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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended NOVEMBER 30, 1993 Commission file number 1-8738
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SEALY CORPORATION
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-3284147
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET
SEATTLE, WASHINGTON 98101
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(Address of principal executive offices)* (Zip Code)
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Registrant's telephone number, including area code (206) 625-1233
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants to Purchase Class B Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 aggregate market value of the voting stock held by nonaffiliates of the
registrant $9,092,260.
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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
FEBRUARY 20, 1994 was 29,459,326.
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DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE: None
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
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PART I
ITEM 1. BUSINESS
GENERAL
Sealy Corporation (the "Company") is the largest bedding manufacturer
in North America. The Company manufactures through its subsidiaries a broad
range of mattresses and boxsprings, wood furniture and convertible sleep sofas.
The Company's conventional bedding products (mattresses and boxsprings) include
the SEALY Registered Trade-mark POSTUREPEDIC Registered Trade-mark brand and
the STEARNS & FOSTER Registered Trade-mark CORRECT COMFORT Registered
Trade-mark brand and account for approximately 90% of the Company's total net
sales for the year ended November 30, 1993. The Company also manufactures
Sealy and Stearns & Foster brand convertible sleep sofas and markets its wood
furniture under the SAMUEL LAWRENCE Trade-mark and WOODSTUFF Registered
Trade-mark brands. The Company has a components parts manufacturing subsidiary
which produces approximately 75% of the Company's mattress innerspring
requirements and a significant portion of the Sealy brand boxspring component
parts units. Another subsidiary, Sealy, Inc., provides corporate and
administrative services for the Company.
HISTORY OF THE COMPANY
The Company was founded in 1907 under the name Ohio Mattress Company. In
1924, the Company was granted its first license to produce Sealy-brand
products. Starting in 1956, the Company began acquiring Sealy-brand licenses
in other geographic areas, and by 1987, had acquired all of the capital stock
of its licensor Sealy, Incorporated (which prior to that time was independent
of the Company), along with all but one of the remaining Sealy conventional
bedding domestic licensees (the "Sealy Acquisitions"). The Company expanded
its bedding manufacturing operations in 1983 by acquiring Stearns & Foster, a
producer of top quality premium mattresses, boxsprings and convertible sleep
sofas. In 1985, the Company acquired Woodstuff Manufacturing, Inc., a
manufacturer of bedroom furniture.
In 1989, the Company's common stock was acquired through a leveraged
buyout (the "LBO") which was financed in part by First Boston Securities
Corporation ("FBSC"), an affiliate of The First Boston Corporation ("First
Boston"). In April 1990, the Company exchanged (the "Exchange") certain
outstanding debt issued to FBSC for new debt at lower interest rates plus
additional common stock. In December 1990, FBSC transferred its equity and
debt interest in the Company to MB L.P. I, an affiliate of First Boston
("MBLP"). In November 1991, the Company successfully completed a
recapitalization (the "Recapitalization") in which the Company's capital
structure was significantly improved, the face amount of its indebtedness and
interest thereon was reduced by approximately $417 million, the Company's
interest expense obligations were substantially reduced and the principal
repayment schedule on a portion of its existing bank term loan facility was
extended. As a result of the Recapitalization, MBLP's equity interest in the
Company increased to approximately 94%.
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell/Chilmark"), led an investor group (the "Zell/Chilmark
Purchasers") which purchased Class A Common Stock of the Company (the "Shares")
from MBLP, representing approximately 94% of the equity of the Company (the
"Acquired Shares") for a cash purchase price of $250 million (the
"Acquisition").
On May 7, 1993, the Company consummated a refinancing transaction (the
"Refinancing"). The Refinancing consisted of (i) the public offering and sale
of $200.0 million aggregate principal amount of 9 1/2% Senior Subordinated
Notes Due 2003 (the "Notes"), (ii) the application of the net proceeds
therefrom to redeem all of the Company's previously outstanding 12.4% Senior
Subordinated Notes Due 2001 (the "Subordinated Notes") and to reduce amounts
outstanding under the Company's pre-existing senior secured credit agreement
(the "Old Credit Agreement"), and (iii) execution of a new senior secured
credit agreement by and among the Company, certain banks and other financial
institutions and Banque Paribas, Citicorp USA, Inc., Continental Bank N.A. and
General Electric Capital Corporation, as Managing Agents (the "New Credit
Agreement") providing for two term loan facilities together aggregating $250.0
million and a $75.0 million revolving credit facility in connection with the
refinancing of the Old Credit Agreement.
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CONVENTIONAL BEDDING
INDUSTRY AND COMPETITION. According to industry sales data compiled by
the International Sleep Products Association ("ISPA"), a bedding industry trade
group, more than 750 manufacturers of mattresses and boxsprings make up the
domestic conventional bedding industry, generating wholesale revenues of
approximately $2.7 billion during calendar year 1993. The market for
conventional bedding represents more than 85% of the entire bedding market in
North America. Approximately 60% of conventional bedding is sold to furniture
stores, national mass merchandisers and department stores. Most of the
remaining conventional bedding is sold to specialty sleep shops and contract
customers such as motels, hotels and hospitals. Management estimates that
approximately two-thirds of conventional bedding is sold for replacement
purposes and that the average time between consumer purchases of conventional
mattresses is approximately 10 to 12 years. According to ISPA, factors such as
sales of existing homes, housing starts and disposable income, as well as birth
and marriage rates, affect 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
and Stearns & Foster. Competition in conventional bedding is generally based
on quality, brand name recognition, service and price.
The following table sets forth certain information regarding the domestic
market shares of major producers of conventional bedding, and is based upon
industry executives' estimates as published in the December 27, 1993 edition of
HFD, THE WEEKLY HOME FURNISHINGS NEWSPAPER , an industry trade publication:
<TABLE>
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COMPANY/LICENSING GROUP MARKET SHARE MAJOR BRANDS
- ----------------------- ------------ ------------
<S> <C> <C>
Sealy Corporation 22% Sealy Posturepedic, Stearns & Foster Correct Comfort
Simmons Company 13 Beautyrest
Serta, Inc. 12 Perfect Sleeper
Spring Air Company 11 Back Supporter
All others 42
---
100%
===
</TABLE>
PRODUCTS. The Company manufactures a variety of Sealy and Stearns & Foster
brand and private label conventional bedding in various sizes ranging in retail
price from under $200 to $2,400. Sealy Posturepedic brand mattress is the
largest selling mattress brand in North America. Approximately 97% of the
Sealy 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 Correct Comfort
trademark, as well as a range of other bedding products sold under the Stearns
& Foster brand name.
CUSTOMERS. The Company serves over 7,000 retail outlets (approximately
3,200 customers), which include furniture stores, national mass merchandisers,
department stores, specialty sleep shops, contract customers and other stores.
The top five conventional bedding customers accounted for approximately 24% of
net sales for the year ended November 30, 1993, with sales to Sears accounting
for approximately 13% of such net sales. The following table sets forth the
customer profile for the Company's conventional bedding sales, the percentage
of total net sales made to that group of customers in fiscal year 1993 and the
names of representative customers:
2
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<TABLE>
<CAPTION>
ESTIMATED
PERCENTAGE
CHANNEL OF DISTRIBUTION OF NET SALES REPRESENTATIVE CUSTOMERS
- ----------------------- ------------ ------------------------
<S> <C> <C>
Furniture stores 42% American T.V. & Furniture, Art Van Furniture Inc., Finger Furniture
Company, Inc., Haverty Furniture Companies, Inc., Rhode's Furniture,
Weberg's Furniture, Wickes Furniture, Roberd's Home Centers and Smith's
Furniture Companies
Mass merchandisers 22% Sears, Roebuck & Co., Montgomery Ward & Co., Inc. and J.C. Penney
Company, Inc.
Department stores 15% Carter Hawley Hale Stores, Inc., Dayton-Hudson-Fields Corporation,
Dillard Department Stores, Inc., The May Department Stores Company,
Federated Department Stores, Inc., and R.H. Macy & Co., Inc.
Specialty sleep shops 19% Bedding Experts Inc. and Slumberland, Inc.
Other (Membership clubs, 2% Fleetwood, John K. Kealy Co. (Navy, Marines
jobbers and contract and Coast Guard) and Rosemount Purchasing
customers) (Hyatt)
---
100%
===
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SALES AND MARKETING. The Company's sales depend primarily on its ability
to provide quality products with recognized brand names at competitive prices.
The Company's marketing emphasis has been on increasing the brand loyalty of
its ultimate consumers, principally through more extensive national advertising
and through cooperative advertising with its dealers along with improved
"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 engages in extensive national and cooperative advertising to
promote the brand names of its products. For fiscal year 1993 the Company
spent approximately $20 million on national advertising and approximately $85
million on cooperative advertising and promotional expenses.
The Company's sales force is generally structured based on regions of the
country and the plants located within those regions, and also includes a sales
staff for specific national accounts operated out of the Company's Chicago,
Illinois office. The Company believes that it has one of the most
comprehensive training and development programs for its sales force, including
its University of Sleep curriculum, which provides on-going 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.
At December 31, 1993, the Company had a conventional bedding sales and
marketing force of 240 people who receive a base salary, plus expenses, and
quarterly and annual sales incentive bonuses. Approximately 25 independent
sales representative organizations service the Company's contract customers.
3
<PAGE> 5
SUPPLIERS. The Company purchases fabric, polyfiber, wire and foam from
a variety of vendors. The Company purchases a significant portion of its Sealy
boxspring parts from a single source, which has patents on various interlocking
wire configurations (the "Wire Patents"), and also purchases 100% of its Stearns
& Foster boxspring parts from another single source. In order to eliminate
certain of the risks of dependence on external supply sources and to enhance
profitability, the Company has expanded its own internal components parts
manufacturing capacity and, as a licensee of the Wire Patents, internally
produces the remainder of its Sealy boxspring parts. See "-- Components
Division." The Company believes that this vertical integration provides it with
a significant competitive advantage, as it is the only conventional bedding
manufacturer in the United States with substantial innerspring and form wire
components making capacity. 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 or similar 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 minimize
their inventory carrying costs. Most bedding orders are scheduled, produced
and shipped within 24 to 72 hours of receipt. This rapid delivery capability
allows the Company to minimize its inventory of finished products and better
satisfy customer demand for prompt shipments.
The Company operates 28 plants which manufacture conventional bedding in
21 states, three Canadian provinces and Puerto Rico. See Item 2.
"--Properties," included elsewhere herein. The Company also operates a
research and development center in Cleveland, Ohio with a staff of 13 people
who test new materials and machinery, train personnel, compare the quality of
the Company's products with those of its competitors and develop new processes.
The Company has developed and patented a computerized model of an adult person,
known as Dataman, which is used in testing the comfort and support level of its
mattresses. Dataman is a registered trademark of the Company.
COMPONENTS DIVISION
Although the Company purchases some of its component parts from a major
supplier to the bedding industry, including 100% of its Stearns & Foster
boxspring parts, in order to eliminate certain of the risks of dependence on
this supplier or any other single supplier for its important raw materials, and
to enhance its profitability and competitive position, the Company operates a
Components Division as an independent profit center with headquarters in
Rensselaer, Indiana. The Components Division sells its component parts at
current market prices exclusively to the Company's bedding plants and its
licensees. The Components Division currently provides approximately 75% of the
Company's mattress innerspring unit requirements, including 100% of Sealy
Posturepedic and Stearns & Foster Correct Comfort brand innersprings. The
Components Division also supplies a significant portion of the Company's
boxspring parts requirements under a license of the Wire Patents. The
Components Division owns and operates three manufacturing sites located in
Rensselaer, Indiana, Delano, Pennsylvania and Colorado Springs, Colorado. See
Item 2. "-- Properties," included elsewhere herein.
Over the last three years, the Company has made substantial commitments to
ensure that the coil-making equipment at its component plants remains
state-of-the-art. Since 1989, the Company has installed 26 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 from approximately 60% to 75%.
4
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WOOD FURNITURE
The Company manufactures and markets bedroom furniture through its
Woodstuff subsidiary ("Samuel Lawrence") under the Samuel Lawrence and
Woodstuff labels. During 1993, conventional bedroom furniture sales accounted
for approximately 70% of Samuel Lawrence's total sales. Samuel Lawrence has
approximately 500 customers, six in-house sales people, 20 independent sales
representatives, and is one of many manufacturers of wood furniture.
CONVERTIBLE SLEEP SOFAS
The Company manufactures and sells primarily convertible sleep sofas under
the Sealy and Stearns & Foster brand names in one facility with six sales
employees and 18 commissioned, self-employed sales representatives. The sleep
sofa industry is fragmented, and management believes that no single
manufacturer comprises more than 10% of that market.
LICENSING
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. There are currently 14 separate license arrangements in
effect with independent licensees, international bedding licensees and
upholstered furniture licensees. In fiscal year 1993, the licensing division
as a whole generated royalties of approximately $5 million, which were
accounted for as a reduction of selling, general and administrative expenses in
the Consolidated Financial Statements included herein.
Sealy New Jersey and a crib mattress licensee are the only domestic
bedding manufacturers that are licensed to use the Sealy trademark subject to
the terms of license agreements. Subject to the terms of a license agreement
between Sealy New Jersey and the Company, Sealy New Jersey has the perpetual
right to use certain Sealy trademarks, including the Sealy "Butterfly" logo, in
the manufacture and sale of Sealy brand products in the United States. In
return, Sealy New Jersey pays the Company royalties, which vary by product, on
all of its Sealy brand net dollar sales and such royalties can be changed over
time upon the occurrence of certain events and subject to limitations contained
in the license agreement. The Company sells component parts to Sealy New
Jersey and provides it with various research and development, advertising,
marketing, and other services, for which Sealy New Jersey may be required to
pay additional compensation to the Company under varying circumstances. In
accordance with a currently effective waiver provided by the Company, the
license agreement no longer restricts Sealy New Jersey's manufacturing
territory to any defined areas of primary responsibility in New Jersey. To
date, Sealy New Jersey has not engaged in manufacturing outside such area and
its sales efforts outside such area have been limited to specific situations.
The license precludes the Company from manufacturing its Sealy brand products
in the licensee's area of primary responsibility in New Jersey. Subject to
certain conditions and limitations, as specified in the license agreement, the
Company has a right of first refusal with respect to any sale of Sealy New
Jersey.
WARRANTIES
Sealy and Stearns & Foster bedding offer limited warranties on their
currently manufactured products. Such warranties range from one year on
promotional bedding to 15 years on Posturepedic and Stearns & Foster Correct
Comfort bedding. The periods for "no- charge" warranty service varies among
products. All currently manufactured Posturepedic and Correct Comfort products
offer a 15 year non-prorated warranty service period. Sealy and Stearns &
Foster convertible sleep sofas offer a 10-year limited warranty on mattresses,
mechanisms and frames, with no warranty on upholstery fabric. Historically,
the Company's warranty costs have been immaterial for each of its product
lines.
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TRADEMARKS AND LICENSES
The Company owns, among others, the Sealy, Stearns & Foster and Samuel
Lawrence trademarks and tradenames and also owns the Posturepedic, Correct
Comfort, Dataman and University of Sleep trademarks, service marks and certain
related logos and design marks.
EMPLOYEES
As of December 31, 1993, the Company had 4,844 full-time employees.
Approximately 2,553 employees at 25 plants are represented by various labor
unions, generally with separate collective bargaining agreements. Due to the
large number of collective bargaining agreements, the Company is periodically
in negotiations with certain of its employees. The Company considers its
overall relations with its work force to be satisfactory. The following table
sets forth certain information regarding employees in each division of the
Company as of December 31, 1993:
<TABLE>
<CAPTION>
Division Manufacturing Marketing Administrative Total
- ---------------------- ------------- --------- -------------- -----
<S> <C> <C> <C> <C>
Conventional Bedding 2,689 240 332 3,261
Components 506 0 26 532
Wood Furniture 622 6 32 660
Convertible Sleep Sofas 204 6 27 237
Corporate Services 0 5 149 154
----- --- --- -----
Total 4,021 257 566 4,844
===== === === =====
</TABLE>
SEASONALITY
The Company's business is somewhat seasonal, with lower sales usually
experienced during the first quarter of each fiscal year. See Note 12 to the
Consolidated Financial Statements of the Company included in Part II, Item 8
herein.
ITEM 2. PROPERTIES
The offices of the Company are located at 520 Pike Street, Seattle,
Washington 98101. Corporate, licensing and marketing services are provided to
the Company by Sealy, Inc. (a wholly-owned subsidiary of the Company), located
in Cleveland, Ohio. The principal address of Sealy, Inc. is Halle Building,
10th Floor, 1228 Euclid Avenue, Cleveland, Ohio 44115.
The Company services certain national account customers in offices located
in Chicago, Illinois, and also administers component operations at its
Rensselaer, Indiana facility. The Company leases a research and development
facility in Cleveland, Ohio. The Company's leased facilities are occupied
under leases which expire from 1994 to 2015, including renewal options.
6
<PAGE> 8
The following table sets forth certain information regarding manufacturing
facilities operated by the Company at February 1, 1994:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE TITLE
- --------------------------------------------------------- ----------- -----
<S> <C> <C> <C>
UNITED STATES
Arizona Phoenix 117,400 Leased
Phoenix 76,000 Owned(a)
Phoenix 240,600 Owned(a)
California Richmond 238,000 Owned(a)
Southgate 185,000 Owned(a)
Colorado Colorado Springs 70,000 Owned(a)
Denver 92,900 Owned(a)
Connecticut Oakville 107,100 Owned(a)
Florida Miami 88,000 Leased
Orlando 97,600 Owned(a)
Georgia Atlanta 292,500 Owned(a)(b)
Illinois Batavia 212,700 Leased(c)
Indiana Rensselaer 131,000 Owned(a)
Kansas Kansas City 102,600 Leased
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned(a)
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Leased(d)
Mississippi Pontotoc 81,000 Owned(a)
New Jersey Millville 126,000 Owned(a)
New York Albany 102,300 Owned(a)
North Carolina Lexington 97,400 Owned(a)
Ohio Medina 140,000 Owned(a)
Oregon Portland 140,000 Owned(a)
Pennsylvania Clarion 85,000 Owned(a)
Delano 143,000 Owned(a)
Tennessee Memphis 225,000 Owned(a)
Texas Brenham 220,000 Owned(a)
North Richland Hills 124,500 Owned(a)
Wisconsin Watertown 107,000 Owned(a)
CANADA
Alberta Edmonton 144,500 Owned(a)
Quebec Saint Narcisse 76,000 Owned(a)
Ontario Toronto 80,200 Leased
PUERTO RICO Carolina 58,600 Owned(a)
---------
4,582,500
=========
</TABLE>
(a) The Company has granted a mortgage or otherwise encumbered its interest in
this facility as collateral for secured indebtedness.
(b) The Company has leased 154,800 square feet to an unrelated tenant.
(c) The Company has subleased 76,000 square feet to an unrelated tenant.
(d) The Company has the option to purchase the property for specified costs at
certain intervals during the lease term.
The Company considers its present facilities to be generally well
maintained, in sound operating condition and adequate for its needs. When
viewed as a whole, the Company has excess capacity available in its facilities
and the necessary equipment (as owner or lessee) to carry on its business.
7
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REGULATORY MATTERS
The Company's principal wastes are wood, cardboard and other
nonhazardous materials derived from product component supplies and packaging.
The Company also periodically disposes of small amounts of used machine
lubricating oil and waste glue used in connection with product components. The
furniture operations of the Company in Phoenix, Arizona use some volatile
solvent-based wood stains, although non-volatile solvent and/or water-based
wood stains are used whenever possible. 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's
furniture operations are also subject to the Resource Conservation and Recovery
Act, the Clean Air 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 (including the amendments to the Clean Air
Act which have been adopted) which would have a material impact on the
Company's operations. 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 and other product lines are subject to
various federal and state laws and regulations relating to flammability,
sanitation and other standards. The Company believes that it is in material
compliance with all such laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
In accordance with procedures established under the Environmental Cleanup
Responsibility Act ("ECRA"), 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"), pursuant
to which the Company and such subsidiary agreed to conduct soil and groundwater
sampling to determine the extent of environmental contamination found at the
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 and its environmental consultant have been conducting
investigation and remediation activities since preliminary evidence of
contamination was first discovered in August, 1991. On November 15, 1993, the
Company received a letter from the Department approving the findings and
substantially all of the recommendations of the Company's consultant contained
in a June 4, 1993 report submitted to the Department, but also requiring the
Company to undertake additional remedial and investigative activities,
including the installation of shallow groundwater monitoring wells off-site.
On December 1, 1993, the Company's consultant submitted to the Department
a report updating and supplementing the June, 1993 report with regard to
activities completed prior to receipt of the Department's November 15, 1993
letter. On December 23, 1993, the Company submitted to the Department a
Remedial Investigation Schedule of activities to be conducted within the next
six (6) months in accordance with the Department's November 15, 1993 letter.
8
<PAGE> 10
In its November 15, 1993 letter, the Department postponed any required
activity by the Company to delineate and/or remediate contaminants in the
fractured bedrock, which it had previously requested the Company to undertake.
The Company, however, still has reservations regarding any such required
activities which the Department may attempt to impose in the future. Because
of the nature of certain of the contaminants and their geological location in
fractured bedrock, the Company and its consultant remain unaware of any
accepted technology for successfully remediating the contamination either in
the shallow groundwater or the fractured bedrock.
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 many 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's merger warrants to acquire shares of Class B common stock
(which warrants were issued in conjunction with the LBO, and which do not
become exercisable until August 9, 1995, except under certain limited
circumstances) (the "Merger Warrants") are registered for trading in the
over-the-counter market; however, because of the extremely limited and sporadic
nature of quotations for such Merger Warrants, there is no established public
trading market for the Merger Warrants. There is no established public trading
market for any other class of common equity of the Company.
As of February 20, 1994, there are 57 holders of record of the Company's
shares, 1,281 holders of record of the Merger Warrants and 45 holders of record
of the Restructure Warrants.
No dividends have been paid on any class of common equity of the Company
during the last three fiscal years. The Company's New Credit Agreement
prohibits the paying of cash dividends on any of its classes of common equity.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other
data of the Company (some periods of which are less than one year due to
accounting requirements for acquisition transactions) for the ten months ended
November 30, 1993, for the two months ended January 31, 1993, for the year
ended November 30, 1992, for the one month ended November 30, 1991, for the
eleven months ended October 31, 1991, for the year ended November 30, 1990, for
the seven months ended November 30, 1989, and for the five months ended April
30, 1989.
During the period from December 1, 1988 through November 30, 1993, the
Company's capital structure and business changed significantly, in large part
as a result of (i) the LBO, (ii) the Recapitalization, and (iii) the
Acquisition in February 1993. Due to required purchase accounting adjustments
relating to such transactions, and the resultant changes in control, the
consolidated financial and other data for each period reflected in the
following tables during this period are not comparable to such data for the
other such periods.
The selected consolidated financial and other data set forth in the
following tables have been derived from the Company's audited consolidated
financial statements. The report of KPMG Peat Marwick, independent auditors,
covering the Company's Consolidated Financial Statements for the ten months
ended November 30, 1993 (Successor period), for the two months ended January
31, 1993, the year ended November 30, 1992, and the one month ended November
30, 1991 (Pre-Successor Periods); and for the eleven months ended October 31,
1991 (Predecessor Period), 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.
10
<PAGE> 12
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
PRE-
SUCCESSOR (a) PRE-SUCCESSOR (a) PREDECESSOR (a) PREDECESSOR(a)
------------- ------------------------------ ----------------------------- --------------
TEN TWO ONE ELEVEN SEVEN FIVE
MONTHS MONTHS YEAR MONTH MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
NOV. 30, JAN. 31, NOV. 30, NOV. 30, OCT. 31, NOV. 30, NOV. 30, APR. 30,
1993 1993 1992 1991 1991 1990 1989 1989
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $579.7 $103.5 $654.2 $ 50.0 $575.9 $652.0 $440.4 $273.4
Costs and expenses 531.0 100.9 628.8 49.4 661.8 718.8 477.0 269.0
Income (loss) before income tax
and extraordinary item 48.7 2.6 25.4 0.6 (85.9) (66.8) (36.6) 4.4
Extraordinary loss (b) 2.9 -- -- -- -- -- -- --
Net income (loss) $ 24.7 $ 1.0 $ 10.0 $ (0.1) $(73.4) $(50.2) $(27.1) $ 2.4
====== ====== ====== ====== ====== ====== ====== ======
Other Data:
Depreciation and amortization of
intangibles $19.1 $4.3 $ 26.4 $ 2.3 $ 33.2 $ 36.6 $ 21.4 $ 8.7
Operating income (c) 79.9 9.3 68.1 3.6 27.8 60.8 52.6 9.5
EBITDA (d) 99.0 13.7 94.5 5.9 61.0 97.4 74.1 18.2
Capital expenditures 7.2 7.8 11.6 0.5 2.7 7.0 11.4 11.2
Interest expense, net 31.2 6.7 42.7 3.0 113.7 127.6 89.2 5.1
Ratio of EBITDA to interest expense,
net/(earnings deficiency) 3.2x 2.0x 2.2x 2.0x $(52.7) $(30.3) $(15.2) 3.6x
Ratio of earnings to fixed charges/
(earnings deficiency) (e) 2.4x 1.4x 1.6x 1.2x $(85.9) $(66.8) $(36.6) 1.7x
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR(a) PRE-SUCCESSOR(a) PREDECESSOR(a)
AS OF NOV. 30, AS OF NOVEMBER 30, AS OF NOVEMBER 30,
-------------- ------------------------- ---------------------------
1993 1992 1991 1990 1989
------ ------ ------ -------- --------
Balance Sheet Data: (dollars in millions)
<S> <C> <C> <C> <C> <C>
Total assets $823.1 $780.3 $805.0 $1,048.3 $1,138.4
Long-term obligations 384.5 404.0 467.6 763.8(f) 828.5
Total debt 406.2 443.5 495.6 796.0(f) 875.6
Stockholders' equity 284.3 179.2 166.5 84.7 45.2
</TABLE>
(a) The Company employed the purchase method of accounting for the February,
1993 Acquisition, the April 1990 Exchange and the November 1991
Recapitalization, and the LBO. Accordingly, historical financial and
other data for the Successor, Pre- Successor, Predecessor and
Pre-Predecessor periods are not comparable.
(b) During 1993, the Company recorded an extraordinary loss of $2.9 million,
net of income tax of $1.5 million, representing the remaining unamortized
debt issuance costs related to long term obligations repaid as a result of
the Refinancing.
(c) Operating income is calculated by adding interest expense, net to net
sales less costs and expenses.
(d) EBITDA is calculated by adding interest expense, net, income tax (benefit)
and depreciation and amortization of intangibles to net income (loss)
before extraordinary item. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service and incur
debt. EBITDA does not represent net income or cash flows from operations
as those terms are defined by generally accepted accounting principles
("GAAP") and does not necessarily indicate whether cash flows will be
sufficient to fund cash needs.
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income tax and extraordinary item plus
fixed charges. Fixed charges consist of interest expense, net, including
amortization of discount and financing costs and the portion of operating
rental expense which management believes is representative of the interest
component of rent expense.
(f) Amounts reflected for long-term obligations and total debt at November 30,
1990 are net of debt discount of $74.9 million.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company employed the purchase method of accounting for both the
Acquisition in February 1993 and the Recapitalization in November 1991. As a
result of the required purchase accounting adjustments, the post-Acquisition
financials for the ten months ended November 30, 1993 (the "Successor
Financials") are not comparable to the pre-Acquisition financials for the two
months ended January 31, 1993, the year ended November 30, 1992 and the one
month ended November 30, 1991 (collectively, the "Pre-Successor Financials"),
which were prepared on the Recapitalization basis of accounting, and are not
comparable to the pre-Recapitalization financials for the eleven months ended
October 31, 1991 (the "Predecessor Financials"), which were prepared on the
basis of accounting resulting from a 1989 acquisition of the Company (see Note
2 to the Consolidated Financial Statements, Part II, Item 8 herein).
The application of purchase accounting for the Acquisition resulted in
decreased monthly depreciation and goodwill amortization for the Successor
Financials when compared with amounts which would have resulted for such
periods from the application of the basis of accounting used in the
Pre-Successor financials. The application of purchase accounting and the
debt-for-equity exchange in the Recapitalization resulted in decreased interest
expense, depreciation and goodwill amortization for the Pre-Successor
Financials when compared with amounts that would have resulted for such periods
from the application of the basis of accounting used in the Predecessor
Financials.
RESULTS OF OPERATIONS
For ease of reference in the following table, the results of operations of
the Company for the ten months ended November 30, 1993 have been arithmetically
combined with those for the two months ended January 31, 1993; and the results
of operations for the one month ended November 30, 1991 have been
arithmetically combined with those for the eleven months ended October 31,
1991. Notes (a) and (b) to the data contained in Item 6 "--selected financial
data" also apply to the preparation of the following table.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------
1993 1992 1991
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $683.2 $654.2 $625.9
------ ------ ------
Costs and expenses:
Cost of goods sold 362.7 354.6 365.1
Selling, general and administrative 217.0 215.8 207.6
Amortization of intangibles 14.3 15.7 21.8
Interest expense, net 37.9 42.7 116.7
------ ------ ------
631.9 628.8 711.2
------ ------ ------
Income (loss) before income tax
and extraordinary item 51.3 25.4 (85.3)
Income tax (benefit) 22.7 15.4 (11.8)
------ ------ ------
Income (loss) before extraordinary item 28.6 10.0 (73.5)
Extraordinary loss 2.9 -- --
------ ------ ------
Net income (loss) $ 25.7 $ 10.0 $(73.5)
====== ====== ======
</TABLE>
12
<PAGE> 14
YEAR ENDED NOVEMBER 30, 1993 COMPARED WITH YEAR ENDED NOVEMBER 30, 1992
NET SALES. Net sales for the year ended November 30, 1993 ("Fiscal 1993"),
increased primarily due to higher average unit selling prices resulting from
significant unit growth in the new higher end Posturepedic line and increased
sales of wood furniture products.
Total net sales to Sears, Roebuck and Company ("Sears"), the Company's
largest customer, increased approximately 2%, or $1.5 million, in Fiscal 1993.
In addition to Sealy brand bedding, the Company manufactures private label
bedding for Sears which accounts for approximately 5% of the Company's total
net sales on an annual basis. Sometime during the third quarter of 1994, the
Company will no longer manufacture Sears' private label bedding. Although
there can be no assurances, the Company expects continued consumer acceptance
of its new Posturepedic line and improved operating efficiencies, which, if
achieved, should result in this decision by Sears not having a material adverse
impact on Sealy's operating revenues or cash flows for fiscal year 1994.
COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold for
Fiscal 1993 decreased 1.1 percentage points to 53.1%. This improvement in
costs as a percentage of net sales can be attributed to an improved product mix
resulting from consumer acceptance of the new Posturepedic line, and lower
material costs due to better raw material management and price efficiencies.
Overhead has also decreased as a percent of net sales due to the effects of
plant consolidations and more efficient operational processes.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for Fiscal 1993 increased slightly by approximately $1 million. In
Fiscal 1993, the Company's marketing emphasis was focused on increasing the
brand loyalty of its products through more extensive national advertising which
increased to $20 million in Fiscal 1993 from $10 million in the prior fiscal
year. The Company intends to further increase this marketing emphasis in 1994.
In addition, higher spending on cooperative advertising and a charge for plant
consolidation expenditures in Fiscal 1993 were partially offset by lower
promotion, incentive bonus, consulting, executive severance, management stock
awards, performance share plan expense and bad debt expenses.
The Company's Performance Share Plan (the "Plan") effective in 1992
provides for the issuance to key employees of the Company and its subsidiaries
of performance share units, each of which represents the right to receive,
without any additional consideration, up to one share of Class A Common Stock
of the Company (the "Shares"), based on the extent to which the Company
achieves specified cumulative operating cash flow targets over the five-year
period ending November 30, 1996 (the "Measurement Period").
So long as the Plan is in effect, the Company expects to incur additional
non-cash charges in future years for Plan expense. Based on the fair value of
the Shares as of November 30, 1993, the Company expects to record an aggregate
of approximately $11 million of such charges during the three year period
ending November 30, 1996, which is the end of the Plan's Measurement Period.
To the extent that the fair value of the Shares or the number of performance
share units outstanding increases or decreases, or management's estimate of the
cumulative cash flow targets achieved during the Plan period changes, such
non-cash charges will be adjusted to give cumulative effect to the Plan expense
recorded in prior reporting periods. See Part III, Item 11. "--Executive
Compensation --Long Term Incentive Plan Awards in Last Fiscal Year" Note (a),
included elsewhere herein.
As a percentage of net sales, selling, general and administrative expenses
decreased 1.2 percentage points from 33.0% to 31.8%.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased as a
result of the Acquisition.
INTEREST EXPENSE, NET. Interest expense, net for Fiscal 1993 decreased
11.3%, or $4.8 million, due primarily to a net reduction of approximately $37.3
million in the amount of indebtedness and a reduction in interest rates on
Senior Subordinated Notes from 12.4% to 9 1/2% as a result of the May 7, 1993
Refinancing.
13
<PAGE> 15
INCOME TAX. The Company's effective income tax rates for Fiscal 1993
differ from the Federal statutory rate because of the application of purchase
accounting, certain foreign tax rate differentials and state and local taxes.
See Note 7 to the Consolidated Financial Statements.
EXTRAORDINARY LOSS. During 1993, the Company recorded a $2.9 million
charge, net of income tax of $1.5 million, representing the remaining
unamortized debt issuance costs related to long term obligations repaid as a
result of the Refinancing.
NET INCOME. For the reasons set forth above, net income for
Fiscal 1993 improved $15.7 million to $25.7 million.
YEAR ENDED NOVEMBER 30, 1992 COMPARED WITH YEAR ENDED NOVEMBER 30, 1991
NET SALES. Net sales for the year ended November 30, 1992 ("Fiscal 1992")
increased principally due to higher average unit selling prices resulting from
a shift in sales to higher priced Posturepedic products and also from increased
unit shipments. The Company's sales increases were concentrated in its top 100
customers as retailers continued to consolidate and the largest customers
increased their presence in the marketplace. Net sales to Sears, the Company's
largest customer, increased approximately 13%, or $10.0 million.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1992 decreased 2.9%
or $10.5 million. This improvement was primarily due to lower material costs
resulting from more efficient utilization of materials, price efficiencies,
improved manufacturing processes, efficiency gains due to higher production
volume and savings resulting from prior plant consolidations.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for Fiscal 1992 increased 4.0%,
or $8.2 million, due to higher spending on cooperative advertising, executive
severance, incentive bonuses, and non-cash charges of $2.1 million for
management stock awards, partially offset by reductions in consulting and bad
debt expenses.
A non-cash charge of $5.4 million was incurred for Fiscal 1992 in
connection with the implementation of the Plan. So long as the performance
share plan (the "Plan") is in effect, the Company expects to incur additional
non-cash charges in future years for Plan expense. Based on the fair value of
the Shares as of Fiscal 1992, the Company expected to record approximately $16
million of such charges during the four years ending November 30, 1996.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased due to
a reduction in goodwill and other intangibles resulting from the
Recapitalization.
INTEREST EXPENSE, NET. Interest expense, net for Fiscal 1992 decreased
63.4%, or $74.0 million, to $42.7 million, due primarily to a net reduction in
the amount of indebtedness of approximately $334 million and a reduction in the
interest rate resulting from the exchange of debt securities bearing interest
at 15.5% and 14.0% to new debt securities with an original principal amount of
$116.7 million bearing interest at 12.4%, both of which resulted from the
Recapitalization. In addition, but to a lesser extent, lower effective
interest rates under the Old Credit Agreement contributed to the decrease in
interest expense, net.
INCOME TAX (BENEFIT). The Company's effective income tax rates for
Fiscal 1992 differ from the federal statutory rate because of the application
of purchase accounting, certain foreign tax rate differentials and state and
local taxes. See Note 7 to the Consolidated Financial Statements.
NET INCOME (LOSS). For the reasons set forth above, net income (loss) for
Fiscal 1992 improved from a net loss of $73.5 million to net income of $10.0
million.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
During Fiscal 1993, the Company's principal source of funds consisted
of cash flow from operating activities and net proceeds from borrowings. Its
principal uses of funds consisted of payments of principal and interest on its
secured indebtedness and capital expenditures. On May 7, 1993, the Company
completed the Refinancing which consisted of (i) the sale of $200.0 million of
9 1/2% Senior Subordinated Notes Due 2003 (the "Notes") pursuant to a public
offering, (ii) the application of $194.5 million of net proceeds therefrom to
redeem all of the Company's approximately $139.6 million of 12.4% Senior
Subordinated Notes Due 2001 and to reduce amounts outstanding under the
Company's credit agreement existing prior thereto and (iii) the execution of a
new secured credit agreement (the "New Credit Agreement") providing for two
term loan facilities together aggregating $250.0 million (together, the "New
Term Loan Facility") and a $75.0 million revolving credit facility (the "New
Revolving Credit Facility").
As a result of the Refinancing, the Company's principal payments over the
next four years have been significantly reduced and the average life of such
indebtedness has been increased under the New Credit Agreement. In addition,
the maturity on the Company's subordinated debt has been extended by two years
to 2003. Further, the Company believes that, in general, the covenants
contained in the New Credit Agreement and Notes are less restrictive than the
covenants in effect prior to the Refinancing, permit significantly increased
capital expenditures and allow the Company to utilize a greater portion of its
excess cash flow.
The Refinancing has, and will result in, increased cash interest expense
obligations during the two fiscal years ending November 30, 1994, due to (i)
the additional indebtedness incurred to pay the fees and expenses associated
with the Refinancing, and (ii) paying interest on the Notes in cash over this
period, whereas interest on the 12.4% Senior Subordinated Notes Due 2001 would
have been payable in whole, or in part, in additional securities. Based on the
Company's operating results since the Recapitalization, management expects that
the Company will continue to generate cash flow from operations sufficient to
meet these higher initial cash interest payments.
The outstanding term loans under the New Credit Agreement at November
30, 1993 totalled $196.8 million. During the fiscal year ended November 30,
1994, the scheduled amortization under the New Credit Agreement is $21.2
million. Under the terms of the New Credit Agreement, the Company is required
to make certain mandatory principal prepayments of the Term Loans in the event
of the sale of any of the Company's principal operating subsidiaries, certain
sales of assets, excess cash flow, sales of stock and issuances of new debt
securities and in certain other circumstances. In addition, the Company is
permitted to make voluntary prepayments. During Fiscal 1993, the Company made
prepayments of $33.2 million under these provisions. The principal source of
such funds was from operations, the collection of a long-term note receivable
and the sales of idle plant facilities. Such prepayments will reduce pro rata
future annual amounts to be amortized under the New Credit Agreement. In
addition, the Company made the scheduled principal payments aggregating $20.0
million in 1993 principally from operations.
Pursuant to the New Credit Agreement, the outstanding principal amount
under the New Revolving Credit Facility must not exceed a certain amount for a
thirty day period during each fiscal year of the Company. The Company is also
subject to certain affirmative and negative covenants under both the New Credit
Agreement and the indenture under which the Notes were issued ( the "Note
Indenture"), including, without limitation, requirements and restrictions with
respect to capital expenditures, dividends, working capital, cash flow, net
worth and other financial ratios.
Since the Refinancing, the maximum amount outstanding under the New
Revolving Credit Facility, excluding outstanding letters of credit, was $9.0
million. At November 30, 1993, the Company had approximately $53 million
available under the New Revolving Credit Facility, with $3.0 million
outstanding and letters of credit issued totalling approximately $19 million.
15
<PAGE> 17
Capital expenditures totalled $15.0 million in Fiscal 1993. Management
believes that annual capital expenditure limitations in the New Credit
Agreement will not significantly inhibit the Company from meeting its ongoing
operating needs. The Company plans to fund fiscal year 1994 capital
expenditures with cash from operations and borrowings under the New Revolving
Credit Facility. Based on operating results achieved since the Refinancing,
management believes that the Company will have the necessary liquidity for the
next several years to fund its expected capital expenditures, obligations under
the New Credit Agreement and the Subordinated Notes, future environmental
liabilities, if any, and for other needs required to manage its business
through cash flow from operations and availability under the New Revolving
Credit Facility.
The Company's net weighted average borrowing cost was 8.3% for Fiscal 1993.
FOREIGN OPERATIONS AND EXPORT SALES
The Company has foreign operations in Canada which had net sales of
approximately $42 million, $46 million and $43 million, and operating income of
approximately $8 million in each of the years ended November 30, 1993, 1992 and
1991. The Company's operations in Canada had identifiable assets, excluding
intercompany receivables and payables, of approximately $30 million, $20
million and $24 million as of November 30, 1993, 1992 and 1991, respectively.
The Company has no other foreign operations and there were no sales from the
Canadian operations to domestic operations in the three-year period ended
November 30, 1993.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEALY CORPORATION
Consolidated Financial Statements
November 30, 1993 and 1992
(With Independent Auditors' Report Thereon)
17
<PAGE> 19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sealy Corporation:
We have audited the accompanying consolidated balance sheets of Sealy
Corporation and subsidiaries (Company) as of November 30, 1993 (Successor) and
1992 (Pre-Successor), and the related consolidated statements of operations,
stockholders' equity, and cash flows for the ten months ended November 30, 1993
(Successor period); for the two months ended January 31, 1993, the year ended
November 30, 1992 and the one month ended November 30, 1991 (Pre-Successor
periods); and for the eleven months ended October 31, 1991 (Predecessor
period). In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules for the
Successor period, Pre-Successor periods, and Predecessor period, as listed in
Item 14(a)(2) of Form 10-K of Sealy Corporation for the year ended November 30,
1993. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Sealy Corporation
and subsidiaries at November 30, 1993 and 1992, and the results of their
operations and their cash flows for the Successor period, Pre-Successor
periods, and Predecessor period, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules for the Successor period, Pre-Successor periods, and Predecessor
period, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on February
12, 1993 a majority of the outstanding common stock of the Company was acquired
in a business combination accounted for as a purchase. Further, on November 6,
1991, the Company completed a recapitalization which resulted in a change in
control of the Company. These transactions have been accounted for under the
purchase method and accordingly the consolidated financial statements of the
Company for the Successor period, Pre-Successor periods, and Predecessor period
are presented on a different cost basis and therefore, are not comparable.
18
<PAGE> 20
As discussed in Notes 1 and 7 to the consolidated financial statements, in
connection with the application of purchase accounting, effective February 1,
1993 the Company changed its method of accounting for income taxes to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
KPMG Peat Marwick
Cleveland, Ohio
January 28, 1994
19
<PAGE> 21
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
--------- -------------
NOVEMBER 30,
------------
1993 1992
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 20,919 $ 12,749
Accounts receivable, less allowance for doubtful
accounts (1993 - $7,650; 1992 - $9,438) 72,128 74,235
Inventories 41,745 39,164
Deferred income taxes 19,941 --
Prepaid expenses 3,320 3,260
-------- --------
158,053 129,408
Property, plant and equipment -- at cost:
Land 14,505 16,875
Buildings and improvements 58,147 68,508
Machinery and equipment 74,681 75,709
-------- --------
147,333 161,092
Less accumulated depreciation 7,228 20,737
-------- --------
140,105 140,355
Other assets:
Goodwill -- net of accumulated amortization
(1993 - $10,652; 1992 - $26,849) 497,547 491,065
Patents and other intangibles -- net of accumulated
amortization (1993 - $1,128; 1992 - $4,207) 9,903 11,256
Debt issuance costs and other assets 17,499 8,232
-------- --------
524,949 510,553
-------- --------
$823,107 $780,316
======== ========
</TABLE>
20
<PAGE> 22
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
--------- -------------
NOVEMBER 30,
------------
1993 1992
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion -- long-term obligations $ 21,728 $ 39,431
Accounts payable 28,603 28,575
Accrued expenses:
Interest 3,474 1,388
Customer incentives 13,739 13,300
Wages, commissions and bonuses 11,094 13,849
Profit sharing and pension 3,630 3,335
Insurance 6,562 6,761
Plant consolidation 7,341 1,958
Other 19,123 17,298
-------- --------
115,294 125,895
Long-term obligations 384,451 404,048
Other noncurrent liabilities 17,160 15,056
Deferred income taxes 21,857 56,112
Stockholders' equity:
Preferred stock, $.01 par value; Authorized,
10,000 shares; Issued, none -- --
Class A common stock, $.01 par value; Authorized,
49,500 shares; Issued (1993 - 29,457; 1992 - 29,459) 295 295
Class B common stock, $.01 par value; Authorized,
500 shares; Issued, none -- --
Additional paid-in capital 260,581 210,010
Retained earnings (deficit) 24,725 (29,581)
Foreign currency translation adjustment (1,256) (1,519)
--------- --------
284,345 179,205
Commitments and contingencies
-------- --------
$823,107 $780,316
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- ---------------------------------------------- --------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $579,704 $103,492 $654,249 $ 49,972 $575,959
-------- -------- -------- -------- --------
Costs and expenses:
Cost of goods sold 305,613 57,110 354,641 28,822 336,315
Selling, general and administrative
(including provisions for bad debts
of $1,354, $265, $3,662, $257
and $7,241, respectively) 182,382 34,597 215,761 16,111 191,443
Amortization of intangibles 11,780 2,473 15,707 1,431 20,359
Interest expense, net 31,218 6,675 42,709 2,990 113,713
-------- -------- -------- -------- --------
530,993 100,855 628,818 49,354 661,830
-------- -------- -------- -------- --------
Income (loss) before income tax
and extraordinary item 48,711 2,637 25,431 618 (85,871)
Income tax (benefit) 21,067 1,660 15,447 671 (12,513)
-------- -------- -------- -------- ---------
Income (loss) before extraordinary
item 27,644 977 9,984 (53) (73,358)
Extraordinary loss from early
extinguishment of debt (net of
income taxes of $1,504) 2,919 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 24,725 $ 977 $ 9,984 $ (53) $(73,358)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Income (loss) before extraordinary item $ .91 $ .03 $ .34 $ -- $ (24.55)
Extraordinary loss (.10) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ .81 $ .03 $ .34 $ -- $ (24.55)
======== ======== ======== ======== ========
Weighted average number of common
shares and equivalents outstanding
during period 30,496 30,062 29,672 29,298 2,988
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Foreign
Additional Retained Currency
Common Stock Paid-in Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
-------- --------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
November 30, 1990 2,988 $ 30 $161,842 $ (77,296) $ 161 $ 84,737
Net loss -- -- -- (73,358) -- (73,358)
Foreign currency translation -- -- -- -- 696 696
------ ---- -------- --------- ------- --------
October 31, 1991 2,988 $ 30 $161,842 $(150,654) $ 857 $ 12,075
====== ==== ======== ========= ======= ========
PRE-SUCCESSOR
November 1, 1991 (reflects the
issuance of 26,310 common
shares in connection with
the Recapitalization) 29,298 $293 $205,130 $ (39,512) $ 857 $166,768
Net loss -- -- -- (53) -- (53)
Foreign currency translation -- -- -- -- (180) (180)
------ ---- -------- --------- ------- --------
November 30, 1991 29,298 293 205,130 (39,565) 677 166,535
Net income -- -- -- 9,984 -- 9,984
Performance share plan -- -- 5,430 -- -- 5,430
Management stock awards,
net of forfeitures 161 2 (550) -- -- (548)
Foreign currency translation -- -- -- -- (2,196) (2,196)
------ ---- -------- --------- ------- --------
November 30, 1992 29,459 295 210,010 (29,581) (1,519) 179,205
Net income -- -- -- 977 -- 977
Performance share plan -- -- 905 -- -- 905
Foreign currency translation -- -- -- -- 462 462
------ ---- -------- --------- ------- --------
January 31, 1993 29,459 $295 $210,915 $ (28,604) $(1,057) $181,549
====== ==== ======== ========= ======= ========
SUCCESSOR
February 1, 1993 (reflects the
purchase of 27,630 common
shares in connection with
the Acquisition) 29,459 $295 $259,854 -- -- $260,149
Net income -- -- -- $ 24,725 -- 24,725
Performance share plan -- -- 2,204 -- -- 2,204
Valuation adjustment on
common stock and warrants
subject to repurchase -- -- (1,483) -- -- (1,483)
Repurchase of management
stock, net of stock options
exercised (2) -- 6 -- -- 6
Foreign currency translation -- -- -- -- $(1,256) (1,256)
------ ---- -------- --------- ------- --------
November 30, 1993 29,457 $295 $260,581 $ 24,725 $(1,256) $284,345
====== ==== ======== ========= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- --------------------------------------------- -------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 24,725 $ 977 $ 9,984 $ (53) $ (73,358)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss 2,919 - - - -
Depreciation 7,275 1,869 10,679 847 12,794
Non cash interest expense 4,157 2,664 15,092 1,005 34,773
Non cash stock incentive expense 2,204 905 7,512 - -
Deferred income taxes 17,000 321 10,644 563 (16,607)
Amortization of:
Intangibles 11,780 2,473 15,707 1,431 20,359
Debt issuance cost 2,394 202 1,303 216 3,247
Debt discount - - - - 4,043
Refinancing/acquisition-related expenses - - - - 6,849
Other, net 3,410 224 (1,809) 398 1,662
Changes in:
Accounts receivable 3,131 (1,024) 2,225 3,534 (131)
Inventories (2,156) (1,425) 4,492 590 9,950
Prepaid expenses (743) (164) 1,139 3,131 (3,379)
Accounts payable/accrued expenses/
other noncurrent liabilities 6,559 (8,299) 1,623 (2,711) 17,431
---------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 82,655 (1,277) 78,591 8,951 17,633
---------- --------- --------- --------- ---------
Investing activities, purchase of:
Property, plant and equipment, net (8,421) (3,082) (8,363) (483) 956
---------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities (8,421) (3,082) (8,363) (483) 956
---------- --------- --------- --------- ---------
Financing activities:
Proceeds from New Credit Agreement
and sale of 9 1/2% Senior Subordinated
Notes due 2003 450,000 - - - -
Repayment of Old Credit Agreement and
12.4% Senior Subordinated Notes
due 2001 (433,320) - - - -
Repayment of long-term obligations, net (63,468) 2,667 (67,167) (24,164) 1,263
Debt issuance costs (17,557) - - - -
Management investor redemptions (27) - (627) - -
Refinancing/acquisition-related expenses - - (3,295) (2,543) (1,011)
---------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities (64,372) 2,667 (71,089) (26,707) 252
---------- --------- --------- --------- ---------
Change in cash and equivalents 9,862 (1,692) (861) (18,239) 18,841
Cash and equivalents:
Beginning of period 11,057 12,749 13,610 31,849 13,008
---------- --------- --------- --------- ---------
End of period $ 20,919 $ 11,057 $ 12,749 $ 13,610 $ 31,849
========== ========= ========= ========= =========
Supplemental disclosures:
Taxes paid (received), net $ 3,549 $ 895 $ 5,067 $ (48) $ 1,979
Interest paid $ 26,295 $ 1,037 $ 27,756 $ 3,632 $ 64,060
</TABLE>
In November 1991, the Company completed a Recapitalization under which
approximately $534 million in face amount of, and interest on, its outstanding
subordinated indebtedness to an affiliate ("MBLP") of First Boston Securities
Corporation was exchanged for 26.3 million additional shares of common stock of
the Company and a $116.7 million 12.4% Senior Subordinated Note.
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
(a) BUSINESS
Sealy Corporation (the "Company"), is engaged in the home furnishings
business and produces mattresses, boxsprings, bedroom furniture and convertible
sleep sofas. Substantially all of the Company's trade accounts receivable are
from retail businesses. Sales to Sears, Roebuck & Co., the Company's largest
customer, were approximately 12%, 17%, 13%, 15% and 12% of total net sales for
the ten months ended November 30, 1993, the two months ended January 31, 1993,
the year ended November 30, 1992, the one month ended November 30, 1991 and the
eleven months ended October 31, 1991 (the "Reporting Periods"). The Company
recognizes revenue upon shipment of goods to customers.
(b) PRINCIPLES OF OF SOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
(c) CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents are stated at cost
which approximates market value.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated over their expected useful
lives principally by the straight-line method for financial reporting purposes
and by both accelerated and straight-line methods for tax reporting purposes.
(e) AMORTIZATION OF INTANGIBLES
Goodwill represents the excess of the purchase price paid over the fair
value of net assets acquired and is amortized on a straight-line basis over the
expected periods to be benefitted. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
future earnings. The amount of goodwill impairment, if any, would be measured
based on projected discounted future results using a discount rate reflecting
the Company's average cost of funds.
Other intangibles include patents and trademarks which are amortized on the
straight-line method over periods ranging from 5 to 17 years.
(f) NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share is based upon weighted average number
of shares of the Company's common stock and common stock equivalents
outstanding for the periods presented. Common stock equivalents included in
the computation, using the treasury stock method, represent shares issuable
upon the assumed exercise of warrants, stock options and performance shares
that would have a dilutive effect in periods in which there were earnings.
Common stock equivalents had no material effect on the computation of earnings
(loss) per common share in the Reporting Periods.
25
<PAGE> 27
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) INCOME TAXES
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 109, "Accounting For Income
Taxes" ("Statement 109"). Under the asset and liability method of Statement
109, 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. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, 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.
The Company adopted Statement 109 effective February 1, 1993, in connection
with the Acquisition of the Company disclosed in Note 2. The adoption of
Statement 109 had no material effect on the amount of income tax expense
reported in the ten months ended November 30, 1993. Prior to February 1, 1993,
the Company followed Statement of Financial Accounting Standard No. 96
("Statement 96") to account for income taxes.
(h) RECLASSIFICATION
Certain items in the consolidated financial statements for 1992 and 1991
have been reclassified to conform to the 1993 presentation.
(2) BASIS OF ACCOUNTING
On February 12, 1993, Zell/Chilmark Fund, L.P. ("Zell/Chilmark") led an
investor group (the "Zell/Chilmark Purchasers") which purchased the 93.6%
equity interest in the Company (the "Acquired Shares") held by MB L.P. I, an
affiliate of The First Boston Corporation ("MBLP"), for a cash purchase price
of $250 million (the "Acquisition").
The Company employed the purchase method of accounting for the Acquisition.
The consolidated financial statements as of November 30, 1993 and for the ten
months then ended reflect an allocation of the sum of the total consideration
paid in the Acquisition for the approximately 94% equity interest and the
remaining 6% equity interest valued at historical book value (collectively, the
"New Basis"). A summary of the New Basis follows:
<TABLE>
<S> <C>
Acquisition of 27,630,000 Common Shares $250.0
Historical basis of shares held by
continuing stockholders 10.1
------
Total New Basis $260.1
======
</TABLE>
The New Basis has been allocated to the tangible and identifiable
intangible assets and liabilities of the Company as of February 1, 1993 based,
in large part, upon independent appraisals of their fair values, with the
remainder of the New Basis allocated to goodwill.
The New Basis in excess of historical book value of the identifiable net
assets acquired is as follows:
<TABLE>
<S> <C>
Total New Basis $260.1
Less historical net book value 181.5
------
Excess New Basis allocated to net assets $ 78.6
======
</TABLE>
26
<PAGE> 28
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The excess New Basis has been allocated as follows:
Increase (decrease) in net assets:
<TABLE>
<S> <C>
Property, plant and equipment $ (4.0)
Deferred taxes 69.9
Other, net (6.7)
Goodwill, net 19.4
------
$ 78.6
======
</TABLE>
A favorable ruling with respect to certain tax contingencies and the
recognition of available net operating loss carryforwards has been reflected as
purchase accounting adjustments in the allocation of the New Basis.
On November 6, 1991, the Company completed a recapitalization (the
"Recapitalization") in which the Company's capital structure was significantly
improved, the face amount of its indebtedness and interest thereon held by MBLP
was reduced by approximately $417 million, the Company's interest expense
obligations were substantially reduced and the principal repayment schedule on
a portion of the Company's existing bank term loan facility was extended. As a
result of an exchange in April 1990 of certain outstanding debt issued to First
Boston Securities Corporation ("FBSC") for new debt at lower interest rates
plus additional common stock (the "Exchange"), and subsequent Recapitalization
in November 1991, MBLP (as successor transferee by FBSC) obtained a controlling
interest in the Company. These transactions have been accounted for under the
purchase method of accounting as a step acquisition.
As a result of the required purchase accounting adjustments, the
post-Acquisition financials as of and for the ten months ended November 30,
1993, (the "Successor Financials") are not comparable to the pre-Acquisition
financials for the two months ended January 31, 1993, the year ended November
30, 1992 and the one month ended November 30, 1991 (collectively, the
"Pre-Successor Financials", which were prepared on the Recapitalization basis
of accounting), and are not comparable to the pre-Recapitalization financials
for the eleven months ended October 31, 1991 (the "Predecessor Financials").
(3) INVENTORIES
Inventories are valued at cost not in excess of market, using the first-in,
first-out (FIFO) method. The major components of inventory as of November 30,
1993 and 1992 were as follows:
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
--------- -------------
1993 1992
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $31,573 $28,041
Work in process 3,782 3,235
Finished goods 6,390 7,888
------- -------
$41,745 $39,164
======= =======
</TABLE>
27
<PAGE> 29
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
--------- -------------
NOVEMBER 30,
----------------------------------
1993 1992
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Secured Credit Agreement:
Revolving Credit Facility $ 3,000 $ 6,000
Term Loan Facility 196,774 293,385
9 1/2% Senior Subordinated Notes Due 2003 200,000 -
12.4% Senior Subordinated Notes Due 2001 - 132,819
Other 6,405 11,275
-------- --------
406,179 443,479
Less current portion 21,728 39,431
-------- --------
$384,451 $404,048
======== ========
</TABLE>
On May 7, 1993, the Company completed a refinancing plan (the
"Refinancing"), which consisted of (i) the sale of $200.0 million of 9 1/2%
Senior Subordinated Notes Due 2003 (the "Notes") pursuant to a public offering,
(ii) the application of $194.5 million of net proceeds therefrom to redeem all
of the then outstanding 12.4% Senior Subordinated Notes of the Company Due 2001
(approximately $139.6 million), and to reduce amounts outstanding under the
Company's existing credit agreement prior thereto (the "Old Credit Agreement")
and (iii) the execution of a new secured credit agreement (the "New Credit
Agreement") with a new group of senior lenders providing for two term loan
facilities (together, the "New Term Loan Facility") and a revolving credit
facility (the "New Revolving Credit Facility") in connection with the
refinancing of the Old Credit Agreement. During May 1993, the Company recorded
a $2.9 million extraordinary loss, net of income tax of $1.5 million,
representing the remaining unamortized debt issuance costs related to the long
term obligations repaid as a result of the Refinancing.
The Notes mature on May 1, 2003 and bear interest at the rate of 9 1/2% per
annum from May 7, 1993, payable semiannually in cash on May 1 and November 1 of
each year, commencing November 1, 1993. The Notes may be redeemed at the
option of the Company on or after May 1, 1998, under the conditions and at the
redemption prices as specified in the note indenture, dated as of May 7, 1993,
under which the Notes were issued (the "Note Indenture"). Notwithstanding the
foregoing, at any time prior to May 1, 1996, the Company may redeem with the
net proceeds of one or more Public Equity Offerings as defined in the Note
Indenture, up to $60.0 million aggregate principal amount of the Notes at the
redemption prices as specified in the Note Indenture. The Notes are
subordinated to all existing and future Senior Debt of the Company as defined
in the Note Indenture.
The New Credit Agreement provides for loans of up to $325 million and
consists of the $75 million New Revolving Credit Facility and the $250 million
New Term Loan Facility. The New Revolving Credit Facility provides sublimits
for a $30 million discretionary letter of credit facility ("Letters of Credit")
and a discretionary swing loan facility of up to $5 million ("Swing Loans").
The New Revolving Credit Facility terminates and is due and payable on November
30, 1998 unless extended as provided for in the New Credit Agreement.
28
<PAGE> 30
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The New Term Loan Facility consists of a $175 million term loan (the
"Tranche A Term Loan") and a $75 million term loan (the "Tranche B Term Loan")
(collectively, the "Term Loans"). Under the terms of the New Credit Agreement,
the Company is required to make certain mandatory principal prepayments of the
Term Loans in the event of the sale of any of the Company's principal operating
subsidiaries, certain sales of assets, excess cash flow, sales of stock and
issuances of new debt securities and in certain other circumstances. In
addition, the Company is permitted to make voluntary prepayments. During the
year ended November 30, 1993, the Company made prepayments of $33.2 million
under these provisions. Such prepayments will reduce pro rata future annual
amounts to be amortized under the New Credit Agreement. In addition, the
Company made the scheduled principal payments aggregating $20 million in 1993.
After application of the 1993 prepayments, the Term Loans amortize according to
the following schedule:
<TABLE>
<CAPTION>
Term Annual Amounts to be Amortized
---- ------------------------------
(in thousands)
<S> <C>
1994 $ 21,241
1995 21,241
1996 29,737
1997 29,737
1998 29,737
1999 32,541
2000 32,540
--------
$196,774
========
</TABLE>
In addition, the outstanding principal amount under the New Revolving
Credit Facility must not exceed a certain amount for a thirty day period during
each fiscal year of the Company. The Company is also subject to certain
affirmative and negative covenants under both the New Credit Agreement and the
Note Indenture, including, without limitation, requirements and restrictions
with respect to capital expenditures, dividends, working capital, cash flow,
net worth and other financial ratios.
At November 30, 1993, the Company had approximately $53 million available
under the Revolving Credit Facility, with $3 million outstanding and letters of
credit issued totalling approximately $19 million. A commitment fee of 0.50%
per annum on the unused portion of the New Revolving Credit Facility is payable
quarterly in arrears. Two separate interest rate options exist and are
available to the Company at its option as follows:
(a) A Base Rate plus a Base Rate Applicable Margin; or
(b) A Eurodollar Rate plus a Eurodollar Applicable Margin.
Borrowings under the Revolving Credit Facility and the Tranche A Term Loan
initially have a Base Rate Applicable Margin of 1.25% and a Eurodollar
Applicable Margin of 2.50%. The Tranche B Term Loan initially has a Base Rate
Applicable Margin of 1.75% and a Eurodollar Applicable Margin of 3.00%. The
initial Base Rate Applicable Margin and Eurodollar Applicable Margin are in
effect until May 6, 1994, and thereafter are subject to decreases or increases
(not in excess of initial applicable margins) based on the Company's leverage
ratio as defined in the New Credit Agreement.
The Secured Credit Agreement requires that interest rate protection be
maintained on an aggregate notional amount at least equal to 50% of outstanding
Term Loans during the period from August 5, 1993 through at least May 7, 1996.
29
<PAGE> 31
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
All obligations of the Company under the Credit Agreement are jointly and
severally guaranteed by each direct and indirect domestic subsidiary of the
Company and secured by first priority liens on and security interests in
substantially all of the assets of the Company and its domestic subsidiaries
and by first priority pledges of substantially all of the capital stock of most
of the subsidiaries of the Company.
(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 30, 1993.
<TABLE>
<CAPTION>
COMMITMENTS UNDER
----------------------------------------------
SUBLEASE
OPERATING CAPITALIZED RENTAL
YEAR ENDED NOVEMBER 30, LEASES LEASES INCOME
----------------------- --------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1994 $7,104 $383 $153
1995 6,356 375 153
1996 5,880 373 153
1997 4,561 372 153
1998 3,251 370 102
Later years 5,988 1,130 -
------- ------ ----
$33,140 $3,003 $714
======= ====
Less amount representing interest 762
------
Present value of minimum lease payments
of capitalized leases $2,241
======
</TABLE>
At November 30, 1993, property, plant and equipment included approximately
$2.2 million of aggregate cost and $0.1 million of accumulated depreciation
related to assets under capitalized leases.
Rental expense charged to operations is as follows:
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- ----------------------------------------------- --------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Minimum rentals $7,580 $1,516 $ 9,035 $754 $8,450
Contingent rentals (based
upon delivery equipment
mileage) 775 155 1,114 83 757
------ ------ ------- ---- ------
$8,355 $1,671 $10,149 $837 $9,207
====== ====== ======= ==== ======
</TABLE>
The Company has the option to renew certain plant operating leases, with
the longest renewal period extending through 2015. Most of the operating
leases provide for increased rent through increases in general price levels.
30
<PAGE> 32
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) STOCK OPTION PLAN
The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989 and
the 1992 Stock Option Plan ("1992 Plan") in 1992 and reserved 100,000 shares
and 600,000 shares, respectively, of Class A Common Stock for future issuance.
Options under the 1989 Plan and the 1992 Plan may be granted either as
Incentive Stock Options as defined in Section 422A of the Internal Revenue Code
or Nonqualified Stock Options subject to the provisions of Section 83 of the
Internal Revenue Code.
During fiscal years 1990 and 1991, the Company issued options under the
1989 Plan totalling 8,250 shares (net of subsequent forfeitures) of which 7,937
are exercisable at November 30, 1993. The remaining 1989 Plan options are
cumulatively exercisable as to one quarter of the underlying shares on each of
the first through fourth anniversaries of date of grant. Any unexercised
options terminate on the tenth anniversary of the date of grant or earlier, in
connection with termination of employment. The exercise price for all 1989
Plan options exercisable or outstanding as of November 30, 1993 is $50.00 per
share. No 1989 Plan options have been exercised since the date of grant.
During fiscal years 1992 and 1993, the Company granted nonqualified options
totalling 198,000 shares (net of subsequent forfeitures) under the 1992 Plan.
The options granted in 1992 totalled 92,000 with an exercise price of $7.52 per
share, and the options granted in June, 1993 totalled 106,000 and have an
exercise price of $9.05 per share. The 1992 Plan options are exercisable 25%
upon grant and 25% per year thereafter. The exercise price is equal to the
estimated fair value of the Company's stock at the date of grant. 1992 Plan
options totalling 750 shares were exercised during 1993. At November 30, 1993,
options for 72,500 shares issued under the 1992 Plan are exercisable.
During fiscal year 1993 the Company adopted the 1993 Non-Employee Director
Stock Option Plan, providing for the one-time automatic grant of ten-year
options to acquire up to 10,000 shares of Class A Common Stock of the Company
(the "Shares") to all current and future directors who are not employed by the
Company, by Zell/Chilmark or by their respective affiliates ("Non-Employee
Directors"). Options granted under the 1993 Non-Employee Director Stock Option
Plan vest immediately and are initially exercisable at a price equal to the
fair market value of the Shares on the date of grant. The exercise price of
options granted pursuant to this Plan increases on each anniversary date of
such grant by 4% compounded annually. Pursuant to this Plan, the Company
granted options to acquire up to 50,000 Shares to Non-Employee Directors in
fiscal year 1993 at an initial exercise price of $9.05 per Share.
(7) INCOME TAXES
As discussed in Note 1(g), the Company adopted Statement 109 effective
February 1, 1993. Prior years' financial statements have not been restated to
apply the provisions of Statement 109.
31
<PAGE> 33
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company and its domestic subsidiaries file a consolidated U.S.
Federal income tax return. Income tax expense (benefit) attributable to income
from continuing operations consists of:
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- ------------------------------------------------- --------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current:
Federal $ - $ 674 $ - $ - $ -
State and local 589 28 766 48 115
Canada and
Commonwealth of
Puerto Rico 3,478 637 4,037 60 3,979
------- ------ ------- ---- --------
4,067 1,339 4,803 108 4,094
Deferred 17,000 321 10,644 563 (16,607)
------- ------ ------- ---- -------
Income tax expense
(benefit) $21,067 $1,660 $15,447 $671 $(12,513)
======= ====== ======= ==== ========
</TABLE>
Income before income taxes from Canadian operations amount to $7,255,
$1,140, $7,972, $25 and $8,933 for the Reporting Periods.
The differences between the effective tax rate and the statutory U.S.
Federal income tax rate are explained as follows:
<TABLE>
<CAPTION>
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- ------------------------------------------------ -------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income tax expense
(benefit) computed at
statutory U.S. Federal
income tax rate 35.0% 34.0% 34.0% 34.0% (34.0)%
State and local income
taxes, net of Federal
tax benefit 4.3 2.0 7.3 20.0 .8
Permanent differences
resulting from purchase
accounting 5.4 20.6 16.8 48.9 5.5
Tax on repatriation of income
from foreign affiliate - - - - 5.0
Foreign tax rate differential 1.3 6.3 3.6 3.1 .7
Limitation of income tax
benefit recognized under
Statement 96 - - - - 8.7
Other items, net (2.8) - (1.0) 2.6 (1.3)
---- -- ---- ----- -----
43.2% 62.9% 60.7% 108.6% (14.6)%
===== ===== ===== ====== =======
</TABLE>
As required by Statement 109, the significant components of deferred income
tax expense attributable to income from continuing operations for the ten
months ended November 30, 1993 include adjustments to deferred tax assets and
liabilities for enacted changes in tax rates of $216, and the recognition of
the benefit of Successor net operating losses of $1,936.
32
<PAGE> 34
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As required under Statement 96, deferred income taxes are provided for
temporary differences between the financial reporting bases and the tax bases
of the Company's assets and liabilities. The sources of these differences and
the effects of changes from these differences on the deferred tax expense
(benefit) are as follows:
<TABLE>
<CAPTION>
PRE-SUCCESSOR PREDECESSOR
----------------------------------------------- --------------
Two Months Year One Month Eleven Months
Ended Ended Ended Ended
Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Depreciation $224 $ 515 $ 94 $ 7
Interest swap rate payments 961 3,037 - -
Write down of idle manufacturing
facilities 104 2,546 - (1,900)
Amortization of intangible assets 370 4,111 899 203
Inventory (12) 965 (24) (492)
Salaries and fringe benefits (583) (227) 1,301 (3,640)
Bad debt expense (905) 2,310 (33) (2,417)
Net operating losses utilized to eliminate
deferred tax liabilities - (2,397) (1,615) (8,107)
Other 162 (216) (59) (261)
---- -------- -------- ---------
Deferred income tax expense $321 $10,644 $ 563 $(16,607)
==== ======= ======= ========
</TABLE>
At November 30, 1993, the total deferred tax assets are $44,464, the total
deferred tax liabilities are $33,257, and the valuation allowance is $13,123.
The significant components of the deferred tax assets are accrued salaries and
benefits of $11,699 and the net operating loss carryforwards of $19,579, and of
the deferred tax liabilities are property, plant and equipment of $26,439 and
intangible assets of $7,154.
As a result of the Recapitalization, the future usage of net operating
losses created prior to November 6, 1991 will be substantially limited. The
Company has net operating loss carryforwards of approximately $43 million for
U.S. Federal income tax purposes. These losses cannot be carried back against
income of prior periods, and will expire, if not utilized, by the year 2008.
The entire amount of the valuation allowance, the amount which has not changed
since the adoption of Statement 109, shall be allocated to goodwill should the
tax benefit for deferred tax assets, to which the valuation allowance relates,
be subsequently realized.
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.
(8) RETIREMENT PLANS
Substantially all employees are covered by profit sharing plans, where
specific amounts are set aside in trust for retirement benefits. The Company
has defined benefit pension plans covering a limited number of employees
pursuant to negotiated labor contracts. The funded status of the defined
benefit pension plans, as well as the amounts expensed for the Reporting
Periods, are considered immaterial. The total profit sharing and pension
expense was $4.0 million, $0.8 million, $4.1 million, $0.3 million and $4.5
million for the Reporting Periods, respectively.
33
<PAGE> 35
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) WARRANTS
SERIES A AND SERIES B WARRANTS
As part of the Recapitalization, the Series A and Series B Warrants
(collectively, "Restructure Warrants") were issued under a Warrant Agreement
("Agreement I") dated as of November 6, 1991 between the Company and its
subsidiary, Sealy, Inc., as warrant agent. Each holder (other than MBLP) of
the Company's common stock immediately prior to the Recapitalization received
warrants entitling all such holders to future ownership (when added to their
then existing holdings) of up to 21.6% of the fully diluted common stock of the
Company upon exercise. The Restructure Warrants, when exercised, will entitle
the Holder thereof to receive one share of Class A Common Stock of the Company
in exchange for the exercise price of $16.00 per share for Series A warrants
and $22.50 per share for Series B warrants, subject to adjustment under certain
circumstances. The Series A and Series B Warrants are exercisable into
4,288,700 and 1,649,500 shares of Class A Common Stock of the Company,
respectively.
The Restructure Warrants are exercisable at any time and from time to time
on or prior to November 6, 2001 ("Expiration Date"). The Restructure Warrants
may terminate and become void prior to the Expiration Date in the event that
such warrants are redeemed as described below or if, prior to November 6, 1996
(after notice to Restructure Warrant holders, who may then exercise such
warrants), the Company merges or consolidates with another entity with the
other entity as the survivor.
The Company has the right to redeem the Restructure Warrants on any date
after November 6, 1996 at a redemption price per share as defined in Agreement
I.
MERGER WARRANTS
Merger Warrants were issued under a Warrant Agreement ("Agreement II")
dated as of August 1, 1989 between the Company and First Chicago Trust Company
of New York, as warrant agent. Each Merger Warrant, when exercised, will
entitle the holder thereof to receive one fiftieth of one share of Class B
Common Stock of the Company in exchange for the exercise price of $.01 per
share, subject to adjustment under certain circumstances.
The Merger Warrants are exercisable after August 9, 1995 or upon the
occurrence of certain other events as described in Agreement II.
Within 90 days after August 9, 1994 (or sooner, under certain
circumstances), the Company will offer to repurchase for cash all outstanding
Merger Warrants and shares issued under such Agreement II ("Warrant Shares") in
a single transaction ("Repurchase Offer") at a purchase price as defined in
Agreement II, provided certain conditions are met. At the present time, the
Company's debt Agreements restrict its ability to repurchase such Merger
Warrants or Warrant Shares. Due to the possible occurrence of the Repurchase
Offer, the Merger Warrants are not considered to be a part of the Company's
stockholders' equity and therefore, are included in other noncurrent
liabilities in the accompanying consolidated balance sheets. The Merger
Warrants, subject to certain conditions, are exercisable into an aggregate of
212,500 shares of Class B Common Stock.
34
<PAGE> 36
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) COMMON STOCK
Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders while the holders of Class B Common
Stock are entitled to one-half vote per share. Except with respect to voting
rights, the terms of the Class A Common Stock and the Class B Common Stock are
identical. Shares of Class B Common Stock, under certain circumstances, are
convertible into shares of Class A Common Stock.
(11) PERFORMANCE SHARE PLAN
Effective April 1, 1992, the Company adopted a Performance Share Plan
("Plan") for certain employees of the Company. Under the Plan, the Board of
Directors may approve the issuance of up to 3.0 million performance share units
each representing the right to receive up to one share of Class A Common Stock
of the Company ("Shares") if the Company meets specified cumulative operating
cash flow targets over the five-year period ended November 30, 1996. As of
November 30, 1993, there are 2.4 million performance share units outstanding
under the Plan which represent the right to receive Shares having an estimated
fair value of $19.7 million. The performance share units vest over the five
years ending November 30, 1996 and, as of November 30, 1993, none of the units
were convertible into Shares.
The Plan is a variable stock compensation plan pursuant to which the fair
value of Shares issuable under the Plan will be recorded as compensation
expense over the Plan's five-year term ending November 30, 1996. In addition
to the annual amount of compensation expense under the Plan, such amount will
be adjusted to give cumulative effect to any change in the amount of non-cash
compensation expense previously recorded in prior reporting periods, resulting
from subsequent increases or decreases in the fair value of the Shares or the
number of performance share units outstanding since such reporting period and
to any change in management's estimate of its ability to achieve the cumulative
operating cash flow targets as defined in the Plan. During the ten months
ended November 30, 1993, the two months ended January 31, 1993 and the year
ended November 30, 1992, the Company recorded $2.2 million, $0.9 million and
$5.4 million, respectively, of non-cash compensation expense under the Plan.
Based on the value of the Shares at November 30, 1993, and giving consideration
to management's estimate of the expected cumulative operating cash flow target
to be achieved over the five year period ended November 30, 1996, the Company
expects to record future non-cash charges totalling approximately $11 million.
To the extent that the fair value of the Shares or the number of performance
share units outstanding increases or decreases, such non-cash expense will also
increase or decrease in future reporting periods.
(12) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Net Earnings
Gross Net per Common
Net Sales Profit Income Share
----------- ------------ ---------- ---------
(dollars in thousands, except per share amounts)
PRE-SUCCESSOR
- -------------
<S> <C> <C> <C> <C>
1992:
First quarter $148,520 $ 63,920 $ 659 $ .02
Second quarter 154,642 70,015 481 .02
Third quarter 174,327 82,117 5,662 .19
Fourth quarter 176,760 83,556 3,182 .11
-------- -------- -------- ---------
$654,249 $299,608 $ 9,984 $ .34
======== ======== ======== =======
1993:
December 1, to January 31 $103,492 $ 46,382 $ 977 $ .03
======== ======== ======== =======
</TABLE>
35
<PAGE> 37
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
SUCCESSOR
- ---------
<S> <C> <C> <C> <C>
1993:
February 1, to February 28 $ 53,564 $ 25,099 $ 1,993 $ .07
Second quarter 161,373 74,451 546 .02
Third quarter 189,943 90,801 12,498 .41
Fourth quarter 174,824 83,740 9,688 .31
-------- -------- -------- ------
$579,704 $274,091 $ 24,725 $ .81
======== ======== ======== ======
</TABLE>
During the second quarter of fiscal year 1993, the Company recorded an
extraordinary loss of $2.9 million, net of income taxes ($.10 per share), from
early extinguishment of debt in connection with the Refinancing. During the
fourth quarter of fiscal year 1993, the Company recorded a $3.0 million charge
for estimated costs of closing certain manufacturing facilities which is
expected to be completed during fiscal year 1994.
(13) 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"), pursuant to which the
Company and such subsidiary agreed to conduct soil and groundwater sampling to
determine the extent of environmental contamination found at the 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 and its environmental consultant have been conducting
investigation and remediation activities since preliminary evidence of
contamination was first discovered in August, 1991. On November 15, 1993, the
Company received a letter from the Department approving the findings and
substantially all of the recommendations of the Company's consultant contained
in a June 4, 1993 report submitted to the Department, but also requiring the
Company to undertake additional remedial and investigative activities,
including the installation of shallow groundwater monitoring wells off-site.
On December 1, 1993, the Company's consultant submitted to the Department a
report updating and supplementing the June, 1993 report with regard to
activities completed prior to receipt of the Department's November 15, 1993
letter. On December 23, 1993, the Company submitted to the Department a
Remedial Investigation Schedule of activities to be conducted within the next
six (6) months in accordance with the Department's November 15, 1993 letter.
In its November 15, 1993 letter, the Department postponed any required
activity by the Company to delineate and/or remediate contaminants in the
fractured bedrock, which it had previously requested the Company to undertake.
The Company, however, still has reservations regarding any such required
activities which the Department may attempt to impose in the future. Because
of the nature of certain of the contaminants and their geological location in
fractured bedrock, the Company and its consultant remain unaware of any
accepted technology for successfully remediating the contamination either in
the shallow groundwater or the fractured bedrock.
36
<PAGE> 38
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 many 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.
37
<PAGE> 39
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 table sets forth the name, age, principal occupation and
employment and business experience during the last five years of each of the
Company's directors:
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY
---- --- -----------------------------------------
<S> <C> <C>
Lyman M. Beggs 55 Chairman, President and Chief Executive Officer of the Company since August 24, 1992. From 1991
until joining the Company, Mr. Beggs was President and Chief Executive Officer of Topco
Associates, a privately-held, national retail food cooperative with annual sales in excess of $3
billion. Prior thereto, he was President of the $300 million Norelco Consumer Products Division
of North America Philips Corporation.
Samuel Zell 52 Director of the Company since February 12, 1993. Mr. Zell: (a) is, and since mid-1990 has been,
one of two individuals who act as general partners of the general partner of Zell/Chilmark Fund,
L.P., a limited partnership formed to invest in and provide capital and management support to
companies that are engaged in, or that are the appropriate subject of, significant
recapitalizations or corporate restructurings; (b) is, and since 1981 and 1986, respectively, has
been, Chairman of the Boards of Equity Financial and Management Company, and Equity Group
Investments, Inc., two privately owned affiliated investment and management companies; (c) is, and
since 1985 has been, Chairman of the Board of Itel Corporation, a company engaged in the
distribution of wiring systems products; (d) is, and since 1983 has been, Chairman of the Board of
Great American Management and Investment, Inc., a diversified company with interests in certain
manufacturing industries and financial services; (e) is, and since 1987 has been, Chairman of the
Board of Capsure Holdings Corp., a company engaged in the business of specialty property and
casualty insurance; (f) is, and since 1992 has been, Co-Chairman of Revco D.S., Inc., a Company
that operates a chain of retail drugstores; (g) prior to October 4, 1991 was President of Madison
Management Group, Inc., which filed a petition under Chapter 11 of the Bankruptcy Code on November
8, 1991; and (h) is, and since March 4, 1993 has been, Chairman of the Board of Carter Hawley Hale
Stores, Inc.
David M. Schulte 47 Director of the Company since February 12, 1993. Mr. Schulte is, and since mid-1990 has been, the
other individual who acts as a general partner of the general partner of Zell/Chilmark Fund, L.P.
Since 1984, Mr. Schulte has been managing general partner of Chilmark Partners, L.P., a merchant
banking firm that has specialized in providing corporate and investment banking advice to
companies on the restructuring of their businesses in conjunction with recapitalizations.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY
---- --- -----------------------------------------
<S> <C> <C>
Joel S. Friedland 39 Director of the Company since February 12, 1993. Mr. Friedland is, and since mid-1990 has been,
an affiliate of the general partner of Zell/Chilmark Fund, L.P. Since 1987, Mr. Friedland has
been a partner of, and since 1984 has been associated with, Chilmark Partners, L.P.
George L. Davis 59 Director of the Company since February 12, 1993. Mr. Davis is, and since October 1990 has been,
President and Chief Executive Officer of Scarborough Partners, Inc., consultants to the financial
services industry. From December 1991 to November 1992, he was also President of First American
Bankshares Inc. Prior thereto, since 1987, Mr. Davis was Group Executive, North America, for
Citibank, N.A., a subsidiary of Citicorp.
Steven R. Fenster 51 Director of the Company since February 12, 1993. Mr. Fenster is, and since 1991 has been,
Visiting Professor of Business Administration at The Harvard Business School. Prior thereto,
since 1987, Mr. Fenster had been a Managing Director of Dillon, Read & Co. Inc., an investment
banking firm. Mr. Fenster is also a limited partner of The Blackstone Group.
Christie A. Hefner 41 Director of the Company since June 23, 1993. Ms. Hefner is, and since November 1988 has been,
Chairman and Chief Executive Officer of Playboy Enterprises.
James W. Johnston 47 Director of the Company since March 4, 1993. Mr. Johnston is, and has been since 1993, Chairman
of R.J. Reynolds Tobacco International, Inc. Since mid-1989, Mr. Johnston has been Chairman and
Chief Executive Officer of R. J. Reynolds Tobacco Company, the domestic tobacco subsidiary of RJR
Nabisco, Inc. Prior thereto, since 1984, 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.
Rolf H. Towe 55 Director of the Company since July 1991. Mr. Towe is, and since April 1991 has been, Vice
President of CIG, Inc., the sole general partner of The Clipper Group L.P., a Delaware limited
partnership, which managed the investments of MBLP in the Company until the Acquisition; and,
since 1989, has been Chairman of Executive Partner Limited, a management advisory firm. Mr. Towe
was previously employed by The Dreyfus Corporation as Senior Vice President.
</TABLE>
Mr. Zell is a director of Revco D.S., Inc., Carter Hawley Hale Stores,
Inc., The Delta Queen Steamboat Co., The Vigoro Corporation and Jacor
Communications, Inc. Mr. Schulte is a director of Revco D.S., Inc., Carter
Hawley Hale Stores, Inc. and Jacor Communications, Inc. Mr. Fenster serves on
the board of American Management Systems, Inc. Ms. Hefner is a director of
Playboy Enterprises, Inc. Mr. Johnston serves as a director of The Wachovia
Corporation, RJR Nabisco, Inc., RJR Nabisco Holdings Corp, R.J. Reynolds
Tobacco Co. and R.J. Reynolds Tobacco International, Inc. Mr. Towe is a
director of The American Heritage Life Insurance Company and Long John Silver's
Restaurants, Inc.
39
<PAGE> 41
EXECUTIVE OFFICERS
The following table sets forth the name, title, age, and certain other
information with respect to the executive and certain other appointed officers
of the Company:
<TABLE>
<CAPTION>
CURRENT PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE AND FIVE-YEAR EMPLOYMENT HISTORY
---- --- -----------------------------------------
<S> <C> <C>
Lyman M. Beggs 55 Chairman, Chief Executive Officer, and President. For further information concerning Mr. Beggs,
see "-- Directors" above.
Gary Fazio 43 Vice President-Sales since 1990. Mr. Fazio joined the Company as a general manager in 1981. From
1987 to 1990 he was Regional Vice President of the Company.
David J. McIlquham 39 Vice President-Marketing since joining the Company in April 1990. Prior thereto, Mr. McIlquham
served as Vice President-Marketing of Samsonite Corp. (USA) from December 1988 to March 1990 and
General Manager of Samsonite Canada Ltd. from May 1987 to December 1988.
Douglas E. Fellmy 44 Vice President-Operations since July 1992. Prior thereto, Mr. Fellmy served as Regional Vice
President-Operations since April 1990 and also as President of the Components Division since
December 1989. Prior thereto he served, since 1971, in numerous other capacities with the
Company's Components Division.
Jeffrey C. Claypool 46 Vice President-Human Resources since joining the Company in September 1991. Prior thereto,
Mr. Claypool was employed by Bridgestone/Firestone, Inc., an international tire manufacturer,
including positions as Vice President Human Resources and Corporate Personnel Manager.
John D. Moran 35 Secretary. Mr. Moran joined the Company in 1987 and was elected Assistant Secretary. He was
elected to his current position as of December 1990.
John G. Bartik 42 Treasurer. Mr. Bartik joined the Company in 1985 as Director of Taxation. He was elected to his
current position as of December 1990.
Frank Abbatomarco 49 Corporate Controller. Mr. Abbatomarco joined the Company in 1982. He was appointed to his
current position in 1987.
</TABLE>
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4, and amendments thereto,
furnished to the Company pursuant to Rule 16a-3(e) during Fiscal 1993 and Form
5, and amendments thereto, furnished to the Company with respect to Fiscal 1993,
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, (as disclosed in the
aforementioned Forms) reports required by Section 16 (a) of the Exchange Act
during Fiscal 1993 or prior fiscal years.
40
<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for each
of the years ended November 30, 1993, 1992 and 1991, of those persons who were,
at November 30, 1993 (i) the chief executive officer and (ii) the other four
most highly compensated executive officers of the Company for the year ended
November 30, 1993 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-----------------------------------------------------------------------------------
Securities
Other Restricted Underlying
Name and Annual Stock Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
- ------------------ ---- -------- ------- ------------ ---------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lyman M. Beggs (a) 1993 $500,016 $314,542 $117,045(a) -- -- -- $19,240(c)
Chairman, Chief 1992 136,368 375,000 180,850(a) $752,000(b) -- -- 510(c)
Executive Officer and 1991 -- -- -- -- -- -- --
President
Gary Fazio 1993 174,000 34,617 -- -- -- -- 14,209(c)
Vice President 1992 170,000 82,480 -- -- -- -- 13,790(c)
-Sales 1991 167,000 16,500 -- -- -- -- 13,615
David J. McIlquham 1993 154,000 31,292 5,141 -- -- -- 12,576(c)
Vice President 1992 145,000 106,908(d) 20,891(e) -- -- -- 11,762(c)
-Marketing 1991 137,500 13,000 -- -- -- -- 10,979
Douglas E. Fellmy 1993 150,000 36,629 -- -- -- -- 12,249(c)
Vice President 1992 134,167 136,642(d) 50,718(e) -- -- -- 10,432(c)
-Operations 1991 125,000 37,500 -- -- -- -- 10,140
Jeffrey C. Claypool 1993 156,000 32,478 -- -- -- -- 12,739(c)
Vice President 1992 150,000 75,383 -- -- -- -- 1,668(c)
-Human Resources 1991 37,500 3,750 -- -- -- -- --
</TABLE>
(a) Pursuant to his Employment Agreement (as hereinafter defined), Mr.
Beggs commenced employment with the Company as of August 24, 1992.
Under the terms of his Employment Agreement, Mr. Beggs received
$117,045 and $180,850 in 1993 and 1992, respectively, as the result
of: (i) the forgiveness of a portion of an equity loan from the
Company to Mr. Beggs, reflecting the loss of equity in his previous
residence (1993-$44,034; 1992-$91,751); (ii) closing costs on a new
home, moving expenses, temporary living expenses and costs relating to
the termination of a contract to purchase another residence
(1993-$44,000; 1992-$89,099); (iii) professional fees, travel and
entertainment expenses; and (iv) payments to cover Mr. Beggs' tax
liabilities on the foregoing items, all as described more fully in
"--Compensation Pursuant to Plans and Other Arrangements -- Executive
Employment Agreements."
41
<PAGE> 43
(b) Such amount reflects the Company's determination of the fair value at
the date of grant of 100,000 Shares issued to Mr. Beggs in 1992
pursuant to his Employment Agreement, certain of which are subject to
forfeiture under certain circumstances. Although the New Credit
Agreement and the indenture relating to the Notes contain restrictions
on the Company's ability to pay dividends, if dividends were declared
and paid on the Company's Shares, such dividends would be paid on such
Shares issued to Mr. Beggs. The Employment Agreement also provides
for the future issuance to Mr. Beggs of an additional 100,000 Shares,
subject to certain conditions. See "-- Compensation Pursuant to Plans
and Other Arrangements -- Executive Employment Agreements." Hence, Mr.
Beggs' aggregate stock holdings consist of 200,000 Shares with an
estimated fair market value of $2,696,000 at the end of fiscal year
1993. No other Named Executive Officer had any holdings of stock
which were subject to forfeiture at the end of fiscal year 1993.
(c) Represents amounts paid in fiscal year 1993 on behalf of each of the
Named Executive Officers for the following three respective categories
of compensation: (i) Company premiums for life and accidental death
and dismemberment insurance, (ii) Company premiums for long-term
disability benefits, and (iii) Company contributions to the Company's
defined contribution plans. Amounts for each of the Named Executive
Officers for each of the three respective preceding categories is as
follows: Mr. Beggs: (1993- $2,220, $1,000, $16,020; 1992- $510, $0,
$0); Mr. Fazio: (1993- $1,159, $870, $12,180; 1992- $1,040, $850,
$11,900); Mr. McIlquham: (1993- $1,026, $770, $10,780; 1992- $887,
$725, $10,150); Mr. Fellmy: (1993- $999, $750, $10,500; 1992- $765,
$625, $9,042); and Mr. Claypool: (1993- $1,039, $780, $10,920; 1992-
$918, $750, $0).
(d) The bonus amounts reflected for such persons include a portion of such
bonus paid in Shares, valued at $7.52 per Share, which the Company
determined was the fair value of such Shares on the date of the bonus
award.
(e) All of Mr. McIlquham's amount and $33,331 of such amount for Mr.
Fellmy represent payments made by the Company to cover their
respective tax liabilities relating to the portion of their bonuses
paid in Shares in fiscal year 1992. The balance of such amount for
Mr. Fellmy represents payment made by the Company to reimburse moving
expenses and cover the tax liability thereon.
42
<PAGE> 44
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE
OR
OTHER
NUMBER OF PERIOD ESTIMATED FUTURE PAYOUTS UNDER
SHARES, UNTIL NON-STOCK PRICE-BASED PLANS
----------------------------------------------
UNITS MATURATION (NUMBERS OF UNITS)
OR OTHER OR THRESHOLD TARGET MAXIMUM
NAME RIGHT (#) PAYOUT (#) (#) (#)
---- ---------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Lyman M. Beggs 1,000,000(a) 11/30/96 100,000 417,000 1,000,000
Gary Fazio 110,000(a) 11/30/96 11,000 45,870 110,000
David J. McIlquham 110,000(a) 11/30/96 11,000 45,870 110,000
Douglas E. Fellmy 110,000(a) 11/30/96 11,000 45,870 110,000
Jeffrey C. Claypool 90,000(a) 11/30/96 9,000 37,530 90,000
</TABLE>
(a) The Company's Performance Share Plan (the "Plan") effective in 1992
provides for the issuance to key employees of the Company and its
subsidiaries (the "Participants") of performance share units ("Performance
Shares"), each of which represents the right to receive, without any
additional consideration, up to one Share, based on the extent to which the
Company achieves specified cumulative operating cash flow ("COCF") targets
over the five-year period ending November 30, 1996 (the "Measurement
Period"). An aggregate of 2,366,000 Performance Shares, net of
forfeitures, have been granted to Participants, and up to 247,100
Performance Shares have been granted and reserved for individuals who will
occupy certain open positions effective, in each case, upon the hire date
of any such individual, under the Plan. The maximum number of Performance
Shares authorized to be granted is 3,000,000.
Generally, the Plan provides that if the Company's COCF for the Measurement
Period is $500 million, then each vested Performance Share shall convert
into .10 Shares (the "Threshold"); if COCF is $575 million, then each
vested Performance Share shall convert into .417 Shares (the "Target"), and
if COCF equals or exceeds $650 million, then each vested Performance Share
shall convert into one Share (the "Maximum"). If COCF for such period is
between $500 million and $650 million, then the conversion ratio will be
interpolated on a straight-line basis between the two closest of the three
aforementioned target ratios. If COCF is less than $500 million, then all
Performance Shares shall be forfeited without conversion. The estimated
fair value of one Share on November 30, 1993 was $13.48. In the event that
the Company is a party to an acquisition, merger or other significant
corporate event or makes an in-kind distribution on any equity security,
the COCF targets or ratios may be equitably adjusted to reflect an
equivalent value.
The Performance Shares generally vest over a five-year period. If a
Participant incurs a termination of employment during the periods
indicated, the following percentages of Initial Performance Shares become
vested: from December 1, 1992 through November 30, 1993 -- 30%; from
December 1, 1993 through November 30, 1994 -- 45%; from December 1, 1994
through November 30, 1995 -- 60%; from December 1, 1995 through November
29, 1996 -- 80%; and on or after November 30, 1996 -- 100%. In the event
that a Participant incurs a termination of employment for cause (as defined
in the Plan) or engages in a breach of certain noncompetition covenants
following a voluntary termination, the Participant shall forfeit all
Performance Shares, whether or not vested.
The Human Resources Committee of the Board (the "Human Resources
Committee") may, in its sole discretion, terminate the Plan at any time
without the consent of any Participant. The Plan shall terminate
automatically on the date upon which the Performance Shares are converted
into Shares (or are forfeited) following the Measurement Period (the
"Payment Date") or, if earlier, upon
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<PAGE> 45
a Change in Control (as defined in the Plan) unless the person(s) who
purchased 50% or more of the common stock or substantially all of the
assets of the Company in effecting such a Change in Control (a "Third Party
Purchaser") agrees to continue the Plan or a replacement plan in a manner
that is fair and equitable to the Participants. As part of the
Acquisition, Zell/Chilmark consented to the continuation of the Plan. In
the event that the Plan is terminated because of changes in the laws or
accounting rules which frustrate the intent of the Plan or because of the
inability to preserve the integrity of the COCF formula by reason of
material changes to the business or operations of the Company, then the
disinterested members of the Board may replace the Plan with an alternative
plan that is comparable in scope and effect or the Board may have the
Company distribute that number of Shares as would be arrived at by
multiplying the unforfeited Performance Shares by a fraction (which may not
be greater than one) the numerator of which is the COCF through the date of
termination and the denominator of which is $650 million. In all other
cases of termination of the Plan, all Performance Shares awarded to a
Participant, which have not previously been forfeited, shall become vested
Performance Shares and the Participant shall receive that number of Shares
equal to the number of that Participant's vested Performance Shares on the
date of termination of the Plan. Notwithstanding any of the foregoing,
upon the termination of the Plan because of a Change in Control where the
Third Party Purchaser did not offer the same or a replacement plan, the
Company shall, unless the common stock of the Company is publicly traded on
the termination date of the Change in Control, make a lump-sum cash payment
to the Participant equal to the fair market value of the applicable number
of Shares, less applicable withholdings, in satisfaction of all rights of
such Participant under the Plan.
Upon the conversion of the Performance Shares into Shares following the
Payment Date, the Company will, at the discretion of the Participant, lend
to those Participants that are still employees a sum (bearing interest at
the prime rate) sufficient to cover his or her estimated tax liability (a
"Tax Loan") or, alternatively, the Participant can elect to have the
Company withhold a sufficient number of Shares as necessary to cover such
estimated tax liability, and pay such withholding tax liability, in cash,
on behalf of the Participants. The holders of Shares issued under the Plan
also will have certain registration rights which will apply after an
initial public offering of Shares (the "Initial IPO"), for a period of five
years following the Payment Date. The Tax Loans, if any, would be due and
payable 30 days following the Initial IPO or such other time as designated
by the Human Resources Committee.
Mr. Beggs was granted his Performance Shares in connection with his
execution of the Employment Agreement. See "-- Compensation Pursuant to
Plans and Other Arrangements -- Executive Employment Agreements."
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.
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<PAGE> 46
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 AGREEMENT. Effective October 31, 1992, the Company
entered into an employment agreement and related reimbursement letter agreement
(collectively, the "Employment Agreement") with Mr. Beggs, pursuant to which
Mr. Beggs became employed as Chairman, President and Chief Executive Officer of
the Company for a period (the "Employment Period") commencing on August 24,
1992 and continuing through November 30, 1997 (the "Expiration Date").
Pursuant to the Employment Agreement, Mr. Beggs' base salary was $500,000 for
Fiscal 1993. Such salary may be increased but not decreased in an annual
review, and Mr. Beggs is entitled to receive an annual cash bonus in an amount
to be determined on the basis of certain corporate and individual performance
targets determined by the Board of Directors, or a committee thereof.
Pursuant to the Employment Agreement, Mr. Beggs was granted an aggregate of
200,000 Shares, 100,000 of which were issued as of October 31, 1992 (the
"Issued Shares"). If Mr. Beggs is terminated for cause or voluntarily
terminates his employment with the Company, other than for "good reason" (as
such terms are defined in the Employment Agreement), 55,000 or 35,000 of such
Issued Shares are forfeitable through November 30, 1994, and November 30, 1995,
respectively. In addition, the following number of additional Shares will be
issued if he remains employed by the Company on the dates indicated: November
30, 1995 -- 10,000 shares; November 30, 1996 --40,000 shares; and November 30,
1997 -- 50,000 shares. Mr. Beggs also entered into a Stockholder's Agreement
with the Company (the "Stockholder's Agreement") in connection with the
Employment Agreement, which provides that, prior to the Expiration Date, Mr.
Beggs may sell his Shares only after an Initial IPO or approval by the Board of
Directors and, after the Expiration Date, the Company shall have certain rights
of first refusal with respect to any proposed transfers of Mr. Beggs' Shares
(other than to certain permitted transferees). The Stockholder's Agreement
also provides that the holders of the Shares issued to Mr. Beggs under the
Employment Agreement shall have certain ""piggyback'' registration rights with
respect to such Shares. Mr. Beggs recognized taxable income in 1992 in
connection with the Issued Shares and borrowed $279,300 from the Company (the
"Stock Loan") to be used in payment of the required withholding taxes. The
Stock Loan bears interest at the applicable federal rate in effect on the date
of the loan, with all unpaid and outstanding principal and interest due and
payable on November 30, 1995. In addition, Mr. Beggs was granted an award of
1,000,000 Performance Shares, representing the right to receive up to 1,000,000
Shares pursuant to, and subject to the terms of, the Performance Share Plan.
See Note (a) to "--Long-Term Incentive Plan Awards in Last Fiscal Year."
Pursuant to the Employment Agreement, Mr. Beggs is entitled to health and
life insurance and certain other benefits and he also received relocation
expenses. The relocation expenses included closing costs on a new home, moving
expenses, temporary living expenses, and costs relating to the termination of a
contract to purchase another residence (collectively, "Relocation Expenses").
The Company increased its payments to Mr. Beggs for Relocation Expenses by the
resulting income tax liability created by such reimbursements. Mr. Beggs has
agreed to reimburse the Company for any Relocation Expenses received by him if
he voluntarily terminates his employment within two years after his relocation
is completed unless such termination is for good reason (as defined in the
Employment Agreement). The Company purchased Mr. Beggs' previous residence
from him for $712,500 and sold such residence for $690,000 in February 1993.
Mr. Beggs borrowed $157,673 from the Company (the "Equity Loan") upon the
purchase of a new home in the Cleveland area, reflecting the loss of equity in
his previous residence. Such Equity Loan is interest free to the extent
allowed under applicable tax laws and otherwise bears interest at the
applicable federal rate. In accordance with the terms of the Employment
Agreement, $20,000 and $57,673 of such Equity Loan was forgiven on November 30,
1993 and December 31, 1992, respectively. In addition, $4,070 in interest
related to such equity loan was also forgiven on November 30, 1993, and the
Company paid Mr. Beggs an additional $44,034 and $34,077, as additional
compensation for his tax liability as a result of such forgiveness of
indebtedness in each period, respectively. The balance of the Equity Loan has
four
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<PAGE> 47
equal annual payments of principal due on November 30, 1994 and each November
30 thereafter for three years. If Mr. Beggs remains employed by the Company
through the date when a payment is due, such indebtedness will be forgiven by
the Company and the Company will pay Mr. Beggs an amount necessary to offset
any tax liability to him as a result of such forgiveness of indebtedness. If
Mr. Beggs voluntarily terminates his employment with the Company, other than
for good reason, the remaining balance of the Equity Loan and any accrued
interest will become immediately due and payable.
If Mr. Beggs' employment is terminated prior to the Expiration Date other
than for cause, (as defined in the Employment Agreement), death or disability
or if Mr. Beggs terminates his employment for good reason, he will continue to
receive his base salary until the later of November 30, 1997 or one year, plus
the forgiveness of the Equity Loan, the payment of a portion of any
then-applicable bonus on a pro-rata basis and the issuance of the remainder of
the unissued Shares noted above. In addition, if Mr. Beggs' employment is
terminated prior to the Expiration Date under such circumstances or because of
his death or disability, then the Stockholder's Agreement grants to Mr. Beggs
or his representative the right to cause the Company to repurchase all of Mr.
Beggs' Shares at their "fair market value" (determined in accordance with the
Shareholders' Agreement). In the event that Mr. Beggs' employment is
terminated prior to the Expiration Date for "cause" or if he voluntarily
terminates his employment other than for "good reason," then the Company shall
have the option to repurchase Mr. Beggs' Shares for their "fair market value."
REMUNERATION OF DIRECTORS. Effective upon the Acquisition, the Company
began compensating its directors who are not employees with a retainer at the
rate of $30,000 on an annual basis, reduced by $1,000 for each Board meeting
not attended, plus $1,000 ($1,250 for Committee Chairmen, if any) for each
Committee meeting attended if such meeting is on a date other than a Board
meeting date, and incidental expenses in connection with traveling to or
attending such meetings. Directors Zell, Schulte, Friedland, Davis, Fenster,
Towe, Johnston and Hefner are eligible for such remuneration.
During 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan, providing for the one-time automatic grant of ten-year options to
acquire up to 10,000 Shares to all current and future directors who are not
employed by the Company, by Zell/Chilmark or by their respective affiliates
("Non-Employee Directors"). Options granted under the 1993 Non-Employee
Director Stock Option Plan vest immediately and are initially exercisable at a
price equal to the fair market value of the Shares on the date of grant. The
exercise price of options granted pursuant to this Plan increases on each
anniversary date of such grant by 4% compounded annually. Pursuant to this
Plan, during 1993, the Company granted options to acquire up to 10,000 Shares
to each of Messrs. Davis, Fenster, Towe and Johnston and Ms. Hefner at an
initial exercise price of $9.05 per Share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the end of fiscal year 1992, Messrs. Robert B. Calhoun, Jr. and John F.
Maypole, former directors of the Company, and Rolf H. Towe were the directors
who served as the members of the Human Resources Committee at that time (which
functions as the Compensation Committee of the Board of Directors). For
information regarding certain relationships or transactions that Messrs. Towe
and Calhoun, or entities with which they are affiliated, have with the Company,
see "Certain Relationships and Related Transactions - Compensation Committee
Interlocks and Insider Participation."
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<PAGE> 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to those
holders which, according to the records of the Company, beneficially own more
than 5% of the outstanding Shares as of February 20, 1994:
<TABLE>
<CAPTION>
PERCENT OF
NAME NUMBER OF SHARES CLASS (a)
---- ---------------- -----------
<S> <C> <C>
Zell/Chilmark Fund, L.P. 26,143,506(b) 88.7%
Two North Riverside Plaza
Suite 1500
Chicago, IL 60606
The Fulcrum III Limited Partnership 2,632,773(c) 8.3%(c)
600 Madison Avenue
New York, New York 10022
The Second Fulcrum III Limited Partnership 1,789,667(c) 5.8%(c)
600 Madison Avenue
New York, New York 10022
</TABLE>
(a) The percent of class calculation assumes that the stockholder for whom
the percent of class is being calculated has exercised all Restructure
Warrants (as described in Note 9 of the Notes to the Consolidated
Financial Statements) owned by such stockholder and that no other
stockholder has exercised any other Restructure Warrants.
Accordingly, the total of the percentages for all the stockholders
listed exceeds 100%.
(b) For further information with respect to Zell/Chilmark, see Item 10.
"Directors and Executive Officers" and Item 13. "Certain
Relationships and Related Transactions."
(c) Assumes the exercise of Restructure Warrants owned by such
Partnerships. See Note 9 of the Notes to the Consolidated Financial
Statements contained in Part II, Item 8 included herein.
The following table sets forth certain information with respect to the
beneficial ownership of the Shares by each of the directors and Named Executive
Officers of the Company and by all directors and executive officers of the
Company as a group, as of February 20, 1994:
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS(a)
- ------------------- ------------ ---------
<S> <C> <C>
Lyman M. Beggs (b) 100,000 **
Samuel Zell 26,143,506(c) 88.7%
David M. Schulte 26,143,506(c) 88.7%
Joel S. Friedland 26,143,506(c) 88.7%
George L. Davis 10,000 **
Steven R. Fenster 10,000 **
Rolf H. Towe 37,630 **
James W. Johnston 10,000 **
Christie A. Hefner 10,000 **
David J. McIlquham 8,199 **
Douglas E. Fellmy 15,373 **
All directors and executive officers as a group 26,354,957 89.4%
** Less than 1%
</TABLE>
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<PAGE> 49
(a) The percent of class calculation for each of the listed individuals
assumes that the stockholder for whom the percent of class is being
calculated has exercised all Restructure Warrants owned by such
stockholder and that no other stockholder has exercised any other
Restructure Warrants. Accordingly, the total of the percentages for
each of the listed individuals exceeds 100%. However, the total percent
of class for all executive officers and directors as a group assumes
that each of the executive officers and directors have exercised any
Restructure Warrants beneficially owned by them and that no other
stockholder has exercised any other Restructure Warrants.
(b) Pursuant to the terms of the Employment Agreement, Mr. Beggs may have
issued to him an aggregate of 200,000 Shares to the extent he remains in
the employ of the Company through November 30, 1997. See
"--Compensation Pursuant to Plans and Other Arrangements--Executive
Employment Agreements."
(c) All of such Shares are beneficially owned by Zell/Chilmark. As a result
of the relationship of each of Messrs. Friedland, Schulte and Zell to
Zell/Chilmark, each may be deemed beneficial owners of such Shares.
Each of Messrs. Friedland, Schulte and Zell disclaims beneficial
ownership of such Shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the end of fiscal year 1992, Messrs. Robert B. Calhoun, Jr. and John
F. Maypole, former directors of the Company, and Rolf H. Towe were the
directors who served as the members of the Human Resources Committee at that
time (which functions as the Compensation Committee of the Board of
Directors)(the "Committee"). Effective March 4, 1993, the Committee consisted
of Messrs. Zell, Towe, Fenster and Johnston.
FBSC, an affiliate of First Boston, owns, directly and through its
subsidiaries, all of the common stock of FBMB I, Inc., a Delaware corporation
and a general partner of MBLP. Messrs. Calhoun and Towe each own 50% of the
common stock of, and are executive officers of, CIG, Inc., the sole general
partner of The Clipper Group L.P. ("Clipper"), which had managed the
investments of MBLP in the Company, including the 12.4% Senior Subordinated
Notes (the "Subordinated Notes").
During the period between the Recapitalization and the Acquisition, MBLP
owned 27,630,000 Shares and all of the Subordinated Notes, and, following the
Acquisition, and until the Refinancing, owned a warrant to purchase up to
4,000,000 million shares of the stock acquired by Zell/Chilmark in the
Acquisition (the "MBLP Warrant") and the Subordinated Notes. Through the
repayment of the Subordinated Notes on May 7, 1993, MBLP received, or had
accrued, interest payments on the Subordinated Notes aggregating approximately
$23 million. In connection with the Acquisition, MBLP waived its right, as
holder of the Subordinated Notes, to require the Company to repurchase the
Subordinated Notes upon the change in control of the Company effected by the
Acquisition. In addition, MBLP consented to and caused the Company and the
Trustee under the Subordinated Note Indenture to enter into a supplemental
indenture which (i) granted the Company the option to redeem the Subordinated
Notes at any time at a redemption price of 100% of the principal amount, plus
accrued interest thereon to the redemption date, (ii) provided that the
Subordinated Notes would no longer be convertible into Preferred Stock of the
Company and (iii) modified certain ratios relating to the issuance of certain
debt obligations of the Company. In consideration of MBLP executing the
supplemental indenture, Zell/Chilmark agreed to pay, or to cause the Company to
pay, all out-of-pocket costs and expenses (including reasonable fees and
expenses) incurred by MBLP in connection with the sale or redemption of the
Subordinated Notes. As part of the Refinancing, the MBLP Warrant was cancelled
and all of the outstanding Subordinated Notes were repaid and redeemed.
48
<PAGE> 50
Zell/Chilmark assigned a portion of its rights and obligations under the
Stock Purchase Agreement to Mr. Towe, pursuant to which he acquired 27,630
Shares from MBLP at the same cash price per Share as paid by the other
Zell/Chilmark Purchasers. As part of the Acquisition and pursuant to the Stock
Purchase Agreement, Zell/Chilmark, MBLP and the Company entered into a
Registration Rights Agreement relating to the Acquired Shares, including the
27,630 Shares purchased by Mr. Towe. Pursuant to such Stock Purchase
Agreement, the holders of a majority of such Acquired Shares have the right to
demand, up to five times but no more than once every six months, registration
of their Acquired Shares under the Securities Act. In addition, under certain
conditions, the holders of the Acquired Shares have a right to include some or
all of their Acquired Shares in any subsequent registration statement filed by
the Company with respect to the sale of Shares. The Company has agreed to bear
all expenses associated with any registration statement relating to the
Acquired Shares other than any underwriting discounts or commissions, brokerage
commissions and fees.
In connection with the Acquisition, the Company and Zell/Chilmark
executed a release (the "Release") dated February 12, 1993 of MBLP and its
affiliates, subsidiaries, stockholders, partners, controlling persons and their
respective directors, officers, employees and certain other related persons
(collectively, the "Related Persons"), which would include, among others, First
Boston, FBSC, Robert B. Calhoun, Jr. (a director of the Company prior to the
Acquisition) and Rolf H. Towe (collectively, MBLP and MBLP's Related Persons
shall be referred to collectively as the "MBLP Released Parties") from any
obligation or liability in any way relating to (i) the acquisition, ownership
or operation of the Company or (ii) the negotiation, execution and closing of
the Stock Purchase Agreement and related documents (the "Stock Purchase
Documents"). The Release does not release the MBLP Released Parties from any
obligation or liability in connection with (i) covenants contained in the Stock
Purchase Documents required to be performed following the Acquisition, (ii)
breaches of certain representations made by MBLP in the Stock Purchase
Agreement, or (iii) actions taken by any MBLP Released Party after February 12,
1993. MBLP executed a similar release of Zell/Chilmark and the Company and
their respective Related Persons which was substantially equivalent in scope
and coverage (except that such release did not cover any obligations in respect
of the Subordinated Notes).
Pursuant to the Stock Purchase Agreement, Zell/Chilmark and the Company
have agreed that, so long as MBLP (or any of its affiliates) held any
Subordinated Notes, First Boston would have the exclusive right (for
competitive fees and terms) to act (i) as the Company's exclusive financial
advisor with respect to any acquisitions or divestitures in which the Company
engaged a financial advisor (other than Zell/Chilmark or its affiliates) and
(ii) as lead underwriter or placement agent with respect to any transactions in
which the Company employed the services of an underwriter or placement agent.
Pursuant to such agreed terms, First Boston served as the lead underwriter in
connection the issuance of the Notes as part of the Refinancing. Zell/Chilmark
and the Company agreed that for three years following the date of the
Refinancing, First Boston will have the right to act (for competitive fees and
terms) as a co-manager or co-placement agent in any transaction in which the
Company employs the services of an underwriter or placement agent.
In addition, the Stock Purchase Agreement provides that, until three
years following the Refinancing, MBLP and First Boston will not (i) directly or
indirectly participate, anywhere in the United States, in the business in which
the Company is currently engaged; (ii) induce or influence any employee of the
Company or Zell/Chilmark to terminate such employee's employment or become an
employee of MBLP or First Boston; or (iii) disclose or furnish to any other
person any of the Company's confidential business information, trade secrets or
manner of conducting its business. MBLP and First Boston further agreed not to
use certain trademarks owned by the Company and, for a period of time, not to
serve as underwriter or placement agent with respect to the sale of securities
by certain entities that use such trademarks.
49
<PAGE> 51
THE ACQUISITION. On January 27, 1993, Zell/Chilmark, MBLP and the Company
entered into the Stock Purchase Agreement pursuant to which MBLP agreed to sell
to Zell/Chilmark up to 27,630,000 Shares (representing a 93.6% equity interest
in the Company). In accordance with the terms of the Stock Purchase Agreement,
Zell/Chilmark acquired 88.7% of the outstanding common stock of the Company
(26,143,506 Shares) and assigned a portion of its rights and obligations under
the Stock Purchase Agreement to Bankers Trust New York Corporation ("BT") and
Rolf H. Towe, a director of the Company. In the Acquisition, BT acquired
1,458,864 Shares and Mr. Towe acquired 27,630 Shares. Zell/Chilmark has
informed the Company that the monies used to fund the cash purchase price that
it paid for its portion of the Acquired Shares were obtained from partnership
capital contributions. All of the Zell/Chilmark Purchasers paid the same $9.05
cash price per Share for their Acquired Shares. The Acquisition was completed
on February 12, 1993.
As part of the Acquisition, Zell/Chilmark granted to MBLP a warrant,
exercisable on or after November 30, 1993, to purchase up to 4,000,000 Acquired
Shares (the "MBLP Warrant") held by Zell/Chilmark, which Warrant expired upon
repayment of the Subordinated Notes.
As part of the Acquisition and pursuant to the Stock Purchase Agreement,
Zell/Chilmark and the Company entered into the Capital Contribution Agreement
whereby Zell/Chilmark agreed to purchase or cause to be purchased, and the
Company agreed to issue, Shares having an aggregate purchase price of $50.0
million (subject to adjustment), computed at a price of $9.05 per Share on or
before November 30, 1993. The Capital Contribution Agreement terminated with
the Refinancing. See "-- Compensation Committee Interlocks and Insider
Participation," above for certain additional information regarding the
Acquisition.
MANAGEMENT SUBSCRIPTION AND BENEFIT ARRANGEMENTS. See "Management --
Compensation Pursuant to Plans and Other Arrangements -- Severance
Arrangements" for a description of the Company's severance arrangements with
certain executive officers. See "Management -- Compensation Pursuant to Plans
and Other Arrangements -- Executive Employment Agreements" for a description of
the Company's employment arrangements with Mr. Beggs.
STOCK REPURCHASE AGREEMENTS. Certain officers, key employees of the Company and
a former employee of the Company (collectively, the "Management Investors") are
the beneficial owners of 90,426 Shares, not including 100,000 Shares held by
Mr. Beggs pursuant to his Employment Agreement (the "Management Investors'
Shares"). Such Shares were acquired in connection with the LBO pursuant to
subscription agreements between the Company and such individuals (the
"Subscription Agreements") or subsequently acquired as stock bonuses pursuant
to the same Subscription Agreements. The Subscription Agreements provide that
the Management Investors' Shares are subject to "put" options whereby the
Company may be required to redeem such Shares at fair market value in the event
of a Management Investor's death, disability, or termination of employment
under certain circumstances, at the option of the Management Investor or his
estate. Under certain circumstances, such Shares also are subject to "call"
options whereby the Company, at its option, may purchase such Shares from a
Management Investor at fair market value, so long as the Company has not
effected a public offering of its common stock, in the event of either (i) a
Management Investor's voluntary termination of employment on or before January
1, 1994, or (ii) a Management Investor's termination for cause (as defined).
Due to the possibility of repurchase, such Management Investors' Shares were
not considered to be part of the Company's stockholders' equity for periods
prior to Fiscal 1993. The Subscription Agreements also grant to the Management
Investors certain registration rights in the event that the Company (or, in
certain circumstances, other investors in the Company) registers any common
stock under the Securities Act.
50
<PAGE> 52
FULCRUM. In connection with the LBO, The Fulcrum III Limited Partnership and
The Second Fulcrum III Limited Partnership (together, the "Fulcrum
Partnerships"), purchased, after giving effect to the reverse stock split,
961,400 Shares pursuant to a stock subscription agreement with the Company (the
"Fulcrum Stock Subscription Agreement") which provides that, under certain
circumstances, the Company has a right of first refusal in the event of a
proposed sale of such Shares by the Fulcrum Partnerships. The Fulcrum
Subscription Agreement also grants to the Fulcrum Partnerships certain rights
to demand the registration of their Shares and certain registration rights in
the event that the Company (or, in certain circumstances, other investors in
the Company) registers any common stock under the Securities Act. In addition,
in connection with the Recapitalization, the Fulcrum Partnerships were issued
Restructure Warrants to acquire up to an aggregate of 3,461,040 Shares.
51
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Sealy Corporation
and its subsidiaries are included in Part II, Item 8:
Sealy Corporation
Report of Independent Auditors
Consolidated Balance Sheets at November 30, 1993 and 1992
Consolidated Statements of Operations for the ten months ended
November 30, 1993 (Successor), the two months ended January
31, 1993, year ended November 30, 1992, one month ended
November 30, 1991 (Pre-Successor), and the eleven months ended
October 31, 1991 (Predecessor).
Consolidated Statements of Stockholders' Equity for the ten
months ended November 30, 1993 (Successor), the two months
ended January 31, 1993, year ended November 30, 1992, one
month ended November 30, 1991 (Pre-Successor), and the eleven
months ended October 31, 1991 (Predecessor).
Consolidated Statements of Cash Flows for the ten months ended
November 30, 1993 (Successor), the two months ended January
31, 1993, year ended November 30, 1992, one month ended
November 30, 1991 (Pre-Successor), and the eleven months ended
October 31, 1991 (Predecessor).
Notes to consolidated financial statements
(a)(2) Financial Statement Schedules
Schedule VIII -- Valuation Accounts
Schedule X -- Supplementary Income Statement Information
(b) The Company filed no reports on Form 8-K during the fourth
quarter of its fiscal year ended November 30, 1993.
52
<PAGE> 54
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
3.1 Restated Certificate of Incorporation of Sealy Corporation dated as of November 5, 1991. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738)).
3.2 By-Laws of Sealy Corporation adopted as of November 4, 1991. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
4.1 Warrant Agreement, dated as of November 6, 1991 between Sealy Corporation and Sealy, Inc., Warrant Agent, including the
form of Series A and Series B Warrant. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.2 Form of Series A and Series B Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.1).
(Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991 (File No. 1-8738)).
4.3 Warrant Agreement, dated as of August 1, 1989 between GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged with
and into Sealy Corporation) and First Chicago Trust Company of New York, Warrant Agent, including the form of Merger
Warrant (Incorporated herein by reference to Exhibit 4.1 to Annual Report on Form 10-K of The Ohio Mattress Holding
Company and The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March 2, 1990).
4.4 Form of Merger Warrant (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.3) (Incorporated herein by
reference to Exhibit 4.2 to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy Holdings, Inc. (merged with and
into Sealy Corporation) for the year ended November 30, 1990, File No. 33-29246, filed February 28, 1991).
4.5 Second Amended and Restated Secured Credit Agreement, dated as of November 6, 1991, among Sealy Corporation, Certain
Banks, Continental Bank N.A. and Caisse Nationale de Credit Agricole, as Co-Agents and The First National Bank of
Chicago as Agent (without annexes). (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's
Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
4.6 Amended and Restated Secured Credit Agreement (Post-Merger Facilities), dated as of July 25, 1989, among GGvA
Acquisition Corp., The Ohio Mattress Holding Company (renamed Sealy Holdings, Inc. and merged with and into Sealy
Corporation), Certain Banks, Continental Bank N.A. and Caisse Nationale de Credit Agricole, as Co-Agents and The First
National Bank of Chicago as Agent (without annexes) (Incorporated herein by reference to Exhibit 4.14 to Amendment No. 1
to Registration Statement of The Ohio Mattress Holding Company on Form S-4, File No. 33-29246, filed August 9, 1989).
4.7 Supplemental Agreement, dated as of June 5, 1989, among GGvA Acquisition Corp., The Ohio Mattress Holding Company
(formerly GGvA Holding Corp., renamed Sealy Holdings, Inc. and merged with and into Sealy Corporation) and Certain Banks
(Incorporated herein by reference to Exhibit 4.13 to Annual Report on Form 10-K of The Ohio Mattress Holding Company and
The Ohio Mattress Company for the year ended November 30, 1989, File No. 33-29246, filed March 2, 1990).
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
4.8 Supplemental Agreement No. 2, dated as of December 8, 1989, among The Ohio Mattress Company (successor by merger to GGvA
Acquisition Corp.), The Ohio Mattress Holding Company (formerly GGvA Holding Corp., renamed Sealy Holdings, Inc. and
merged with and into Sealy Corporation) and Certain Banks (Incorporated herein by reference to Exhibit 4.14 to Annual
Report on Form 10-K of The Ohio Mattress Holding Company and the Ohio Mattress Company for the year ended November 30,
1989, File No. 33-29246, filed March 2, 1990).
4.9 Supplemental Agreement No. 3, dated as of March 1, 1990, among The Ohio Mattress Company (successor by merger to GGvA
Acquisition Corp. and renamed Sealy Corporation), The Ohio Mattress Holding Company (formerly GGvA Holding Corp.,
renamed Sealy Holdings, Inc. and merged with and into Sealy Corporation) and Certain Banks (Incorporated herein by
reference to Exhibit 4.6 to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy Holdings, Inc. (merged with and
into Sealy Corporation) for the year ended November 30, 1990, File No. 33-29246, filed February 28, 1991).
4.10 Supplemental Agreement No. 4, dated as of April 26, 1990, among Sealy Corporation (formerly The Ohio Mattress Company),
Sealy Holdings, Inc. (formerly The Ohio Mattress Holding Company and merged with and into Sealy Corporation) and Certain
Banks (Incorporated herein by reference to Exhibit 28.1 to Current Report on Form 8-K of Sealy Holdings, Inc. and Sealy
Corporation dated April 26, 1990, File No. 33-29246, filed May 3, 1990).
4.11 Supplemental Agreement No. 5, dated as of July 11, 1990, among Sealy Corporation (formerly The Ohio Mattress Company),
Sealy Holdings, Inc. (formerly The Ohio Mattress Holding Company) and Certain Banks (Incorporated herein by reference to
Exhibit 4.8 to Annual Report on Form 10-K of Sealy Holdings, Inc. and Sealy Holdings, Inc. (merged with and into Sealy
Corporation) for the year ended November 30, 1990, File No. 33-29246, filed February 28, 1991).
4.12 Supplemental Agreement No. 6, dated as of February 15, 1991 among Sealy Corporation (formerly The Ohio Mattress
Company), Sealy Holdings, Inc. (formerly The Ohio Mattress Holding Company and merged with and into Sealy Corporation)
and Certain Banks (Incorporated herein by reference to Exhibit 4.9 to Annual Report on Form 10-K of Sealy Holdings, Inc.
and Sealy Holdings, Inc. (merged with and into Sealy Corporation) for the year ended November 30, 1990, File
No. 33-29246, filed February 28, 1991).
4.14 Indenture dated as of November 1, 1991, among Sealy Corporation, certain subsidiaries of Sealy Corporation listed on the
signature pages thereto and Ameritrust Company National Association (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
4.15 Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy Holdings, Inc.
and merged with and into Sealy Corporation) and the purchasers listed therein (Incorporated herein by reference to
Exhibit 4.4 to Registration Statement of The Ohio Mattress Holding Company and The Ohio Mattress Company on Form S-4,
File No. 33-29246, filed June 13, 1989).
4.16 Management Stock Subscription Agreement, dated as of March 30, 1989 by and among GGvA Holding Corp. (renamed Sealy
Holdings, Inc. and merged with and into Sealy Corporation) and the management purchasers listed therein (Incorporated
herein by reference to Exhibit 4.5 to Registration Statement of The Ohio Mattress Holding Company on Form S-4, File
No. 3329246, filed June 13, 1989).
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
4.17 First Supplemental Indenture, dated as of February 12, 1993, by and among Sealy Corporation, certain subsidiaries of
Sealy Corporation listed on the signature pages thereto as Ameritrust Company National Association (n.k.a Society
National Bank). (Incorporated herein by reference to the appropriate exhibit to the Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
4.18 Amendment No. 2, dated as of February 8, 1993, to the Second Amended and Restated Secured Credit Agreement by and among
Sealy Corporation, certain Banks, Continental Bank, N.A. and Caisse Nationale de Credit Agricole, as Co-Agents, and The
First National Bank of Chicago, as Agent. (Incorporated herein by reference to the appropriate exhibit to the Form 10-K
for the fiscal year ended November 30, 1992 (File No. 1-8738)).
4.19 Indenture, dated as of May 7, 1993, by and between Sealy Corporation and Society National Bank relating to the Sealy
Corporation's 9 1/2% Senior Subordinated Notes. (Incorporated herein by reference to the appropriate exhibit to the
Form 8-K Current Report of Sealy Corporation dated May 7, 1993.)
4.20 Form of 9 1/2% Senior Subordinated Note Due 2003. (Incorporated herein by reference to the appropriate exhibit to the
Form 8-K Current Report of Sealy Corporation dated May 7, 1993.)
4.21 Secured Credit Agreement, dated as of May 7, 1993, by and among Sealy Corporation, Certain Banks and Other Financial
Institutions and Banque Paribas, Citicorp USA, Inc., Continental Bank N.A. and General Electric Capital Corporation, as
Managing Agents. (Incorporated herein by reference to the appropriate exhibit to the Form 8-K Current Report of Sealy
Corporation dated May 7, 1993.)
*10.1 Amended and Restated Sealy Profit-Sharing Plan dated January 1, 1988. (Incorporated herein by reference to the
appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
*10.2 Sealy Profit-Sharing Plan Amendment No. 1 dated December 1, 1988. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File
No. 1-8738)).
*10.3 Sealy Profit-Sharing Plan Amendments No. 2 and 3 and Trust Agreement dated June 1, 1990. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1991 (File No. 1-8738)).
*10.4 The Ohio Mattress Holding Company 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.16 to Annual
Report on Form 10-K of The Ohio Mattress Holding Company and The Ohio Mattress Company for the year ended November 30,
1989, File No. 33-29246, filed March 2, 1990).
*10.5 The Sealy Corporation 1991 Bonus Program. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File No. 1-8738)).
*10.6 1992 Bonus Program of Sealy Corporation. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.7 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
*10.8 Sealy Corporation Performance Share Plan. (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.9 Employment Agreement dated as of October 31, 1992, by and between Sealy Corporation and Lyman M. Beggs. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
*10.10 Letter Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
*10.11 Stockholder Agreement, dated as of October 31, 1992 by and between Sealy Corporation and Lyman M. Beggs. (Incorporated
herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1992 (File No. 1-8738)).
*10.12 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation and Sam F. Smith, Jr. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended
November 30, 1992 (File No. 1-8738)).
10.13 Sealy Corporation 1993 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to the appropriate
exhibit to the Form S-1 Registration Statement of Sealy Corporation (File No. 33-59134)).
21.1 List of subsidiaries of Sealy Corporation (Incorporated herein by reference to the appropriate exhibit to Sealy
Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File No. 1-8738)).
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc. with and into Sealy Corporation dated as of November 5,
1991. (Incorporated herein by reference to the appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for
the fiscal year ended November 30, 1991 (File No. 1-8738)).
99.2 Sealy Corporation Executive Severance Benefit Plan dated January 25, 1993. (Incorporated herein by reference to the
appropriate exhibit to Sealy Corporation's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File
No. 1-8738)).
</TABLE>
- --------------
* Management contract or compensatory plan or arrangement identified pursuant
to Item 14(a) of this Form 10-K.
56
<PAGE> 58
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
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
By: /s/ Lyman M. Beggs Chairman, President and Chief Executive Officer
--------------------------
Lyman M. Beggs (Principal Executive Officer)
</TABLE>
Date: February 28, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<S> <C> <C>
/s/ Lyman M. Beggs Chairman, President and February 28, 1994
- ----------------------------------
Lyman M. Beggs Chief Executive Officer
(Principal Executive and
Principal Financial Officer)
/s/ Frank Abbatomarco Corporate Controller February 28, 1994
- ----------------------------------
Frank Abbatomarco (Principal Accounting Officer)
/s/ Samuel Zell Director February 28, 1994
- --------------------------------------
Samuel Zell
/s/ David M. Schulte Director February 28, 1994
- ------------------------------------
David M. Schulte
/s/ Joel S. Friedland Director February 28, 1994
- -------------------------------------
Joel S. Friedland
/s/ George L. Davis Director February 28, 1994
- ------------------------------------
George L. Davis
/s/ Steven R. Fenster Director February 24, 1994
- ------------------------------------
Steven R. Fenster
/s/ Christie A. Hefner Director February 28, 1994
- -------------------------------------
Christie A. Hefner
/s/ James W. Johnston Director February 22, 1994
- ----------------------------------
James W. Johnston
/s/ Rolf H. Towe Director February 24, 1994
- --------------------------------------
Rolf H. Towe
</TABLE>
57
<PAGE> 59
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULES
TEN MONTHS ENDED NOVEMBER 30, 1993, TWO MONTHS ENDED JANUARY 31, 1993,
YEAR ENDED NOVEMBER 30, 1992,
ONE MONTH ENDED NOVEMBER 30, 1991, ELEVEN MONTHS ENDED OCTOBER 31, 1991
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
SEALY CORPORATION
58
<PAGE> 60
SEALY CORPORATION
SCHEDULE VIII -- VALUATION ACCOUNTS
<TABLE>
<CAPTION>
====================================================================================================================
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT BALANCE
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUCCESSOR
Ten months ended November 30, 1993:
Allowance for doubtful accounts
receivable $ 9,683 $1,354 $3,387 $7,650
PRE-SUCCESSOR
Two months ended January 31, 1993:
Allowance for doubtful accounts
receivable $ 9,438 265 20 9,683
Fiscal year ended November 30, 1992:
Allowance for doubtful accounts
receivable $13,091 3,662 7,315 9,438
One month ended November 30, 1991:
Allowance for doubtful accounts
receivable $12,909 257 75 13,091
PREDECESSOR
Eleven months ended October 31, 1991:
Allowance for doubtful accounts
receivable $ 7,375 7,241 1,707 12,909
</TABLE>
59
<PAGE> 61
SEALY CORPORATION
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
===================================================================================================================================
COL. A COL. B
- ------------------------------- ----------------------------------------------------------------------------------------
CHARGED TO COSTS AND EXPENSES
(IN THOUSANDS)
SUCCESSOR PRE-SUCCESSOR PREDECESSOR
--------- -------------------------------------------- --------------
Ten Months Two Months Year One Month Eleven Months
Ended Ended Ended Ended Ended
Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992 Nov. 30, 1991 Oct. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Advertising costs $67,319 $12,305 $65,871 $5,085 $48,946
</TABLE>
60
