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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarter ended February 28, 1994 Commission file number 1-8738
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SEALY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET
SEATTLE, WASHINGTON 98101
- ---------------------------------- -------------------------
(Address of principal executive offices)* (Zip Code)
Registrant's telephone number, including area code (206) 625-1233
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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 and 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
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The number of shares of the registrant's common stock outstanding as of MARCH
31, 1994 was 29,459,326.
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
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PART I. FINANCIAL INFORMATION
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Item 1 - Financial Statements
<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
------------------------------ -------------
THREE MONTHS ONE MONTH TWO MONTHS
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, JANUARY 31,
1994 1993 1993
------------ ------------ -------------
<S> <C> <C> <C>
Net sales $155,607 $ 53,564 $103,492
-------- -------- --------
Costs and expenses:
Cost of goods sold 82,333 28,465 57,110
Selling, general and administrative 51,552 16,867 34,597
Amortization of intangibles 3,515 1,352 2,473
Interest expense, net 8,576 3,225 6,675
-------- ------- --------
145,976 49,909 100,855
------- ------- -------
Income before income tax 9,631 3,655 2,637
Income tax 4,486 1,662 1,660
------- -------- --------
Net income $ 5,145 $ 1,993 $ 977
======= ======== ========
Earnings per common share $ .17 $ .07 $ .03
Weighted average number of common
shares and equivalents outstanding
during period 30,553 30,102 30,062
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
SUCCESSOR
-------------------------------------
FEBRUARY 28, NOVEMBER 30,
1994 1993
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ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 24,969 $ 20,919
Accounts receivable, less allowance for doubtful
accounts (1994 - $7,880; 1993 - $7,650) 73,566 72,128
Inventories 42,678 41,745
Prepaid expenses and taxes 22,785 23,261
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163,998 158,053
Property, plant and equipment -- at cost 148,644 147,333
Less accumulated depreciation 9,606 7,228
-------- --------
139,038 140,105
Other assets:
Goodwill and other intangibles -
net of accumulated amortization
(1994 - $15,295; 1993 - $11,780) 503,935 507,450
Debt issuance costs and other assets 17,483 17,499
-------- --------
521,418 524,949
-------- --------
$824,454 $823,107
======== ========
</TABLE>
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
SUCCESSOR
-------------------------------------
FEBRUARY 28, NOVEMBER 30,
1994 1993
------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion -- long-term obligations $ 21,589 $ 21,728
Accounts payable 26,125 28,603
Accrued interest payable 7,787 3,474
Other accrued expenses 57,042 61,489
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112,543 115,294
Long-term obligations 379,168 384,451
Other noncurrent liabilities 17,994 17,160
Deferred income taxes 24,179 21,857
Stockholders' equity:
Common stock 295 295
Additional paid-in capital 261,658 260,581
Retained earnings 29,870 24,725
Foreign currency translation adjustment (1,253) (1,256)
-------- --------
290,570 284,345
Commitments and contingencies
-------- --------
$824,454 $823,107
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
------------------------------ -------------
THREE MONTHS ONE MONTH TWO MONTHS
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, JANUARY 31,
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 10,783 $ 1,702 $ (1,277)
-------- ------- ---------
Net cash used in investing activities:
Property, plant and equipment, net (1,311) (5,267) (3,082)
--------- -------- ---------
Net cash (used for) provided by
financing activities:
Repayment of long term obligations, net (5,422) 3,455 2,667
--------- -------- --------
Change in cash and equivalents 4,050 (110) (1,692)
Cash and equivalents:
Beginning of period 20,919 11,057 12,749
-------- -------- --------
End of period $ 24,969 $ 10,947 $ 11,057
======== ======== ========
Supplemental disclosures:
- -------------------------
Taxes paid, net $ 1,402 $ 344 $ 895
Interest paid $ 3,541 $ 4,168 $ 1,037
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1994, ONE MONTH ENDED FEBRUARY 28, 1993
AND TWO MONTHS ENDED JANUARY 31, 1993
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NOTE A -- BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively, the
"Company").
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 30, 1993.
On February 12, 1993, a group of investors led by the Zell/Chilmark Fund
L.P., a Delaware Limited Partnership acquired the Company for $250.0 million
(the "Acquisition"). The Company employed the purchase method of accounting
for the Acquisition, the effect of which changed the basis of certain assets
and liabilities, including deferred income taxes, goodwill, property, plant
and equipment and stockholders' equity. As a result of the purchase
accounting adjustments, the financials for the three months ended February 28,
1994 and the one month ended February 28, 1993 (the "Successor Financials") are
not comparable to the financials for the two-month period ended January 31,
1993 (the "Pre-Successor Financials") presented herein.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at February 28, 1994, and
its results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.
The November 30, 1993 condensed consolidated balance sheet included herein is
derived from the audited consolidated balance sheet as of November 30, 1993.
NOTE B -- INVENTORIES
<TABLE>
The major components of inventories were as follows:
<CAPTION>
SUCCESSOR
-----------------------------------
FEBRUARY 28, NOVEMBER 30,
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $32,288 $31,573
Work in process 3,863 3,782
Finished goods 6,527 6,390
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$42,678 $41,745
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</TABLE>
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<TABLE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1994, ONE MONTH ENDED FEBRUARY 28, 1993
AND TWO MONTHS ENDED JANUARY 31, 1993
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NOTE C -- LONG-TERM OBLIGATIONS
<CAPTION>
SUCCESSOR
------------------------------------
FEBRUARY 28, NOVEMBER 30,
1994 1993
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(IN THOUSANDS)
<S> <C> <C>
Secured Credit Agreement:
Revolving Credit Facility $ - $ 3,000
Term Loan Facility 194,543 196,774
9 1/2% Senior Subordinated Notes Due 2003 200,000 200,000
Other 6,214 6,405
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400,757 406,179
Less current portion 21,589 21,728
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$379,168 $384,451
======== ========
</TABLE>
NOTE D -- CONTINGENCIES
Sealy Corporation and one of its subsidiaries are parties to an
Administrative Consent Order (the "ACO") issued by the New Jersey Department of
Environmental Protection and Energy (the "Department") dating back to 1989,
which requires that soil and groundwater sampling be conducted to determine the
extent of environmental contamination found at a closed plant owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that
any of its manufacturing processes was a source of any of the contaminants
found to exist above regulatorily acceptable levels in the groundwater, and the
Company is exploring other possible sources of the contamination, including
former owners of the facility. As the current owners of the facility, however,
the Company and its subsidiary are primarily responsible for site investigation
and any necessary clean-up plan approved by the Department under the terms of
the ACO. The Company has established an accrual for further site investigation
and remediation. Based on the facts currently known by the Company, management
believes that the accrual is adequate to cover the Company's probable liability
and does not believe that resolution of this matter will have a material
adverse effect on the Company's financial position or future operations.
However, because of the nature of certain of the contaminants found, their
geological location in fractured bedrock, the lack of any accepted technology
for successfully remediating the contamination, as well as additional factors,
including the uncertainties surrounding the nature and application of
environmental regulations, the practical and technical difficulties in
obtaining complete delineation of the contamination, the level of clean-up that
may be required, if any, or the technology that could be involved, and the
possible involvement of other potentially responsible parties, the Company
cannot presently predict the ultimate cost to remediate this facility, and
there can be no assurance that the Company will not incur material liability
with respect to this matter.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company employed the purchase method of accounting for the Acquisition
in February 1993. In accordance with generally accepted accounting principles,
the post-Acquisition financials for the one month ended February 28, 1993,
presented in Part I, Item 1 herein, may not be combined with the
pre-Acquisition based financials for the two months ended January 31, 1993.
The application of purchase accounting for the Acquisition resulted in changes
in the valuation of certain assets and liabilities, the effect of which had a
slight change in the amount of depreciation and amortization in the
post-Acquisition financials when compared with amounts in the pre-Acquisition
Financials.
RESULTS OF OPERATIONS
For ease of reference in the following tables, the results of operations
of the Company for the one month ended February 28, 1993 have been
arithmetically combined with those for the two months ended January 31, 1993.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
February 28,
1994 1993
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(in millions)
<S> <C> <C>
Net sales $155.6 $157.1
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Costs and expenses:
Cost of goods sold 82.3 85.6
Selling, general and
administrative 51.6 51.5
Amortization of intangibles 3.5 3.8
Interest expense, net 8.6 9.9
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146.0 150.8
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Income before income tax 9.6 6.3
Income tax 4.5 3.3
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Net income $ 5.1 $3.0
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</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1994 AND 1993
NET SALES. Net sales decreased $1.5 million (0.9%) for the three months
ended February 28, 1994 ("First Quarter 94") when compared with the three
months ended February 28, 1993 ("First Quarter 93") which included $3.3 million
of sales from the discontinued waterbed business. Excluding the waterbed
business, First Quarter 94 sales increased $1.8 million (1.2%) over First
Quarter 93. A shift in mix to the more profitable Posturepedic product line
and increased sales of wood furniture products increased average unit selling
prices in First Quarter 94 and more than offset the decline in sales resulting
from management's decision to discontinue sales of certain lower margin
products as well as a decline in sales to Sears Roebuck and Company ("Sears"),
the Company's largest customer.
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The decline in sales to Sears is attributable to Sears reducing the number
of its furniture and bedding outlets, closing its catalog business, adding
another major bedding brand to its traditional stores and featuring that brand
during the First Quarter 94 promotion. Sometime during the third quarter of
1994, the Company will no longer manufacture Sears' private label bedding.
Although there can be no assurances, management believes that continued
consumer acceptance of the Company's new Posturepedic line as well as improved
operating efficiencies will result in Sears' decisions not having a material
adverse impact on the Company's profitability for fiscal 1994.
COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold for
First Quarter 94 decreased 1.6 percentage points due to an improved product
mix, better raw material management and absorption of manufacturing overhead.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and administrative
expenses were unchanged for First Quarter 94.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased as a
result of the Acquisition.
INTEREST EXPENSE, NET. Interest expense, net for First Quarter 94
decreased 13.4% or $1.3 million, due primarily to a net reduction of
approximately $53 million in total indebtedness and a reduction in interest
rates on senior subordinated notes from 12.4% to 9 1/2% as a result of a
refinancing in May 1993.
INCOME TAX. The Company's effective income tax rates differ from the
Federal statutory rate because of the application of purchase accounting,
certain foreign tax rate differentials and state and local taxes.
NET INCOME. For the reasons set forth above, net income improved 73%
to $5.1 million.
LIQUIDITY AND CAPITAL RESOURCES
During First Quarter 94 the Company's principal source of funds consisted
of cash flow from operating activities. Its principal uses of funds consisted
of payments of principal, interest and capital expenditures. Capital
expenditures totalled $1.8 million for First Quarter 94. Management believes
that annual capital expenditure limitations in its credit agreement will not
significantly inhibit the Company from meeting its ongoing operating needs. At
February 28, 1994, the Company had approximately $55 million available under
its revolving credit facility, with no amount outstanding, and letters of
credit issued totalling approximately $20 million. The Company's net weighted
average borrowing cost was 8.6% for First Quarter 94.
Management believes that the Company will have the necessary liquidity for
the next several years to fund its expected capital expenditures, obligations
under its credit agreement and subordinated note indenture, future
environmental liabilities, if any, and for other needs required to manage its
business, through cash flow from operations and availability under the
revolving credit facility.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
There have been no material developments in or dispositions of legal
proceedings reported in the Company's Annual Report on Form 10K for the fiscal
year ended November 30, 1993, as filed with the Securities and Exchange
Commission on February 28, 1994. See Note D to the Condensed Consolidated
Financial Statements, Part I, Item 1 included herein.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Sealy Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
Signature Title
--------- -----
By: /s/ Lyman M. Beggs Chairman, President and Chief Executive
--------------------------------- Officer (Principal Executive Officer)
Lyman M. Beggs
By: /s/ Frank Abbatomarco Corporate Controller
--------------------------------- (Principal Accounting Officer)
Frank Abbatomarco
Date: April 14, 1994
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