, $0;1998-$297,000, $0, $0, $0, $39,785, $0, $0); Mr. McIlquham
(2000-$0,$0,$0,$0,$2,701,$0,$0;1999-$0, $0, $0, $0, $28,509, $0, $0;1998-
$300,000, $150,486, $225,983, $0, $7,706, $0, $0); Mr. Rogers (1999-$0, $0,
$0, $0, $1,357, $0, $0;1998-$254,115, $0, $0, $28,232, $81,508, $0, $12,000).
(c) On December 18, 1997, the Company issued to certain of the named Executive
Officers, among others, ten-year fully vested non-qualified stock options
to acquire (i) shares of the Company's Class A Common Stock at the then
current fair market value of $0.50, with an exercise price of $0.125 per
share; and (ii) shares of the Company's Class L Common stock at the then
current fair market value of $40.50, with an exercise price of $10.125 per
share. In the December 1997, the indicated Named Executive Officers
received options for the following A and L shares: Mr. Jones 891,630 A
Shares and 99,070 L Shares; Mr. Fazio 75,285 A Shares and 8,365 L Shares;
Mr. Fellmy 75,285 A Shares and 8,365 L Shares; and Mr. Rogers 75,285 A
Shares and 8,365 L Shares. On March 17, 1998, pursuant to the 1998 Stock
Option Plan, the Company issued to the Named Executive Officers, among
others, ten-year non-qualified stock options to acquire shares of the
Company's Class A Common Stock at the then current fair market value
exercise price of $0.50 per share and also additional options to acquire
shares of Company's Class A Common Stock at an exercise price of $4.18 per
share. In March, 1998, the Named Executive Officers received the following
stock options: Mr. Jones 600,000 options at $0.50 and 480,000 options at
$4.18; Mr. Fazio 100,000 options at $0.50 and 80,000 options at $4.18; Mr.
McIlquham 100,000 options at $0.50 and 80,000 options at $4.18; Mr. Fellmy
100,000 options at $0.50 and 80,000 options at $4.18; and Mr. Rogers
100,000 options at $0.50 and 80,000 options at $4.18.
(d) Mr. Fazio left the employment of the Company on January 23, 2001.
53
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During fiscal 2000, no stock options or stock appreciation rights were
granted to the Chief Executive Officer or the four most highly compensated
executives.
AGGREGATED OPTION/SAR EXERCISED IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number Of Securities
Shares Underlying Unexercised Value Of Unexercised In-the-
Acquired On Value Options/sars At FY-End (#) money Options/sars At FY-End ($)
Name Exercise (#) Realized Exercisable/unexercisable (a) Exercisable/unexercisable (b) (c)
---- ------------ -------- ----------------------------- ---------------------------------
Ronald L. Jones......... -- -- 627,070/552,000 $10,538,780/5,641,440
Chairman, Chief
Executive
Officer and President
Gary T. Fazio(d)........ -- -- 80,365/108,000 $ 1,176,882/1,065,360
VP General Mgr.
Domestic
Bedding
Douglas E. Fellmy....... -- -- 80,365/108,000 $ 1,176,882/1,065,360
VP General Mgr.
Domestic
Bedding
David J. McIlquham...... -- -- 72,000/108,000 $ 710,240/1,065,360
VP of Sales and
Marketing
Lawrence J. Rogers...... -- -- 80,365/108,000 $ 1,176,882/1,065,360
VP General Mgr. Of
International Ops.
- --------
(a) Includes options exercisable within 60 days after November 26, 2000.
(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 26, 2000 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 26, 2000.
(d) Mr. Fazio left the employment of the Company on January 23, 2001.
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.
54
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. Ronald Jones has entered into an
employment agreement with Parent providing for his employment as Chief
Executive Officer. The agreement has an initial term of three years and a
perpetual two-year term thereafter. The agreement currently provides for an
annual base salary of U.S. $530,000, subject to annual increase by Parent's
Board of Directors, plus a performance bonus and grants Mr. Jones the right to
require Parent to repurchase certain securities of Parent held by Mr. Jones.
In addition, nine employees of the Company, including Gary T. Fazio, Douglas
Fellmy, Lawrence J. Rogers, and David J. McIlquham, have entered into
employment agreements that provide, among other things, for an initial
employment term of two years and a perpetual one-year employment term
thereafter, during which such employees will receive base salary (respectively
of at least U.S. $204,500, U.S. $198,000, U.S. $200,000, and U.S. $200,000)
and a performance bonus between zero and seventy percent of their base salary
and substantially the same benefits as they received as of the date of such
agreements. For the fiscal year ending November 26, 2000, the compensation
committee of the Company's Board of Directors determined that the bonuses to
be paid pursuant to those employment agreements were to be based 75% on the
Company's achievement of an Adjusted EBITDA target and 25% on the Company's
achievement of a Return on Net Tangible Assets target. Each such target
represented an improvement over the Company's prior year performance.
Deferred Compensation Agreements. On December 18, 1997, Mr. Jones entered
into a deferred compensation agreement with Parent pursuant to which Mr. Jones
elected to defer $1,114,538 of compensation until either December 18, 2007 or,
in certain instances, such earlier date as provided in such deferred
compensation agreement. In addition, on December 18, 1997, six employees,
including Gary T. Fazio, Douglas Fellmy, and Lawrence J. Rogers, entered into
deferred compensation agreements with Parent pursuant to which such employees
elected to defer an aggregate $522,518 of compensation, in each case, until
either December 18, 2007 or, in certain instances, such earlier date as
provided in such deferred compensation agreements.
Severance Benefit Plans. In addition, certain executives and other
employees are eligible for benefits under the Company's severance benefit
plans and certain other agreements, which provide for cash severance payments
equal to their base salary and, in some instances, bonuses (from periods
ranging from two weeks to two years) and for the continuation of certain
benefits.
Management Incentive Plan. The Company provides performance-based
compensation awards to executive officers and key employees for achievement
each year as part of a bonus plan. Such compensation awards are a function of
individual performance and corporate results. The qualitative and quantitative
criteria will be determined from time to time by Parent's Board of Directors
and currently include such factors as EBITDA, return on net assets and return
on selected Company investments.
Management Equity Participation in the Transactions. In connection with the
Transactions, in order to provide financial incentives for certain of the
Company's employees, the Management Investors acquired common stock of Parent
and/or fully vested options to acquire common stock of Parent in exchange for
either (i) cash or (ii) preferred stock and/or options held by such Management
Investors prior to the Merger. Upon a Management Investor's termination of
employment with the Company, the exercise period of such options held by such
Management Investor will be reduced to a period ending no later than six
months after such Management Investor's termination. If such termination
occurs prior to a qualified initial public offering of Parent's common stock,
then Parent shall have the right to repurchase the common stock of Parent held
by such Management Investor and only if the Management Investor is terminated
without "cause" (as defined in his employment agreement), such Management
Investor shall have the right to require Parent to repurchase the common stock
of Parent held by such Management Investor.
55
Sealy Corporation 1998 Stock Option Plan. In order to provide additional
financial incentives for certain of the Company's employees, subsequent to the
consummation of the December 18, 1997 transaction the Management Investors and
certain other employees of the Company were granted and are expected to
periodically be granted options to purchase additional common stock of Parent
pursuant to the Sealy Corporation 1998 Stock Option Plan. Such options vest
and become exercisable upon (i) certain threshold dates or (ii) a change of
control or sale of Parent. Upon an employee's termination of employment with
the Company, all of such employee's unvested options will expire, the exercise
period of all such employee's vested options will be reduced to a period
ending no later than six months after such employee's termination, and if such
termination occurs prior to a qualified initial public offering of the
Parent's common stock, then Parent shall have the right to repurchase the
common stock of Parent held by such employee.
Remuneration of Directors. The Company reimburses all directors for any
out-of-pocket expenses incurred by them in connection with services provided
in such capacity. Mr. Johnston receives an annual retainer of $30,000, reduced
by $1,000 for each Board meeting not attended, plus $1,000 ($1,250 if he is
Committee Chairman) for each Board of Directors committee meeting attended if
such meeting is on a date other than a Board meeting date.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of January 28, 2001, the outstanding capital stock of the Company
consists of 14,078,803 shares of Class A common stock, par value $0.01 per
share ("Class A common"), 13,481,919 shares of Class B Common stock, par value
$0.01 per share ("Class B Common"), 1,582,661 shares of Class L common stock,
par value $0.01 per share ("Class L Common"), and 1,548,997 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. Class B Common and Class M Common are
otherwise identical, except that the shares of Class M Common are entitled to
a preference over Class B 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.
56
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 Owed
-------------------------------------------------------------------------------
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)........ 6,814,140 48.4% 4,366,179 32.4% 718,206 45.4% 524,051 33.8%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harvard Private Capital 4,444,446 31.6% -- -- 493,827 31.2% -- --
Holdings, Inc..........
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Sealy Investors 1, 702,532 5.0% 6,031,476 44.7% 74,031 4.7% 674,192 43.5%
LLC(2).................
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 2, 702,532 5.0% 2,664,472 19.8% 74,031 4.7% 300,081 19.4%
LLC(2).................
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 3, 702,532 5.0% 419,803 3.1% 74,031 4.7% 50,673 3.3%
LLC(2).................
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
- --------
(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.
57
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, the Management Investors, and 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)(2)... 6,814,140 48.4% -- -- 718,206 48.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Paul Edgerley(1)(2)..... 6,814,140 48.4% -- -- 718,206 45.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Michael Krupka(1)(2).... 6,814,140 48.4% -- -- 718,206 45.4% -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Andrew S. Janower(3).... 4,444,446 31.6% -- -- 493,827 31.6% -- --
c/o Charlesbank Capital
Partners LLC 600
Atlantic Avenue Boston,
MA 02210
Ronald L. Jones(4)...... 701,402 4.8% -- -- 115,670 7.3% -- --
c/o Sealy Corporation
1228 One Office
Parkway, Trinity, NC
27230
Gary T. Fazio(5)(6)..... 191,646 1.4% -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
Douglas E. Fellmy(5).... 191,646 1.4% -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
David J. McIlquham(5)... 158,355 1.1% -- -- 5,595 * -- --
c/o Sealy Corporation
One Office Parkway,
1228 Trinity, NC 27230
Lawrence J. Rogers(5)... 191,646 1.4% -- -- 9,294 * -- --
c/o Sealy Corporation
1228 One Office Parkway
Trinity, NC 27230
Management investors(7)
as a group (11
persons)............... 2,177,078 13.9% -- -- 182,634 11.2% -- --
All directors and
executive officers as a
group (15 persons)..... 13,435,664 85.8% -- -- 1,394,667 85.6% -- --
58
- --------
* 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) 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.
(3) Mr. Janower is a Vice President of Charlesbank Capital Partners LLC, an
affiliate of Harvard Private Capital Holdings, Inc. ("Harvard").
Accordingly, Mr. Janower may be deemed to beneficially own shares owned by
Harvard. Mr. Janower disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest.
(4) Includes 552,000 shares of Class A Common issuable upon exercise of
outstanding and currently exercisable options.
(5) Amounts shown reflect shares issuable upon exercise of outstanding and
currently exercisable options.
(6) Mr. Fazio left the employment of the Company on January 23, 2001.
(7) The Management Investors consists of Messrs. Jones, Fazio, Fellmy,
McIlquham, and Rogers and Bruce Barman, Jeffrey C. Claypool, James F.
Goughenour, Richard F. Sowerby, Kenneth L. Walker, and E. Lee Wyatt.
Includes 1,575,570 shares of Class A Common and 46,446 shares of Class L
Common issuable upon exercise of currently exercisable options.
Item 13. Certain Relationships And Related Transactions
Compensation Committee Interlocks And Insider Participation
The Compensation Committee of the Company's Board of Directors currently
consists of Messrs. Johnston, Bekenstein and Krupka. From March 17, 1998,
through December 9, 1998, the Compensation Committee of the Company's Board of
Directors consisted of Messrs. Johnston, Bekenstein and former director John
Sallay.
Stockholders Agreement. In December 1997, the Company and certain of its
stockholders, including the Bain Funds, Harvard and the LLCs (collectively,
the "Stockholders") entered into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement: (i) requires that each of the parties
thereto vote all of its voting securities of the Company 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) grants the Company
and the Bain Funds a right of first offer on any proposed transfer of shares
of capital stock of the Company held by Harvard or the LLCs; (iii) grants
Harvard a right of first offer on any proposed transfer of shares of capital
stock of the Company held by the Bain Funds; (iv) grants tag-along rights
(rights to participate on a pro rata basis in sales of stock by other
shareholders) on certain transfers of shares of capital stock of the Company;
and (v) requires the Stockholders to consent to a sale of the Company 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 the Company.
Certain of the foregoing provisions of the Stockholders Agreement will
terminate upon the consummation of an initial Public Offering or an Approved
Sale (as each is defined in the Stockholders Agreement). Certain of the
Stockholders, including Bain, received one-time transaction fees aggregating
$8.9 million upon consummation of the Transactions.
Related Party Transactions. In December 1997, the Company entered into a
Management Services Agreement with Bain pursuant to which Bain has agreed to
provide: (i) general management services;
59
(ii) identification, support, negotiation and analysis of acquisitions and
dispositions; (iii) support, negotiation and analysis of financial
alternatives; and (iv) other services agreed upon by the Company and Bain. In
exchange for such services, Bain will receive: (i) an annual management fee of
$2.0 million, plus reasonable out-of-pocket expenses (payable quarterly); and
(ii) a transaction fee in an amount equal to 1.0% of the aggregate transaction
value in connection with the consummation of any additional acquisition or
divestiture by the Company and of each financing or refinancing. The
Management Services Agreement has an initial term of five years, subject to
automatic one-year extensions unless the Company or Bain provides written
notice of termination. During fiscal 2000, the Company paid $558,000 to a
company that employs Ronald L. Jones' son for web site development services.
The Company believes that the amounts paid are comparable to that which would
be paid to an unaffiliated party in an arm's length transaction. In January
2001, pursuant to his employment agreement, Ronald L. Jones transferred to the
Company 891,630 shares of the Company's Class A common stock for $10.7
million.
Registration Rights Agreement. In December 1997, the Company and certain of
its stockholders, including the Bain Funds, Harvard and the LLCs entered into
a registration rights agreement (the "Registration Rights Agreement"). Under
the Registration Rights Agreement, the holders of a majority of the
Registrable Securities (as defined in the Registration Rights Agreement) owned
by the Bain Funds have the right, subject to certain conditions, to require
the Company to register any or all of their shares of common stock of the
Company under the Securities Act at the Company's expense. In addition, all
holders of Registrable Securities are entitled to request the inclusion of any
share of common stock of the Company subject to the Registration Rights
Agreement in any registration statement at the Company's expense whenever the
Company proposes to register any of its common stock under the Securities Act.
In connection with all such registrations, the Company has agreed to indemnify
all holders of Registrable Securities against certain liabilities, including
liabilities under the Securities Act.
60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Sealy Corporation
Report of Independent Accountants (PricewaterhouseCoopers LLP).
Consolidated Balance Sheets at November 26, 2000 and November 28,
1999.
Consolidated Statements of Operations for the years ended November 26,
2000, November 28, 1999 and, November 29, 1998
Consolidated Statements of Stockholders' Equity for the years ended
November 26, 2000, November 28, 1999 and, November 29, 1998
Consolidated Statements of Cash Flows for the years ended November 26,
2000, November 28, 1999 and, November 29, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or are
not required or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as a
part of this Report.
(b) 1. Reports on Form 8-K Filed During the Last Quarter
None
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 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 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)).
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