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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended NOVEMBER 30, 1994 Commission file number 1-8738
--------------------- --------
SEALY CORPORATION
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET
SEATTLE, WASHINGTON 98101
- ------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)*
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
---------- -----------
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 28, 1995 was $11,334,150.
-----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding as of
February 28, 1995 was 29,436,580.
- ----------------- ----------
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 (referred to, with all its consolidated subsidiaries and
their predecessor entities, unless the context otherwise requires, as the
"Company") is the largest bedding manufacturer in North America. The Company
manufactures a diversified line of mattresses and boxsprings, wood bedroom
furniture and convertible sleep sofa products. The Company's conventional
bedding products (mattresses and boxsprings) include the SEALY(R), SEALY
POSTUREPEDIC(R), SEALY COMFORT SERIES(R), and the STEARNS & FOSTER(R) brands
and represented approximately 90% of the Company's total net sales for the year
ended November 30, 1994. The Company also manufactures Sealy and Stearns &
Foster brand convertible sleep sofas and markets its wood bedroom furniture
under the SAMUEL LAWRENCE(TM) brand name. The Company has a component parts
manufacturing subsidiary which produces approximately 97% of the Company's
mattress innerspring requirements and approximately 50% of the Company's
boxspring component parts requirements. Another subsidiary, Sealy, Inc.,
provides corporate and administrative services for the Company.
HISTORY OF THE COMPANY
The Company was founded in 1907 under the name Ohio Mattress Company. In
1924, the Company was granted its first license to produce Sealy-brand
products. Starting in 1956, the Company began acquiring Sealy-brand licenses
in other geographic areas, and by 1987, had acquired all of the capital stock
of its licensor, then named Sealy, Incorporated (which prior to that time was
independent of the Company), along with all but one of the remaining Sealy
conventional bedding domestic licensees. The Company expanded its bedding
manufacturing operations in 1983 by acquiring Stearns & Foster, a producer of
premium mattresses, boxsprings and convertible sleep sofas. In 1985, the
Company acquired Woodstuff Manufacturing, Inc., a manufacturer of bedroom
furniture, now doing business as Samuel Lawrence Furniture Company.
In 1989, the Company's common stock was acquired through a leveraged
buyout (the "LBO") which was financed in part by First Boston Securities
Corporation ("FBSC"), an affiliate of The First Boston Corporation ("First
Boston"). In April 1990, the Company exchanged certain outstanding debt issued
to FBSC for new debt at lower interest rates plus additional common stock (the
"Exchange"). In December 1990, FBSC transferred its equity and debt interest
in the Company to its affiliate MB L.P. I ("MBLP"). In November 1991, the
Company successfully completed a recapitalization (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%, consisting of
shares of Class A Common Stock, $.01 par value (the "Shares").
On February 12, 1993, Zell/Chilmark Fund, L.P., a Delaware limited
partnership ("Zell/Chilmark"), led an investor group which purchased MBLP's 94%
equity interest in the Company (the "Acquired Shares") for a cash purchase
price of $250 million (the "Acquisition").
On May 7, 1993, the Company completed a refinancing plan (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 then existing credit agreement and (iii) the execution of a new
secured credit agreement (the "1993 Credit Agreement") by and among the
Company, certain banks and other financial institutions and Banque Paribas,
Citicorp USA, Inc., Bank of America (formerly Continental Bank N.A.) and
General Electric Capital Corporation, as Managing Agents.
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On May 27, 1994, the Company entered into a restated secured credit
agreement (the "1994 Credit Agreement") with a majority of its then current
group of senior lenders (the "Senior Lenders"), which modified the terms of the
1993 Credit Agreement by reducing the amounts available under its existing term
loan facilities thereunder from an aggregate of $250 million to a single
facility of $150 million (the "Term Loan Facility") and by increasing the
amount available under its existing revolving credit facility thereunder from
$75 million to $125 million (the "Revolving Credit Facility").
CONVENTIONAL BEDDING
INDUSTRY AND COMPETITION. According to industry sales data compiled by
the International Sleep Products Association ("ISPA"), a bedding industry trade
group, approximately 800 manufacturers of mattresses and boxsprings make up the
domestic conventional bedding industry, generating wholesale revenues of
approximately $3.0 billion during calendar year 1994. The market for
conventional bedding represents more than 85% of the entire bedding market in
North America. According to ISPA, approximately 75% of conventional bedding is
sold to furniture stores and specialty sleep shops. Most of the remaining
conventional bedding is sold to department stores, national mass merchandisers,
membership clubs and contract customers such as motels, hotels and hospitals.
Management estimates that approximately two-thirds of conventional bedding is
sold for replacement purposes and that the average time between consumer
purchases of conventional mattresses is approximately 10 to 12 years. Factors
such as disposable income and sales of homes also have some effect on bedding
purchases.
Management believes that sales by companies with recognized national
brands account for more than half of total conventional bedding sales. The
Company supplies such nationally recognized brands as Sealy, Sealy
Posturepedic, Sealy Comfort Series 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 July 18, 1994 edition of
FURNITURE/TODAY(R), THE WEEKLY BUSINESS NEWSPAPER OF THE FURNITURE INDUSTRY, an
industry trade publication:
<TABLE>
<S> <C> <C>
Company/Licensing Group Market Share Major Brands
----------------------- ------------ ------------------------------------
Sealy Corporation 22.6% Sealy Posturepedic, Stearns & Foster
Simmons Company 14.3 Beautyrest, Maxipedic
Serta, Inc. 12.4 Perfect Sleeper, Sertapedic
Spring Air Company 9.3 Back Supporter, Spring-O-Pedic
All others 41.4
-----
100.0%
======
</TABLE>
PRODUCTS. The Company manufactures a variety of Sealy and Stearns &
Foster brand conventional bedding in various sizes ranging in retail price from
under $200 to $2,700. 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 Stearns &
Foster brand name.
CUSTOMERS. The Company serves over 7,800 retail outlets (approximately
3,400 customers), which include furniture stores, national mass merchandisers,
specialty sleep shops, department stores, contract customers and other stores.
The top five conventional bedding customers accounted for approximately
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20% of the Company's net sales for the year ended November 30, 1994. No single
customer accounted for over 10% of the Company's net sales.
SALES AND MARKETING. The Company's sales depend primarily on its ability
to 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's sales force is generally structured based on regions of the
country and districts 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(R) curriculum, which provides on-going training, with programs
focusing on advertising, merchandising and sales education, including
techniques to help analyze a retail dealer's business and profitability.
The Company's sales force emphasizes follow-up service to retail stores
and provides retailers with promotional and merchandising assistance as well as
extensive specialized professional training and instructional materials.
Training for retail sales personnel focuses on several programs, designed to
assist retailers in maximizing the effectiveness of their own sales personnel,
store operations, and advertising and promotional programs, thereby creating
loyalty to, and enhanced sales of, the Company's products.
SUPPLIERS. The Company purchases fabric, polyfiber, wire and foam from a
variety of vendors. The Company purchases approximately 50% of its Sealy
boxspring parts from a single third-party source, which has patents on various
interlocking wire configurations (the "Wire Patents"), and manufactures the
remainder of these parts as a licensee under the Wire Patents. The Company
purchases substantially all of its Stearns & Foster boxspring parts from the
same single third-party source. In order to reduce the risks of dependence
on external supply sources and to enhance profitability, the Company has
expanded its own internal component parts manufacturing capacity and, as a
licensee of the Wire Patents, internally produces the remainder of its Sealy
boxspring parts. See "-- Components Division." As is the case with all of the
Company's product lines, the Company does not consider itself dependent upon
any single outside vendor as a source of supply to its conventional bedding
business and believes that sufficient alternative sources of supply for the
same, similar or alternative components are available.
MANUFACTURING AND FACILITIES. The Company manufactures most conventional
bedding to order and has adopted "just-in-time" inventory techniques in its
manufacturing process to serve its dealers' needs more efficiently and to
minimize their inventory carrying costs. Most bedding orders are scheduled,
produced and shipped within 72 hours of receipt. This rapid delivery
capability allows the Company to minimize its inventory of finished products
and better satisfy customer demand for prompt shipments.
The Company operates 24 plants which manufacture conventional bedding in
18 states, three Canadian provinces and Puerto Rico. See Item 2,
"--Properties," herein. The Company also operates a research and development
center in Cleveland, Ohio with a staff which tests new materials and machinery,
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(R), which is
used in testing the support level of its mattresses.
COMPONENTS DIVISION
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 licensees. The Components Division currently provides approximately
97% of the Company's mattress innerspring unit requirements, including 100% of
Sealy Posturepedic and Stearns & Foster brand innersprings. The Components
Division also supplies approximately 50% of the Company's Sealy boxspring parts
requirements under a license of the Wire
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Patents. The Components Division owns and operates three manufacturing sites
located in Rensselaer, Indiana, Delano, Pennsylvania and Colorado Springs,
Colorado. See Item 2, "--Properties," herein.
Over the last five years, the Company has made substantial commitments to
ensure that the coil-making equipment at its components 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 over that time period from approximately 60%
to 97%.
In addition to reducing the risks associated with relying on single
sources of supply for certain essential raw materials, the Company believes the
vertical integration resulting from its component manufacturing capability
provides it with a significant competitive advantage. The Company believes
that it is the only conventional bedding manufacturer in the United States with
substantial innerspring and form wire component-making capacity.
WOOD FURNITURE
The Company manufactures and markets bedroom furniture through its Samuel
Lawrence subsidiary under the Samuel Lawrence label. During 1994, conventional
bedroom furniture sales accounted for substantially all of Samuel Lawrence's
total sales. Samuel Lawrence has approximately 500 customers and is one of
many manufacturers of wood bedroom furniture.
CONVERTIBLE SLEEP SOFAS
The Company manufactures primarily convertible sleep sofas, as well as
other upholstered furniture, under the Sealy and Stearns & Foster brand names
in one facility. The sleep sofa industry is fragmented, and management believes
that no single manufacturer comprises more than 10% of that market.
LICENSING
Sealy New Jersey and Kolcraft Enterprises, Inc. (a crib mattress
manufacturer) are the only domestic bedding manufacturers that are licensed to
use the Sealy trademark, subject to the terms of license agreements. Under the
license agreement between Sealy New Jersey and the Company, Sealy New Jersey
has the perpetual right to use certain Sealy trademarks in the manufacture and
sale of Sealy brand products in the United States.
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 13 separate license arrangements in
effect with independent licensees, including international bedding licensees
and upholstered furniture licensees. In the fiscal year ended November 30,
1994, 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.
WARRANTIES
Sealy and Stearns & Foster bedding offer limited warranties on their
manufactured products. The periods for "no-charge" warranty service vary among
products. Prior to fiscal year 1995, such warranties ranged from one year on
promotional bedding to 20 years on certain Posturepedic and Stearns & Foster
bedding. All currently manufactured Sealy Posturepedic models, Stearns &
Foster bedding and some other Sealy-brand products offer a 10-year non-prorated
limited warranty service period. Sealy and Stearns & Foster convertible sleep
sofas offer a 10-year limited warranty. 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, Comfort
Series, Dataman and University of Sleep trademarks, service marks and certain
related logos and design marks.
EMPLOYEES
As of December 31, 1994, the Company had 4,833 full-time employees.
Approximately half of the Company's employees at 30 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 the unions representing its
employees. The Company considers its overall relations with its work force to
be satisfactory.
SEASONALITY/OTHER
The Company's business is somewhat seasonal, with lower sales usually
experienced during the first quarter of each fiscal year and higher bedding
sales usually experienced in the last three quarters of each fiscal year. See
Note 12 to the Consolidated Financial Statements of the Company included in
Part II, Item 8 herein.
The Company has no material long-term contractual relationships with any
customer for its products. Since the level of production of products is
generally adjusted to meet customer order demand promptly, the Company has a
negligible backlog of orders. Finished goods inventories of bedding products
are physically stored at manufacturing locations until shipped (usually within
days of manufacture).
Sealy's Canadian facilities comprise all of the Company's foreign-owned
manufacturing operations. The Company does not derive a material portion of
its sales or revenues from its foreign-owned operations or from customers in
any other foreign country.
ITEM 2. PROPERTIES
The offices of the Company are located at 520 Pike Street, Seattle,
Washington 98101. Corporate 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 1995 to 2015, including renewal options.
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<TABLE>
The following table sets forth certain information regarding manufacturing
facilities operated by the Company at February 28, 1995:
<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)
South Gate 185,000 Owned(a)
Colorado Colorado Springs 70,000 Owned(a)
Denver 92,900 Owned(a)
Florida Orlando 97,600 Owned(a)
Georgia Conyers 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(d)
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 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
Delano 143,000 Owned(a)
Tennessee Memphis 225,000 Owned(a)
Texas Brenham 220,000 Owned
North Richland Hills 124,500 Owned(a)
CANADA
Alberta Edmonton 144,500 Owned(a)
Quebec Saint Narcisse 76,000 Owned(a)
Ontario Toronto 80,200 Leased
PUERTO RICO Carolina 58,600 Owned(a)
---------
4,154,400
=========
<FN>
(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 at certain intervals
during the lease term.
</TABLE>
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.
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REGULATORY MATTERS
The Company's principal wastes are wood, cardboard and other non-hazardous
materials derived from product component supplies and packaging. The Company
also periodically disposes 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 when 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 (now known as the Industrial Site Recovery Act), 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 (the "DEP"), 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 DEP 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 DEP approving the findings and substantially all
of the recommendations of the Company's consultant contained in a June 4, 1993
report submitted to DEP, but also requiring the Company to undertake additional
remedial and investigative activities, including the installation of shallow
groundwater monitoring wells off-site. In addition, by its November 15, 1993
letter, DEP postponed any required activity by the Company to delineate and/or
remediate contaminants in the fractured bedrock, which DEP previously had
requested the Company to undertake, and which DEP could attempt to impose in
the future. The Company and its consultant are unaware of any accepted
technology for successfully remediating the contamination either in the shallow
groundwater or the fractured bedrock due to the nature of certain of the
contaminants, their geological location in and porosity of the fractured
bedrock. Thus, the groundwater remediation plan proposes no remedial activity
regarding groundwater in the fractured bedrock. As of November 30, 1994, all
investigative activities and the majority of remedial activity then required by
DEP in its November 15, 1993 letter were completed by the Company.
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On October 3, 1994, the Company's consultant submitted to DEP a report
summarizing the results of soil investigative activities and recommending a
soil remediation plan for DEP approval. On December 23, 1994, the Company's
consultant submitted a report to DEP summarizing groundwater investigative
activities and proposing a groundwater (shallow acquifer only) remediation plan
for DEP approval. The Company has not yet received a formal response from DEP
with respect to these remediation plans.
The Company has established an accrual for further site investigation and
remediation. However, because of the nature of certain of the contaminants
found, their geographical location in the fractured bedrock, the aforementioned
lack of any accepted technology for successfully remediating the contamination
and additional factors, including the uncertainties surrounding the nature and
application of environmental regulations, the practical and technical
difficulties in obtaining complete delineation of the contamination, the level
of clean-up that may be required, if any, or the technology that could be
involved, and the possible involvement of other potentially responsible
parties, the Company cannot presently predict the ultimate cost to remediate
this facility, and there can be no assurance that the Company will not incur
material liability with respect to this matter. 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.
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 circumstances)
(the "Merger Warrants") are traded on 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 28, 1995, there are 61 holders of record of the Company's
Shares, 1,284 holders of record of the Merger Warrants and 47 holders of record
of the Restructure Warrants. See Note 9 to the Consolidated Financial
Statements, Part II, Item 8 herein.
No dividends have been paid on any class of common equity of the Company
during the last three fiscal years. The Company's 1994 Credit Agreement
provides that, after the occurrence of an initial public offering of at least
20% of capital stock, the Company may pay cash dividends, subject to certain
limitations, on such capital stock. The Company's 9 1/2% Senior Subordinated
Notes contain other provisions which provide certain limitations on the payment
of dividends.
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 year ended
November 30, 1994, 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, and for the year ended November 30, 1990.
During the period from December 1, 1989 through November 30, 1994, the
Company's capital structure changed significantly, in large part as a result of
(i) the November 1991 Recapitalization and (ii) the February 1993 Acquisition.
Due to required purchase accounting adjustments relating to such transactions,
and the resultant changes in control, the consolidated financial and other data
for each period reflected in the following tables during this period are not
comparable to such data for the other such periods.
The selected consolidated financial and other data set forth in the
following tables have been derived from the Company's audited consolidated
financial statements. The report of KPMG Peat Marwick LLP, independent
auditors, covering the Company's Consolidated Financial Statements for the year
ended November 30, 1994, for the ten months ended November 30, 1993 (Successor
Periods), for the two months ended January 31, 1993, and the year ended
November 30, 1992 (Pre-Successor Periods), 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.
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<TABLE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<CAPTION>
Successor (a) Pre-Successor (a) Predecessor (a)
---------------------- ---------------------------------- ------------------------
Ten Two One Eleven Eleven
Year Months Months Year Month Months Year
Ended Ended Ended Ended Ended Ended Ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30, Oct. 31, Nov. 30,
1994 1993 1993 1992 1991 1991 1990
-------- -------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Net Sales $697.7 $579.7 $103.5 $654.2 $50.0 $575.9 $652.0
Costs and expenses 641.6 531.0 100.9 628.8 49.4 661.8 718.8
Income (loss) before income tax
and extraordinary item 56.1 48.7 2.6 25.4 0.6 (85.9) (66.8)
Extraordinary loss (b) -- 2.9 -- -- -- -- --
Net Income (loss) $29.2 $24.7 $1.0 $10.0 $(0.1) $(73.4) $(50.2)
===== ===== ==== ===== ====== ======= =======
OTHER DATA:
- -----------
Depreciation and amortization of
intangibles $23.6 $19.1 $4.3 $26.4 $2.3 $33.2 $36.6
Operating income (c) 89.5 79.9 9.3 68.1 3.6 27.8 60.8
EBITDA (d) 113.1 99.0 13.7 94.5 5.9 61.0 97.4
Capital Expenditures 12.7 7.2 7.8 11.6 0.5 2.7 7.0
Interest expense, net 33.4 31.2 6.7 42.7 3.0 113.7 127.6
Ratio of EBITDA to interest expense,
net/(earnings deficiency) 3.4x 3.2x 2.0x 2.2x 2.0x $(52.7) $(30.3)
Ratio of earnings to fixed charges/
(earnings deficiency) (e) 2.5x 2.4x 1.4x 1.6x 1.2x $(85.9) $(66.8)
</TABLE>
<TABLE>
<CAPTION>
Successor (a) Pre-Successor (a) Predecessor (a)
as of November 30, as of November 30, as of Nov. 30,
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
------------------
Total assets $810.6 $823.1 $780.3 $805.0 $1,048.3
Long-term obligations 329.5 384.5 404.0 467.6 763.8(f)
Total debt 349.9 406.2 443.5 495.6 796.0(f)
Stockholder's equity 322.2 284.3 179.2 166.5 84.7
<FN>
(a) The Company employed the purchase method of accounting for
the February, 1993 Acquisition, the April 1990 Exchange and the November
1991 Recapitalization. Accordingly, historical financial and other data
for the Successor, Pre-Successor and 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.
</TABLE>
10
<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 the Acquisition
in February 1993. As a result of the required purchase accounting adjustments,
the post-Acquisition financials for the year ended November 30, 1994 and 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 and the year ended November 30, 1992 (collectively, the "Pre-Successor
Financials"). 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.
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. 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,
------------------------------------------------
1994 1993 1992
-------------- --------------- ---------------
(dollars in millions)
<S> <C> <C> <C>
Statement of Operations Data:
----------------------------
Net sales $697.7 $683.2 $654.2
------ ------ ------
Costs and expenses:
Cost of goods sold 372.5 362.7 354.6
Selling, general and administrative 211.9 213.9 210.4
Performance share plan 9.7 3.1 5.4
Amortization of intangibles 14.1 14.3 15.7
Interest expense, net 33.4 37.9 42.7
------ ------ ------
641.6 631.9 628.8
------ ------ ------
Income before income tax and
extraordinary item 56.1 51.3 25.4
Income tax 26.9 22.7 15.4
------ ------ ------
Income before extraordinary item 29.2 28.6 10.0
Extraordinary loss -- 2.9 --
------ ------ ------
Net income $ 29.2 $ 25.7 $ 10.0
====== ====== ======
</TABLE>
YEAR ENDED NOVEMBER 30, 1994 COMPARED WITH YEAR ENDED NOVEMBER 30, 1993
Net sales for the year ended November 30, 1994 were $697.7 million, an
increase of 2.1%. The Company's sales increase was due primarily to a 7.0% (or
$41.4 million) increase in conventional bedding average unit selling price
primarily attributable to a shift in sales to higher priced Posturepedic
products, partially offset by a 4.3% (or $26.4 million) overall decline in unit
shipments. Decreased shipments of low end promotional and private label bedding
lines accounted for most of the decrease in unit shipments. The decrease in
shipments of private label bedding units resulted primarily from the Company's
cessation of production of private label bedding for Sears, Roebuck & Co.
("Sears") during the third quarter of fiscal year
11
<PAGE> 14
1994. Sales of private label bedding to Sears accounted for approximately 2.5%
of the Company's net sales during fiscal year 1994 and approximately 5.5% of
its net sales during fiscal year 1993. Private label bedding has historically
accounted for a significant percentage of the Company's net sales. The
Company's marketing emphasis, however, has shifted to increasing brand
preference, and therefore, Sealy has de-emphasized private label products and
anticipates that these products will account for a lower percentage of its net
sales during future periods. As a result of increasing market acceptance of
the Company's Posturepedic line and increasing sales of higher-margin branded
products to other retailers, the Company does not believe that Sears' decision
will have a material adverse effect on the Company's net sales or profitability
during future periods.
Sales of products other than conventional bedding represented approximately
10% of net sales during fiscal year 1994. Increased sales of wood bedroom
furniture products were offset by the loss of sales resulting from the
Company's decision in fiscal year 1993 to discontinue the manufacture and sale
of waterbed products.
As a percentage of net sales, cost of goods sold increased to 53.4% from
53.1% in fiscal year 1993. This increase during fiscal year 1994 was primarily
attributable to the transitional inefficiencies resulting from plant shutdowns
and the related transfer of business to ongoing facilities, one-time
inefficiencies resulting from the startup of second shift operations at various
bedding locations, higher direct labor costs associated with the introduction
of the new Stearns & Foster bedding line, and a fourth quarter overall increase
in cost of materials. The Company anticipates that the increase in material
costs will continue to adversely affect cost of goods sold until after the
introduction of the Company's new Sealy product lines in the second quarter of
fiscal year 1995.
Selling, general and administrative expenses for fiscal year 1994 decreased
0.9 percentage point. In fiscal year 1994, the Company continued its emphasis
on increasing the brand preference of its products through increased marketing
spending, which increased to approximately $108.4 million from $104.8 million
in the prior fiscal year. Reflecting development of its marketing emphasis on
brand preference, during recent periods the Company has spent an increasing
percentage of its marketing budget on national advertising while continuing to
make significant expenditures on cooperative advertising. The Company expects
to continue emphasizing national advertising, and intends to increase its
overall marketing expenditures during fiscal year 1995. The fiscal year 1994
increase in marketing spending was offset, in part, by a decline of $2.9
million in sales employment costs resulting from a consolidation of the Sealy
and Stearns & Foster sales forces. In addition, plant consolidation
expenditures included in selling, general and administration expenses, of $0.8
million in fiscal year 1994 versus $4.1 million in the prior year, further
offset the additional expenditures for marketing spending.
The Company's Performance Share Plan (the "Plan") effective in 1992
provides for the issuance to key employees of the Company and of performance
share units, 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 targets over the
five-year period ending November 30, 1996 (the "Measurement Period"). To the
extent that the fair value of the Shares (as determined in accordance with the
provisions of the Plan) 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 are
adjusted to give cumulative effect to the Plan expense recorded in prior
reporting periods.
During fiscal year 1994 and fiscal year 1993, the Company incurred non-cash
charges for Plan expense of $9.7 million and $3.1 million, respectively.
Approximately $5.4 million of the non-cash charges incurred during fiscal year
1994 represent adjustments to give cumulative effect to Plan expense recorded
during prior periods. So long as the Plan is in effect, the Company is expected
to incur additional non-cash charges in the next two years for Plan expense.
See Note 11 of Notes to Consolidated Financial Statements.
12
<PAGE> 15
Interest expense, net for fiscal year 1994 decreased $4.5 million primarily
due to a net reduction of approximately $56 million in total indebtedness and a
reduction in interest rates as a result of refinancings in May 1993 and May
1994.
The Company's effective income tax rates for fiscal year 1994 differ from
the Federal statutory rate because of the application of purchase accounting,
certain foreign tax rate differentials, and state and local taxes. The
Company's effective income tax rate for fiscal year 1994 was approximately
48.0% compared to approximately 44.3% for fiscal year 1993. The higher
effective rate for fiscal year 1994 primarily reflects the impact of permanent
differences relating to the February 1993 acquisition and statutory rate
changes in 1993. See Note 7 of Notes to Consolidated Financial Statements.
For the reasons set forth above, net income for fiscal year 1994 improved
$3.5 million to $29.2 million.
YEAR ENDED NOVEMBER 30, 1993 COMPARED WITH YEAR ENDED NOVEMBER 30, 1992
Net sales for the year ended November 30, 1993 were $683.2 million, an
increase of 4.4%. The Company's sales increased primarily due to a 6.3% (or
$36.4 million) increase in conventional bedding average unit selling price due
to significant unit growth in new higher end Posturepedic products, partially
offset by a 1.9% (or $11.3 million) overall decline in unit shipments. Sales
of products other than conventional bedding products remained approximately 10%
of total net sales.
Total net sales to Sears, the Company's largest customer, increased 1.7%,
or $1.5 million, in fiscal year 1993. In addition to Sealy brand bedding, the
Company manufactured private label bedding for Sears which accounted for 5.5%
of the Company's total net sales on an annual basis. During the third quarter
of 1994, the Company ceased substantially all of its manufacturing of Sears'
private label bedding.
Cost of goods sold as a percentage of net sales for fiscal year 1993
decreased 1.1 percentage points to 53.1%. This improvement in costs as a
percentage of net sales was 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 also
decreased as a percentage of net sales due to plant consolidations and the
implementation of more efficient operational processes.
Selling, general and administrative expenses for fiscal year 1993 increased
by approximately $3.5 million. In fiscal year 1993, the Company's marketing
emphasis focused on increasing the brand preference of its products through
increased marketing spending, which increased to approximately $104.8 million
from $92.5 million in the prior fiscal year. In addition, charges for plant
consolidation expenditures ($4.1 million), were offset by lower incentive bonus
($3.3 million), consulting ($2.2 million), executive severance ($5.0 million),
management stock awards ($2.1 million), and bad debt ($1.5 million) expenses.
Plant consolidation expenditures were incurred to reduce the geographical
overlap of the Company's manufacturing operations.
Interest expense, net for fiscal year 1993 decreased $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.
The Company's effective income tax rates for fiscal year 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
of Notes to Consolidated Financial Statements.
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.
13
<PAGE> 16
For the reasons set forth above, net income for fiscal year 1993 improved
$15.7 million to $25.7 million.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1994, the Company's principal source of funds consisted
of cash flow from operations. Its principal uses of funds consisted of
principal and interest payments on its secured indebtedness, capital
expenditures and interest payments on its outstanding 9 1/2% Senior
Subordinated Notes (the "Notes").
During May 1994, the Company entered into a restated secured credit
agreement (the "1994 Credit Agreement"). The 1994 Credit Agreement provided
the Company with a $150 million term loan facility (the "Term Loan Facility")
and a $125 million revolving credit facility (the "Revolving Credit Facility").
At November 30, 1994, $130 million was outstanding under the Term Loan
Facility. During fiscal year 1994, the Company made regularly scheduled
principal payments on the Term Loan Facility of $20 million, and is required to
make principal payments in the same amount during fiscal year 1995. The
Company's annual principal payment obligations on the Term Loan Facility
increase to $25 million during each of fiscal year 1996 and fiscal year 1997,
and to $30 million during each of fiscal years 1998 and 1999. At November 30,
1994, approximately $100 million was available for borrowing under the
Revolving Credit Facility. The 1994 Credit Agreement provides that amounts
outstanding under the Revolving Credit Facility may not exceed $75 million for
30 consecutive calendar days in the period beginning September 1 and ending
December 31 in each year. During fiscal year 1994, the maximum amount
outstanding under the Revolving Credit Facility, excluding letters of credit,
was $33 million. Amounts outstanding under the 1994 Credit Agreement are
secured by substantially all of the Company's assets, and bear interest at a
variable rate based on an applicable margin over the greater of a corporate
base rate or federal funds rate, or Eurodollar rate, at the Company's option.
The applicable margin fluctuates depending on the Company's performance, as
measured by certain financial ratios. The 1994 Credit Agreement requires that
interest rate protection be maintained on an aggregate notional amount equal to
at least 50% of the amount outstanding from time to time under the Term Loan
Facility from inception through at least May 7, 1996.
The Notes are unsecured, subordinated obligations of the Company. Interest
on the Notes is payable in semi-annual installments at the rate of 9.5% per
annum. The outstanding principal amount of the Notes is payable on May 1,
2003. 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"). However, at any time prior to May 1, 1996, the Company may
redeem up to $60 million in aggregate principal amount of the Notes with the
proceeds of one or more Public Equity Offerings (as defined in the Note
Indenture) at redemption prices specified in the Note Indenture.
The 1994 Credit Agreement and the Note Indenture contain certain negative
and affirmative covenants including, without limitation, requirements and
restrictions relating to capital expenditures, dividends, working capital, net
worth and other financial ratios. At November 30, 1994, the Company was in
compliance with the financial covenants contained in these agreements.
The Company made capital expenditures aggregating $12.7 million during
fiscal year 1994. Management expects to exceed the historical level of capital
expenditures in fiscal year 1995 with additional expenditures for the
automation of manufacturing processes and enhanced management information
systems. The Company intends to fund fiscal year 1995 capital expenditures
with cash generated by operations. Management believes that the annual capital
expenditure limitations contained in the 1994 Credit Agreement will not
significantly inhibit the Company's ability to meet its ongoing operating
needs. Based upon its results of operations during periods subsequent to the
execution of the 1994 Credit Agreement and its current financial condition,
management believes that cash flow from operations, together with amounts
available for borrowing under the Revolving Credit Facility, will provide
14
<PAGE> 17
the Company with the resources necessary to meet its anticipated capital
requirements for the next several years. The Company's net weighted average
borrowing cost was 8.2% for fiscal year 1994.
The Company issued a press release on February 28, 1995 announcing that the
Company intends to file a registration statement with the Securities and
Exchange Commission in connection with a proposed public offering of the
Company's Common Stock. Although the size of the proposed offering has not
been determined and there can be no assurances that the offering will be made,
the Company expects the offering will generate approximately $70 million in net
proceeds to the Company and up to an additional $70 million in net proceeds to
selling stockholders. The offering will be made only by means of a prospectus
and is expected to occur sometime during May-July, 1995.
FOREIGN OPERATIONS AND EXPORT SALES
The Company has foreign operations in Canada which had net sales of
approximately $44 million, $42 million and $46 million for fiscal years ended
November 30, 1994, 1993 and 1992 respectively, and operating income of
approximately $8 million in each of such years. The Company's operations in
Canada had identifiable assets, excluding intercompany receivables and
payables, of approximately $30 million, $30 million and $20 million,
respectively. The Company owns no other foreign operations and there were no
sales from the Canadian operations to domestic operations in the three-year
period ended November 30, 1994.
15
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEALY CORPORATION
Consolidated Financial Statements
November 30, 1994 and 1993
(With Independent Auditors' Report Thereon)
16
<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, 1994 and 1993
(Successor), and the related consolidated statements of income, stockholders'
equity, and cash flows for the year ended November 30, 1994 and the ten months
ended November 30, 1993 (Successor periods); for the two months ended January
31, 1993, and for the year ended November 30, 1992 (Pre-Successor periods). In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule for the Successor periods and the
Pre-Successor periods as listed in Item 14(a)(2) of Form 10-K of Sealy
Corporation for the year ended November 30, 1994. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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, 1994 and 1993, and the results of their
operations and their cash flows for the Successor periods and Pre-Successor
periods in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule for the Successor periods
and Pre-Successor periods, when considered in relation to the basic
consolidated financial statements taken as a whole, presents 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. As a result of the
acquisition, the consolidated financial statements of the Company for the
Successor periods and Pre-Successor periods are presented on a different cost
basis and therefore, are not comparable.
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 LLP
Cleveland, Ohio
January 24, 1995
17
<PAGE> 20
<TABLE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<CAPTION>
November 30,
---------------------------------------
1994 1993
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 21,309 $ 20,919
Accounts receivable, less allowance for
doubtful accounts (1994 - $7,774;
1993 - $7,650) 78,313 72,128
Inventories 42,623 41,745
Deferred income taxes 15,706 19,941
Prepaid expenses 2,764 3,320
-------- --------
160,715 158,053
Property, plant and equipment - at cost:
Land 14,225 14,505
Buildings and improvements 59,677 58,147
Machinery and equipment 83,486 74,681
-------- --------
157,388 147,333
Less accumulated depreciation 16,308 7,228
-------- --------
141,080 140,105
Other assets:
Goodwill - net of accumulated amortization
(1994 - $23,357; 1993 - $10,652) 484,842 497,547
Patents and other intangibles - net of accumulated
amortization (1994 - $2,483; 1993 - $1,128) 8,548 9,903
Debt issuance costs, net and other assets 15,464 17,499
-------- --------
508,854 524,949
-------- --------
$810,649 $823,107
======== ========
</TABLE>
18
<PAGE> 21
<TABLE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<CAPTION>
November 30,
--------------------------------------
1994 1993
---------------- ------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long-term obligations $ 20,361 $ 21,728
Accounts payable 28,113 28,603
Accrued expenses:
Customer incentives 15,682 13,739
Compensation 16,884 14,724
Insurance 7,094 6,562
Plant consolidation 2,488 7,341
Other 17,566 22,597
-------- --------
108,188 115,294
Long-term obligations 329,528 384,451
Other non-current liabilities 29,605 17,160
Deferred income taxes 21,095 21,857
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 (1994 - 29,434; 1993 - 29,457) 294 295
Class B common stock, $.01 par value;
Authorized, 500 shares, Issued, none -- --
Additional paid-in capital 269,229 260,581
Retained earnings 53,917 24,725
Foreign currency translation adjustment (1,207) (1,256)
--------- ---------
322,233 284,345
-------- --------
$810,649 $823,107
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
(This page intentionally left blank)
20
<PAGE> 23
<TABLE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
----------------------------------- ------------------------------------
Year Ten Months Two Months Year
Ended Ended Ended Ended
Nov. 30, 1994 Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net sales $697,664 $579,704 $103,492 $654,249
-------- -------- -------- --------
Cost and expenses:
Cost of goods sold 372,466 305,613 57,110 354,641
Selling, general and administrative
(including provisions for bad debts
of $1,625, $1,354, $265, and
$3,662, respectively) 211,913 180,178 33,692 210,331
Performance share plan 9,681 2,204 905 5,430
Amortization of intangibles 14,060 11,780 2,473 15,707
Interest expense, net 33,454 31,218 6,675 42,709
-------- -------- -------- --------
641,574 530,993 100,855 628,818
-------- -------- -------- --------
Income before income taxes
and extraordinary item 56,090 48,711 2,637 25,431
Income taxes 26,898 21,067 1,660 15,447
-------- -------- -------- --------
Income before extraordinary item 29,192 27,644 977 9,984
Extraordinary loss from early
extinguishment of debt (net of
income taxes of $1,504) -- 2,919 -- --
-------- -------- -------- --------
Net income $29,192 $24,725 $ 977 $ 9,984
======== ======== ======== ========
Earnings per common share:
Income before extraordinary item $ .95 $ .91 $ .03 $ .34
Extraordinary loss -- ( .10) -- --
-------- -------- -------- --------
Net income $ .95 $ .81 $ .03 $ .34
======== ======== ======== ========
Weighted average number of common
shares and equivalents outstanding
during period 30,878 30,496 30,062 29,672
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
<TABLE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
Foreign
Additional Retained Currency
Common Stock Paid-in Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
-------- --------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PRE-SUCCESSOR
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
Net income -- -- -- 29,192 -- 29,192
Performance share plan -- -- 9,681 -- -- 9,681
Valuation adjustment on
common stock and warrants
subject to repurchase -- -- (1,065) -- -- (1,065)
Repurchase of management
stock, net of stock options
exercised (23) (1) 32 -- -- 31
Foreign currency translation -- -- -- -- 49 49
------ ---- -------- -------- ------- --------
November 30, 1994 29,434 $294 $269,229 $53,917 $(1,207) $322,233
====== ==== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
<TABLE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
----------------------------------- ----------------------------------
Year Ten Months Two Months Year
Ended Ended Ended Ended
Nov. 30, 1994 Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 29,192 $ 24,725 $ 977 $ 9,984
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 9,512 7,275 1,869 10,679
Non-cash interest expense -- 4,157 2,664 15,092
Non-cash stock incentive expense 9,681 2,204 905 7,512
Deferred income taxes 3,473 17,000 321 10,644
Extraordinary loss -- 2,919 -- --
Amortization of:
Intangibles 14,060 11,780 2,473 15,707
Debt issuance cost 3,248 2,394 202 1,303
Other, net (305) 3,410 224 (1,809)
Changes in:
Accounts receivable (6,185) 3,131 (1,024) 2,225
Inventories (878) (2,156) (1,425) 4,492
Prepaid expenses 556 (743) (164) 1,139
Accounts payable/accrued expenses/
other non-current liabilities 6,030 6,559 (8,299) 1,623
-------- -------- -------- -------
Net cash provided by (used in)
operating activities 68,384 82,655 (1,277) 78,591
-------- -------- -------- -------
Investing activities, purchase of:
Property, plant and equipment, net (10,487) (8,421) (3,082) (8,363)
--------- --------- -------- -------
Net cash used in investing
activities (10,487) (8,421) (3,082) (8,363)
--------- --------- -------- -------
Financing activities:
Proceeds from 1993 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 (56,290) (63,468) 2,667 (67,167)
Debt issuance costs (858) (17,557) -- --
Management investor redemptions (359) (27) -- (627)
Refinancing/acquisition-related expenses -- -- -- (3,295)
-------- -------- -------- -------
Net cash (used in) provided by
financing activities (57,507) (64,372) 2,667 (71,089)
--------- --------- -------- -------
Change in cash and equivalents 390 9,862 (1,692) (861)
Cash and equivalents:
Beginning of period 20,919 11,057 12,749 13,610
-------- -------- -------- -------
End of period $ 21,309 $ 20,919 $11,057 $12,749
======== ======== ======== =======
Supplemental disclosures:
Taxes paid, net $ 9,215 $ 3,549 $ 895 $ 5,067
Interest paid, net $ 31,198 $ 26,295 $ 1,037 $27,756
</TABLE>
See accompanying notes to consolidated financial statements.
23
<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 (referred to, with all of its consolidated subsidiaries
and their predecessor entities, unless the context otherwise requires, as 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 receivables are from retail
businesses. Sales to Sears, Roebuck & Co., the Company's largest customer,
were approximately 8%, 12%, 17% and 13% of total net sales for the year ended
November 30, 1994, the ten months ended November 30, 1993, the two months ended
January 31, 1993 and the year ended November 30, 1992 (the "Reporting
Periods"). The Company recognizes revenue upon shipment of goods to customers.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
(c) Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a 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 a
forty year period. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected undiscounted future 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 Per Common Share
-----------------------------
Net earnings per common share ("EPS") is based upon the 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.
24
<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 year 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 1993 and 1992
have been reclassified to conform to the 1994 presentation.
(2) BASIS OF ACCOUNTING
On February 12, 1993, Zell/Chilmark Fund, L.P. ("Zell/Chilmark") led an
investor group which purchased the 93.6% equity interest in the Company held by
MB L.P. I, an affiliate of The First Boston Corporation, 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, 1994 and 1993 and for
the year and 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>
25
<PAGE> 28
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
The excess New Basis has been allocated as follows:
Increase (decrease) in net assets:
<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.
As a result of the required purchase accounting adjustments, the
post-Acquisition financials as of and for the year ended November 30, 1994 and
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, and the year ended November 30, 1992 (the
"Pre-Successor Financials").
(3) INVENTORIES
<TABLE>
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,
1994 and 1993 were as follows:
<CAPTION>
1994 1993
-------------- ------------
(in thousands)
<S> <C> <C>
Raw materials $33,471 $31,573
Work in process 3,203 3,782
Finished goods 5,949 6,390
-------- --------
$ 42,623 $ 41,745
======== ========
</TABLE>
26
<PAGE> 29
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) LONG-TERM OBLIGATIONS
<TABLE>
Long-term debt as of November 30, 1994 and 1993 consisted of the following:
<CAPTION>
1994 1993
-------------- ----------------
(in thousands)
<S> <C> <C>
1993 Credit Agreement:
Revolving Credit Facility $ -- $ 3,000
Term Loan Facility -- 196,774
1994 Credit Agreement
Revolving Credit Facility 14,000 --
Term Loan Facility 130,000 --
9 1/2% Senior Subordinated Notes 200,000 200,000
Other 5,889 6,405
-------- --------
349,889 406,179
Less current portion 20,361 21,728
-------- --------
$329,528 $384,451
======== ========
</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 then existing credit agreement and (iii) the execution of a new
secured credit agreement (the "1993 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.
On May 27, 1994, the Company entered into a restated secured credit
agreement (the "1994 Credit Agreement") with a majority of its then current
group of senior lenders (the "Senior Lenders"), which modified the terms of the
1993 Credit Agreement by reducing the amounts under its then existing term loan
facilities thereunder from an aggregate of $250 million to a single facility in
the initial amount of $150 million (the "Term Loan Facility") and by increasing
the amount available under its existing revolving credit facility thereunder
from $75 million to $125 million (the "Revolving Credit Facility"). The
Revolving Credit Facility 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. The Revolving Credit Facility terminates and is
due and payable on November 30, 1999.
Under the terms of the 1994 Credit Agreement, the Company is required to
make certain mandatory principal prepayments of the Term Loan Facility in the
event of the sale of any of the Company's principal operating subsidiaries,
certain sales of assets, 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, 1994, the
Company made scheduled principal payments aggregating $20 million. The Term
Loan Facility amortizes according to the following schedule:
27
<PAGE> 30
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Term Annual Amounts to be Amortized
---- ------------------------------
(in thousands)
<S> <C>
1995 $ 20,000
1996 25,000
1997 25,000
1998 30,000
1999 30,000
--------
$130,000
========
</TABLE>
In addition, the outstanding principal amount of the Revolving Credit
Facility may not exceed $75 million for thirty consecutive calendar days in the
period beginning September 1 and ending December 31 during each year. The
Company has met this requirement for calendar year 1994. The Company is also
subject to certain affirmative and negative covenants under both the 1994
Credit Agreement and the 1993 indenture under which the Notes were issued,
including, without limitation, requirements and restrictions with respect to
capital expenditures, dividends, working capital, net worth and other financial
ratios.
At November 30, 1994, the Company had approximately $100 million available
under the Revolving Credit Facility, with $14 million outstanding and Letters
of Credit issued totaling approximately $11 million. Under the terms of the
1994 Credit Agreement, the Company is initially obligated to pay a commitment
fee rate of 0.375% per annum on the unused portion of the Revolving Credit
Facility. The fee, which is payable quarterly in arrears, is reduced or
increased depending on the Company's performance, as measured by certain
financial ratios.
The May 27, 1994 refinancing lowered the Company's contractual interest rates
and debt service obligations. Two separate interest rate options exist under
the 1994 Credit Agreement and are available to the Company at its option as
follows:
(a) A Floating Rate which is the greater of
(i) A Corporate Base Rate plus an applicable margin or
(ii) A Federal Funds Rate plus 0.25% and an applicable margin; or
(b) A Eurodollar Rate plus an applicable margin.
The applicable margin is initially zero for the Floating Rate option and
1.25% for the Eurodollar Rate option. The applicable margin is reduced or
increased depending on certain financial ratios. At November 30, 1994 the
weighted average interest rate on the Revolving Credit Facility was 7.2% and on
the Term Loan Facility was 6.4%.
In addition, certain other provisions of the 1994 Credit Agreement were
amended to provide more flexibility to the Company relating to, among other
things, investments, capital expenditures and incurrence of debt.
The 1994 Credit Agreement requires that interest rate protection be
maintained on an aggregate notional amount equal to at least 50% of the amount
outstanding from time to time under the Term Loan Facility from inception
through at least May 7, 1996.
All obligations of the Company under the 1994 Credit Agreement are jointly
and severally guaranteed by each direct and indirect domestic subsidiary of the
Company and secured by first priority
28
<PAGE> 31
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The 9 1/2% Senior Subordinated Notes mature on May 1, 2003 with interest
payable semiannually in cash on May 1 and November 1 of each year. The Notes
may be redeemed at the option of the Company on or after May 1, 1998, under the
conditions and at the redemption prices as specified in the note indenture,
dated as of May 7, 1993, under which the 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 fair value of the Notes
was $187 million at November 30, 1994 based on the quoted market price.
(5) LEASE COMMITMENTS
<TABLE>
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, 1994.
<CAPTION>
COMMITMENTS UNDER
---------------------------
SUBLEASE
OPERATING CAPITALIZED RENTAL
YEAR ENDED NOVEMBER 30, LEASES LEASES INCOME
----------------------- --------- -------- ------
(in thousands)
<S> <C> <C> <C>
1995 $6,570 $377 $153
1996 6,101 375 153
1997 4,952 373 153
1998 3,746 371 102
1999 1,888 349 -
Later years 4,106 781 -
------- ------ ----
$27,363 $2,626 $561
======= ====
Less amount representing interest 608
------
Present value of minimum lease payments
of capitalized leases $2,018
======
</TABLE>
At November 30, 1994, 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.
29
<PAGE> 32
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
Rental expense charged to operations is as follows:
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
------------------------------------ -----------------------------------
Year Ten Months Two Months Year
Ended Ended Ended Ended
Nov. 30, 1994 Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Minimum rentals $8,625 $7,580 $1,516 $ 9,035
Contingent rentals (based
upon delivery equipment
mileage) 1,361 775 155 1,114
------ ------ ------ -------
$9,986 $8,355 $1,671 $10,149
====== ====== ====== =======
</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.
(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 of the Company
(the "Shares") 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.
Prior to fiscal year 1994, the Company issued options under the 1989
Plan totalling 5,500 Shares (net of subsequent forfeitures) all of which are
exercisable on or after November 30, 1994. Any unexercised options terminate
on the tenth anniversary of the date of grant or earlier, in connection with
termination of employment. The exercise price for all 1989 Plan options as of
November 30, 1994 is $50.00 per Share. No 1989 Plan options have been
exercised since the date of grant.
During fiscal years 1992, 1993 and 1994, the Company granted
nonqualified options totalling 252,500 Shares (net of subsequent forfeitures)
under the 1992 Plan. The options granted in 1992 totalled 74,000 with an
exercise price of $7.52 per Share, the options granted in June, 1993 totalled
83,500 with an exercise price of $9.05 per Share, and the options granted in
June, 1994 totalled 95,000 and have an exercise price of $13.48 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 3,850 Shares were exercised
during 1994. At November 30, 1994, options for 121,000 Shares issued under the
1992 Plan are exercisable.
During fiscal year 1993, the Company adopted the 1993 Non-Employee
Director Stock Option Plan (the "1993 Plan"), which was subsequently amended on
April 6, 1994. The 1993 Plan provides for the one-time automatic grant of
ten-year options to acquire up to 10,000 Shares to all current and future
directors who are not employed by the Company, by Zell/Chilmark or by their
respective affiliates ("Non-Employee Directors"). Options granted under the
1993 Plan vest immediately and are initially exercisable at a price equal to
the fair market value of the Shares on the date of grant. For options granted
prior to March 1, 1994, the exercise price of options granted pursuant to this
Plan
30
<PAGE> 33
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
increased on the first anniversary date of such grant by 4% compounded
annually, which became the fixed exercise price for all such options. Options
issued thereafter, if any, will be exercisable over their term at the fair
market value on the date of grant. Pursuant to the 1993 Plan, the Company
granted options to acquire up to 50,000 Shares to Non-Employee Directors in
fiscal year 1993 at an initial exercise price of $9.05 per Share, which now
have a fixed exercise price of $9.41 per Share. During fiscal year 1994 no
options under the 1993 Plan were exercised.
31
<PAGE> 34
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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.
<TABLE>
The Company and its domestic subsidiaries file a consolidated U.S. Federal
income tax return. Income tax expense attributable to income from continuing
operations consists of:
<CAPTION>
SUCCESSOR PRE-SUCCESSOR
------------------------------------------ -----------------------------------------
Year Ten Months Two Months Year
Ended Ended Ended Ended
Nov. 30, 1994 Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992
----------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal $14,695 $ -- $ 674 $ --
State and local 3,287 589 28 766
Canada and
Commonwealth of
Puerto Rico 4,488 3,478 637 4,037
------- ------- ------ -------
22,470 4,067 1,339 4,803
Deferred 4,428 17,000 321 10,644
------- ------- ------ -------
Income tax expense $26,898 $21,067 $1,660 $15,447
======= ======= ====== =======
</TABLE>
Income before income taxes from Canadian operations amount to $8,720,
$7,255, $1,140 and $7,972 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
------------------------------------------- -----------------------------------------
Year Ten Months Two Months Year
Ended Ended Ended Ended
Nov. 30, 1994 Nov. 30, 1993 Jan. 31, 1993 Nov. 30, 1992
----------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Income tax expense
(benefit) computed at
statutory U.S. Federal
income tax rate 35.0% 35.0% 34.0% 34.0%
State and local income
taxes, net of Federal
tax benefit 4.6 4.3 2.0 7.3
Permanent differences
resulting from purchase
accounting 7.4 5.4 20.6 16.8
Foreign tax rate
differential 1.5 1.3 6.3 3.6
Other items, net (0.5) (2.8) -- (1.0)
----- ---- ---- ----
48.0% 43.2% 62.9% 60.7%
==== ==== ==== ====
</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
32
<PAGE> 35
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
<TABLE>
Deferred income taxes under Statement 96 were 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 are as
follows:
<CAPTION>
PRE-SUCCESSOR
--------------------------------------------
Two Months Year
Ended Ended
Jan. 31, 1993 Nov. 30, 1992
----------------- -----------------
<S> <C> <C>
Depreciation $224 $ 515
Interest swap rate payments 961 3,037
Write-down of idle manufacturing 104 2,546
facilities
Amortization of intangible assets 370 4,111
Inventory (12) 965
Salaries and fringe benefits (583) (227)
Bad debt expense (905) 2,310
Net operating losses utilized to eliminate
deferred tax liabilities -- (2,397)
Other 162 (216)
---- -------
Deferred income tax expense $321 $10,644
==== =======
</TABLE>
At November 30, 1994 and 1993, the total deferred tax assets were $32,600
and $44,464, respectively, total deferred tax liabilities were $37,989 and
$33,257, and the valuation allowance was $0 and $13,123. The significant
components of the deferred tax assets were accrued salaries and benefits of
$14,523 and $11,699 and net operating loss carryforwards of $6,475 and $19,579,
and the deferred tax liabilities relating to property, plant and equipment were
$27,098 and $26,439 and intangible assets of $10,126 and $7,154.
The future usage of net operating losses generated prior to November 6,
1991 will be substantially limited as to annual usage due to a recapitalization
that occurred on that date. The Company has net operating loss carryforwards
of approximately $16 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.
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 pension or 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 immaterial. The total profit sharing and pension
expense was $5.3 million, $4.0 million, $0.8 million, and $4.1 million for the
Reporting Periods, respectively.
33
<PAGE> 36
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) WARRANTS
Series A and Series B Warrants
------------------------------
Series A and Series B Warrants (collectively, "Restructure Warrants") were
issued under a Warrant Agreement dated as of November 6, 1991 between the
Company and its subsidiary, Sealy, Inc., as warrant agent. The Restructure
Warrants, when exercised, will entitle the Holder thereof to receive one Share
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, 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 the
Warrant Agreement.
Merger Warrants
---------------
Merger Warrants were issued under a Warrant Agreement (the "Agreement")
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 the Agreement.
The Merger Warrants also provided that within 90 days after August 9, 1994
(or sooner, under certain circumstances), the Company would offer to repurchase
for cash all outstanding Merger Warrants and shares issued under the Agreement
in a single transaction at a purchase price as defined in the Agreement,
provided certain conditions were met and the Company was permitted to do so by
its existing debt agreements. Because the Company's 1994 Credit Agreement does
not allow a repurchase offer, the Company cannot offer to purchase the Merger
Warrants.
The Company is required to offer to repurchase the Merger Warrants upon the
removal of any limitations to repurchase or upon the occurrence of certain
other events. Merger Warrants are, therefore, not considered to be a part of
the Company's stockholders' equity, but are included in other non-current
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.
(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.
34
<PAGE> 37
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) PERFORMANCE SHARE PLAN
Effective April 1, 1992, the Company adopted a Performance Share Plan (the
"Plan") for certain employees of the Company. Under the Plan, the Board of
Directors may approve the issuance of up to 3.0 million performance share units
each representing the right to receive up to one Share if the Company meets
specified cumulative operating cash flow targets over the five-year period
ended November 30, 1996. As of November 30, 1994, there are approximately 2.5
million performance share units outstanding under the Plan which represent the
right to receive in the future, subject to attaining the estimated cumulative
operating cash flow, Shares having an estimated fair value of $30.4 million.
The performance share units vest over the five years ending November 30, 1996
and, as of November 30, 1994, 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 year ended
November 30, 1994, the ten months ended November 30, 1993, the two months ended
January 31, 1993 and the year ended November 30, 1992, the Company recorded
$9.7 million, $2.2 million, $0.9 million and $5.4 million, respectively, of
non-cash compensation expense under the Plan. To the extent that the fair
value of the Shares or the number of performance share units outstanding
increases or decreases, or for any change in management's estimate of its
ability to achieve the cumulative operating cash flow targets, such non-cash
expense will also increase or decrease in future reporting periods.
<TABLE>
(12) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
<CAPTION>
Gross Net
Net Sales Profit Income EPS
----------- ------------ ---------- ------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
PRE-SUCCESSOR
- -------------
1993:
December 1, to January 31 $103,492 $ 46,382 $ 977 $ .03
======== ======== ======== =====
SUCCESSOR
- ---------
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
======== ======== ======== =====
1994:
First quarter $155,607 $ 73,274 $ 5,145 $ .17
Second quarter 176,751 82,550 8,612 .28
Third quarter 193,624 91,418 13,462 .44
Fourth quarter 171,682 77,956 1,973 .06
-------- -------- -------- -----
$697,664 $325,198 $ 29,192 $ .95
======== ======== ======== =====
</TABLE>
35
<PAGE> 38
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the second quarter of fiscal year 1993, the Company recorded an
extraordinary loss of $2.9 million, net of income taxes of $1.5 million ($.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 was completed during fiscal year 1994. During
the fourth quarter of fiscal year 1994, the Company recorded an additional
non-cash charge of $5.4 million related to the Plan to give cumulative effect
to changes in the fair market value of such Shares and management's estimate of
cumulative cash flow during the measurement period.
(13) CONTINGENCIES
In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), 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 (the "DEP"), 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 DEP 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 DEP approving the findings and substantially all
of the recommendations of the Company's consultant contained in a June 4, 1993
report submitted to DEP, but also requiring the Company to undertake additional
remedial and investigative activities, including the installation of shallow
groundwater monitoring wells off-site. In addition, by its November 15, 1993
letter, DEP postponed any required activity by the Company to delineate and/or
remediate contaminants in the fractured bedrock, which DEP previously had
requested the Company to undertake, and which DEP could attempt to impose in
the future. The Company and its consultant are unaware of any accepted
technology for successfully remediating the contamination either in the shallow
groundwater or the fractured bedrock due to the nature of certain of the
contaminants, their geological location in and porosity of the fractured
bedrock. Thus, the groundwater remediation plan proposes no remedial activity
regarding groundwater in the fractured bedrock. As of November 30, 1994, all
investigative activities and the majority of remedial activity then required by
DEP in its November 15, 1993 letter were completed by the Company.
On October 3, 1994, the Company's consultant submitted to DEP a report
summarizing the results of soil investigative activities and recommending a
soil remediation plan for DEP approval. On December 23, 1994, the Company's
consultant submitted a report to DEP summarizing groundwater investigative
activities and proposing a groundwater (shallow acquifer only) remediation plan
for DEP approval. The Company has not yet received a formal response from DEP
with respect to these remediation plans.
The Company has established an accrual for further site investigation and
remediation. However, because of the nature of certain of the contaminants
found, their geographical location in the fractured bedrock, the aforementioned
lack of any accepted technology for successfully remediating the contamination
and additional factors, including the uncertainties surrounding the nature and
application
36
<PAGE> 39
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
37
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following sets forth the name, age, principal occupation and
employment and business experience during the last five years of each of the
Company's directors:
Lyman M. Beggs
Mr. Beggs, age 56, since August 24, 1992 has been Chairman, President
and Chief Executive Officer of the Company. 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. Previously, Mr. Beggs was President of the $300
million Norelco Consumer Products Division of North America Philips
Corporation.
George L. Davis
Mr. Davis, age 60, since February 12, 1993 has been a director of the
Company. Mr. Davis is, and since October 1990 has been, President and Chief
Executive Officer of Scarborough Partners, Inc., consultants to the financial
services industry. Mr. Davis is, and since November 1993 has been, Chairman
and Chief Executive Officer of Banco de Venezuela, Inc. From December 1991 to
November 1992, Mr. Davis was also President of First American Bankshares Inc.
Previously, since 1987, Mr. Davis was Group Executive, North America, for
Citibank, N.A., a subsidiary of Citicorp.
Steven R. Fenster
Mr. Fenster, age 52, since February 12, 1993 has been a director of
the Company. Mr. Fenster is, and since 1991 has been, Visiting Professor of
Business Administration at The Harvard Business School. Previously, since
1987, Mr. Fenster was a Managing Director of Dillon, Read & Co. Inc., an
investment banking firm. Mr. Fenster is also a limited partner of The
Blackstone Group and a director of American Management Systems, Inc. and
Bloomberg L.P.
Joel S. Friedland
Mr. Friedland, age 40, since February 12, 1993 has been a director of
the Company. Mr. Friedland is, and since mid-1990 has been, an affiliate of
the general partner of Zell/Chilmark Fund, L.P. Since 1984, Mr. Friedland has
been associated with, and since 1987 has been a partner of, Chilmark Partners,
L.P.
Christie A. Hefner
Ms. Hefner, age 42, since June 23, 1993 has been a director of the
Company. Ms. Hefner is, and since November 1988 has been, Chairman and Chief
Executive Officer of Playboy Enterprises, Inc.
James W. Johnston
Mr. Johnston, age 48, since March 4, 1993 has been a director of the
Company. 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. From 1984 until joining R.J. Reynolds, Mr.
Johnston
38
<PAGE> 41
was Division Executive, Northeast Division, of Citibank, N.A., a subsidiary of
Citicorp, where he was responsible for Citibank's New York Banking Division,
its banking activities in upstate New York, Maine and Mid-Atlantic regions, and
its national student loan business. Mr. Johnston is also a director of The
Wachovia Corporation, RJR Nabisco, Inc. and RJR Nabisco Holdings Corp.
David M. Schulte
Mr. Schulte, age 48, is, and since February 12, 1993 has been, a
director of the Company. Mr. Schulte is, and since mid-1990 has been, one of
two individuals (the other being Mr. Zell) who act as general partners of the
general partner of Zell/Chilmark Fund, L.P., a limited partnership with capital
commitments in excess of $1 billion formed to invest in and provide capital and
management support to companies that are engaged in or are the appropriate
subject of significant recapitalizations or corporate restructurings, both in
and out of the bankruptcy process. Since 1984, Mr. Schulte has been managing
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,
although he currently devotes full-time to the affairs of Zell/Chilmark. Mr.
Schulte is also a director of Broadway Stores, Inc., Jacor Communications, Inc.
(where he also serves as Chairman of the Board), Revco D.S., Inc., and Santa Fe
Energy Resources, Inc.
Rolf H. Towe
Mr. Towe, age 56, is, and since July 10, 1991 has been, a director of
the Company. Mr. Towe is, and since April 1991 has been, Vice President of
Clipper Asset Management Group, 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. Mr. Towe is also
a director of The American Heritage Life Insurance Company and Long John
Silver's Restaurants, Inc.
Samuel Zell
Mr. Zell, age 53, since February 12, 1993 has been a director of the
Company. Mr. Zell is, and since 1981 has been, Chairman of the Board of Equity
Financial and Management Company and, since 1986 has been, Chairman of the
Board of Equity Group Investments, Inc., two privately owned affiliated
investment and management companies; is, and since mid-1990 has been, one of
two individuals (the other being Mr. Schulte) who act as general partners of
the general partner of Zell/Chilmark Fund, L.P.; is, and since 1985 has been,
Chairman of the Board of Itel Corporation, a company engaged in the
distribution of wiring systems products; is, and since 1983 has been, Chairman
of the Board, and from 1990 through 1993 has been Chief Executive Officer and
President, of Great American Management and Investment, Inc., a diversified
company with interests in manufacturing, agriculture, chemicals and fertilizers
and financial services; from 1987 has served as Chairman of the Board of
Capsure Holdings Corp. (formerly called Nucorp Inc.), a company engaged in the
business of specialty property and casualty insurance; is, and since 1992 has
been, Co-Chairman of Revco D.S., Inc., a company that operates a chain of
retail drugstores; is, and since 1993 has been, Chairman of the Board of Equity
Residential Properties Trust, a self-administered, self-managed equity real
estate investment trust; is, and since 1993 has been, Chairman of the Board of
Broadway Stores, Inc., a retail organization in California and the Southwestern
United States; and from 1993 to January 1994 was Co-Chairman, and from January
1994 to the present was Chairman of the Board of Manufactured Home Communities,
Inc., a self-administered and self-managed equity real estate investment trust
which owns and operates properties in 16 states. Mr. Zell is a member of the
board of directors of American Classic Voyages Co., Jacor Communications, Inc.,
Revco D.S., Inc., Falcon Building Products, Inc., and the Vigoro Corporation.
Prior to October 4, 1991, Mr. Zell was President of Madison Management Group,
Inc., which filed a petition under Chapter 11 of the Bankruptcy Code on
November 8, 1991.
39
<PAGE> 42
EXECUTIVE AND OTHER OFFICERS
The following sets forth the name, age, title and certain other
information with respect to the executive and certain other appointed officers
of the Company:
Bruce G. Barman
Dr. Barman, age 46, since January 1995 has been Vice
President-Research and Development of the Company. From 1991 until he joined
the Company, Dr. Barman was Vice President-Research and Development of Griffith
Laboratories N.A., a custom food products producer for a customer base of major
North American food service and food processing companies. From 1988 to 1991
Dr. Barman served as Vice President-Research and Development-Personal Care
Products Division of the Weyerhaueser Company.
John G. Bartik
Mr. Bartik, age 43, since December 1990 has been Treasurer of the
Company and from 1985 has served as the Company's Director of Taxation.
Lyman M. Beggs
Mr. Beggs, age 56, since August 24, 1992 has been Chairman, President
and Chief Executive Officer of the Company. For further information concerning
Mr. Beggs, see "--Directors" above.
Jeffrey C. Claypool
Mr. Claypool, age 47, since September 1991 has been Vice
President-Human Resources of the Company. Previously, Mr. Claypool was
employed by Bridgestone/Firestone, Inc. an international tire manufacturer, in
various positions, including Vice President Human Resources and Corporate
Personnel Manager.
Gary T. Fazio
Mr. Fazio, age 44, since 1990 has been Vice President-Sales of the
Company. Mr. Fazio joined the Company as a general manager in 1981. From 1987
to 1990 he was Regional Vice President of the Company.
Douglas E. Fellmy
Mr. Fellmy, age 45, since July 1992 has been Vice President-Operations
of the Company. Previously, Mr. Fellmy served as Regional Vice
President-Operations since April 1990 and also as President of the Components
Division since December 1989. Mr. Fellmy has served, since 1971, in numerous
other capacities with the Company's Components Division.
Thomas M. Forman
Mr. Forman, age 49, since June 1994 has been Vice President-General
Counsel of the Company. Previously, Mr. Forman was President of Forman Venture
Capital, Inc. and from 1981 to 1990 held various executive positions with
Bridgestone/Firestone, Inc., an international tire manufacturer, most recently
as an Executive Vice President and a member of the board of directors. Mr.
Forman is a director of Olympic Steel, Inc., a NASDAQ-listed steel distribution
company.
40
<PAGE> 43
Jesse E. Hogan
Mr. Hogan, age 48, since June 1994 has been Senior Vice
President-Chief Financial Officer of the Company. Previously, from 1992, Mr.
Hogan served as President, Columbo Fresh Products, a division of Bongrain,
S.A., a worldwide dairy company, from 1991 to 1992 as General Manager of Alta
Dena Certified Dairy and from 1988 to 1991 as Operations Controller of
Bongrain, S.A.
David J. Mcllquham
Mr. Mcllquham, age 40, since April 1990 has been Vice
President-Marketing of the Company. Previously, Mr. Mcllquham 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.
John D. Moran
Mr. Moran, age 36, since December 1990 has been Secretary of the
Company. Mr. Moran joined the Company in 1987 and was elected Assistant
Secretary.
Larry J. Rogers
Mr. Rogers, age 46, since February 1994 has been Vice
President-International of the Company. Previously, Mr. Rogers has served,
since 1979, in numerous other capacities within the Company's operations,
including, since March 1988, as President-Sealy Canada.
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
During fiscal year 1994, Mr. Rogers did not timely file his initial Form
3 upon being named an Executive Officer of the Company. Upon being notified of
this filing obligation, Mr. Rogers promptly filed his Form 3. 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 year 1994 and of Forms 5, and
amendments thereto, furnished to the Company with respect to fiscal year 1994,
the Company is not aware of any other 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 year 1994 or prior fiscal years.
41
<PAGE> 44
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
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, 1994, 1993 and 1992, of those persons who were,
at November 30, 1994 (i) the chief executive officer and (ii) the other four
most highly compensated executive officers of the Company for the year ended
November 30, 1994 (collectively, the "Named Executive Officers"):
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------- ------------------------------------------------
Securities
Other Restricted Underlying
Name and Annual Stock Options/ LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
- ------------------ ---- -------- ------- ------------ ----------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lyman M. Beggs (a) 1994 $522,918 $550,807 $ 78,778(a) -- -- -- $19,569(c)
Chairman, Chief 1993 500,016 314,542 117,045(a) -- -- -- 19,240(c)
Executive Officer and 1992 136,368 375,000 180,850(a) 752,000(b) -- -- 510(c)
President
Gary T. Fazio 1994 178,785 56,136 -- -- -- -- 14,457(c)
Vice President 1993 174,000 34,617 -- -- -- -- 14,209(c)
-Sales 1992 170,000 82,480 -- -- -- -- 13,790(c)
Jeffrey C. Claypool 1994 164,580 57,786 -- -- -- -- 13,308(c)
Vice President 1993 156,000 32,478 -- -- -- -- 12,739(c)
-Human Resources 1992 150,000 75,383 -- -- -- -- 1,668(c)
David J. Mcllquham 1994 162,470 57,045 486 -- -- -- 13,137(c)
Vice President 1993 154,000 31,292 5,141 -- -- -- 12,576(c)
-Marketing 1992 145,000 106,908(d) 20,891(e) -- -- -- 11,762(c)
Douglas E. Fellmy 1994 158,250 55,564 -- -- -- -- 12,796(c)
Vice President 1993 150,000 36,629 -- -- -- -- 12,249(c)
-Operations 1992 134,167 136,642(d) 50,718(e) -- -- -- 10,432(c)
<FN>
(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
$78,778, $117,045 and $180,850 in 1994, 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 (1994-$47,029; 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."
(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 1994 Credit
Agreement and Note Indenture 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
42
<PAGE> 45
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 $3,190,000 at the end of fiscal year 1994. No
other Named Executive Officer had any holdings of stock which were
subject to forfeiture at the end of fiscal year 1994.
(c) Represents amounts paid in fiscal year 1994 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: (1994- $2,220, $840, $16,509; 1993- $2,220,
$1,000, $16,020); Mr. Fazio: (1994- $1,191, $751, $12,515; 1993-
$1,159, $870, $12,180); Mr. Claypool: (1994- $1,096, $691, $11,521;
1993- $1,039, $780, $10,920); Mr. Mcllquham: (1994- $1,082, $682,
$11,373; 1993- $1,026, $770, $10,780); and Mr. Fellmy: (1994- $1,054,
$665, $11,077; 1993- $999, $750, $10,500).
(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. Mcllquham'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.
</TABLE>
43
<PAGE> 46
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE
OR
OTHER ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERIOD NON-STOCK PRICE-BASED PLANS
SHARES, UNTIL -------------------------------------------
UNITS MATURITY (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 T. Fazio 110,000(a) 11/30/96 11,000 45,870 110,000
David J. Mcllquham 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 2,493,800 Performance Shares, net of
forfeitures, have been granted to Participants as of November 30, 1994, and
up to 46,500 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, 1994 was $15.95. 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 non-competition 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
44
<PAGE> 47
Shares (or are forfeited) following the Measurement Period (the "Payment
Date") or, if earlier, upon 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
45
<PAGE> 48
compensation for the corresponding period from the Participant's new
employer. Participants receiving cash severance payments under the
Executive Severance Plan also would receive six months of contributory
health and dental coverage and six months of group term life insurance
coverage.
The Company currently follows the terminal accrual approach to accounting
for severance benefits under the Executive Severance Plan and records the
estimated cost of these benefits as expense at the date of the event giving
rise to payment of the benefits.
EXECUTIVE EMPLOYMENT AGREEMENTS. Effective 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' minimum base salary is
$500,000 annually. Such salary may be increased but not decreased in an annual
review, and Mr. Beggs is also 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), 35,000 of such Issued
Shares are forfeitable through November 30, 1995. 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. The
Stock Loan was repaid in full on February 21,1995. 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
Plan. See Note (a) to "--Long-Term Incentive Plan Awards in Last Fiscal Year."
Pursuant to the Employment Agreement, Mr. Beggs received relocation
expenses and is entitled to health and life insurance and certain other
benefits. The Company purchased Mr. Beggs' previous residence from him for
$712,500 and sold such residence for $690,000 in February 1993. Mr. Beggs
borrowed $157,673 from the Company (the "Equity Loan") upon the purchase of a
new home in the Cleveland area, reflecting the loss of equity in his previous
residence. Such Equity Loan 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,
$20,000 and $57,673 of the Equity Loan was forgiven on November 30, 1994,
November 30, 1993 and December 31, 1992, respectively. In addition, $3,256 and
$4,070 in interest related to the Equity Loan was also forgiven on November 30,
1994 and 1993, respectively, and the Company paid Mr. Beggs an additional
$47,029, $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 three equal annual payments of principal due
on November 30, 1995 and each November 30 thereafter for
46
<PAGE> 49
two 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 and he
will also receive 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,
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 Stockholders' 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 Chairperson, 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 fiscal year 1993, the Company adopted the 1993 Non-Employee Director
Stock Option Plan (the "1993 Plan"), which was subsequently amended on April 6,
1994. The 1993 Plan provides for the one-time automatic grant of ten-year
options to acquire up to 10,000 Shares to all current and future directors who
are not employed by the Company, by Zell/Chilmark or by their respective
affiliates ("Non-Employee Directors"). Options granted under the 1993 Plan
vest immediately and are initially exercisable at a price equal to the fair
market value of the Shares on the date of grant. For options granted prior to
March 1, 1994, the exercise price of options granted pursuant to this Plan
increased on the first anniversary date of such grant by 4% compounded
annually, which became the fixed exercise price for all such options. Options
issued thereafter, if any, will be exercisable over their term at the fair
market value on the date of grant. Pursuant to the 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, which now have a fixed exercise price of $9.41 per Share.
During fiscal year 1994 no options under the 1993 Plan were exercised.
47
<PAGE> 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
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 28, 1995:
<CAPTION>
PERCENT OF
NAME NUMBER OF SHARES CLASS (A)
---- ---------------- -----------
<S> <C> <C>
Zell/Chilmark Fund, L.P. 26,143,506(b) 88.8%
Two North Riverside Plaza
Suite 1500
Chicago, IL 60606
The Fulcrum III Limited Partnership 2,632,773(c) 8.4%(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
<FN>
(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
warrant or option holder has exercised any other convertible security.
Accordingly, the total of the percentages for all the stockholders
listed exceeds 100%.
(b) For further information with respect to Zell/Chilmark, Fund L.P., 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.
</TABLE>
48
<PAGE> 51
<TABLE>
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 28, 1995:
<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) 88.8%
David M. Schulte 26,143,506(c) 88.8%
Joel S. Friedland 26,143,506(c) 88.8%
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. Mcllquham 8,199 **
Douglas E. Fellmy 15,373 **
All directors and executive officers as a group 26,354,957 89.4%
** Less than 1%
<FN>
(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.
Messrs. Friedland, Schulte and Zell each disclaim beneficial ownership
of such Shares.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal year 1994, the Compensation Committee of the Board of
Directors consisted of Messrs. Zell, Towe, Fenster and Johnston.
As part of the Acquisition and pursuant to the Stock Purchase Agreement
(defined below), 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 the Stock Purchase Agreement,
the holders of a majority of such Acquired Shares have the right to demand, up
49
<PAGE> 52
to five times but no more than once every six months, registration of their
Acquired Shares under the Securities Act of 1933 as amended. In addition,
under certain conditions, the holders of the Acquired Shares 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.
MANAGEMENT SUBSCRIPTION AND BENEFIT ARRANGEMENTS. See "Management --
Compensation Pursuant to Plans and Other Arrangements -- Severance
Arrangements" for a description of the Company's severance arrangements with
certain executive officers. See "Management -- Compensation Pursuant to Plans
and Other Arrangements -- Executive Employment Agreements" for a description of
the Company's employment arrangements with Mr. Beggs.
STOCK REPURCHASE AGREEMENTS. Certain officers, key employees of the Company and
certain former employees of the Company (collectively, the "Management
Investors") are the beneficial owners of 63,830 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 in connection with the put
options, such Management Investors' Shares were not considered to be part of
the Company's stockholders' equity for periods prior to January 1, 1994. The
Subscription Agreements also grant to the Management Investors certain
registration rights in the event that the Company (or, in certain
circumstances, other investors in the Company) registers any common stock under
the Securities Act.
FULCRUM. In connection with the LBO, The Fulcrum III Limited Partnership and
The Second Fulcrum III Limited Partnership (together, the "Fulcrum
Partnerships"), purchased, after giving effect to the reverse stock split,
961,400 Shares pursuant to a stock subscription agreement with the Company (the
"Fulcrum Stock Subscription Agreement") which provides that, under certain
circumstances, the Company 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.
50
<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, 1994 and 1993
Consolidated Statements of Income for the year ended November
30, 1994 and for the ten months ended November 30, 1993
(Successor Periods), the two months ended January 31, 1993 and
the year ended November 30, 1992 (Pre-Successor Periods).
Consolidated Statements of Stockholders' Equity for the year
ended November 30, 1994 and for the ten months ended November
30, 1993 (Successor Periods), the two months ended January 31,
1993 and the year ended November 30, 1992 (Pre-Successor
Periods).
Consolidated Statements of Cash Flows for the year ended
November 30, 1994 and for the ten months ended November 30,
1993 (Successor Periods), the two months ended January 31,
1993 and the year ended November 30, 1992 (Pre-Successor
Periods).
Notes to consolidated financial statements
(a)(2) Financial Statement Schedule
Schedule VIII -- Valuation Accounts
(a)(3) The exhibits to this report are listed in section (c) of Item 14
below.
(b) The Company filed no reports on Form 8-K during the fourth
quarter of its fiscal year ended November 30, 1994.
(c) Exhibits:
Exhibit
Number Exhibit Description
- ------ -------------------
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).)
51
<PAGE> 54
Exhibit
Number Exhibit Description
- ------ -------------------
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 Indenture dated as of November 1, 1991, among Sealy Corporation,
certain subsidiaries of Sealy Corporation listed on the signature
pages thereto and Ameritrust Company National Association.
(Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1991 (File No. 1-8738).)
4.6 Stock Subscription Agreement, dated as of March 30, 1989 by and
among GGvA Holding Corp. (renamed Sealy Holdings, Inc. and merged
with and into Sealy Corporation) and the purchasers listed therein.
(Incorporated herein by reference to Exhibit 4.4 to Registration
Statement of The Ohio Mattress Holding Company and The Ohio
Mattress Company on Form S-4, File No. 33-29246, filed June 13,
1989.)
4.7 Management Stock Subscription Agreement, dated as of March 30, 1989
by and among GGvA Holding Corp. (renamed Sealy Holdings, 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.)
4.8 First Supplemental Indenture, dated as of February 12, 1993, by and
among Sealy Corporation, certain subsidiaries of Sealy Corporation
listed on the signature pages thereto as Ameritrust Company
National Association (n.k.a Society National Bank). (Incorporated
herein by reference to the appropriate exhibit to the Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738).)
4.9 Indenture, dated as of May 7, 1993, by and between Sealy
Corporation and Society National Bank relating to the Sealy
Corporation's 9 1/2% Senior Subordinated Notes. (Incorporated
herein by reference to the appropriate exhibit to the Form 8-K
Current Report of Sealy Corporation dated May 7, 1993.)
4.10 Form of 9 1/2% Senior Subordinated Note Due 2003. (Incorporated
herein by reference to the appropriate exhibit to the Form 8-K
Current Report of Sealy Corporation dated May 7, 1993.)
52
<PAGE> 55
Exhibit
Number Exhibit Description
- ------ -------------------
4.11 Restated Secured Credit Agreement, dated as of May 27, 1994, by and
among Sealy Corporation, Certain Banks and Other Financial
Institutions and Banque Paribas, Citicorp USA, Inc., Bank of
America (formerly Continental Bank N.A.) and General Electric
Capital Corporation, as Managing Agents. (Incorporated herein by
reference to the appropriate exhibit to the Form 10-Q Quarterly
Report of Sealy Corporation dated May 31, 1994.)
*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).)
*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).)
53
<PAGE> 56
Exhibit
Number Exhibit Description
- ------ -------------------
*10.12 Letter Agreement, dated June 5, 1991 by and between Sealy
Corporation and Sam F. Smith, Jr. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992
(File No. 1- 8738).)
10.13 Sealy Corporation 1993 Non-Employee Director Stock Option Plan.
(Incorporated herein by reference to the appropriate exhibit to the
Form S-1 Registration Statement of Sealy Corporation (File No.
33-59134).) (As amended by Amendment No. 1 dated April 6, 1994.)
21.1 List of subsidiaries of Sealy Corporation. (Incorporated herein by
reference to the appropriate exhibit to Sealy Corporation's Annual
Report on Form 10-K for the fiscal year ended November 30, 1992
(File No. 1-8738).)
27.1 Financial Data Schedule
99.1 Certificate of Ownership and Merger merging Sealy Holdings, Inc.
with and into Sealy Corporation dated as of November 5, 1991.
(Incorporated herein by reference to the appropriate exhibit to
Sealy Corporation's Annual Report on Form 10-K for the fiscal year
ended November 30, 1991 (File No. 1-8738).)
99.2 Sealy Corporation Executive Severance Benefit Plan dated January
25, 1993. (Incorporated herein by reference to the appropriate
exhibit to Sealy Corporation's Annual Report on Form 10-K for the
fiscal year ended November 30, 1992 (File No. 1-8738).)
(d) The financial statement schedules filed with this report are listed in
section (a)(2) of Item 14 above.
- -----------------------
* Management contract or compensatory plan or arrangement identified pursuant
to Item 14(a) of this Form 10-K.
54
<PAGE> 57
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, SEALY CORPORATION HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SEALY CORPORATION
SIGNATURE TITLE
--------- -----
By: /s/ Lyman M. Beggs Chairman, President and
------------------- Chief Executive Officer
Lyman M. Beggs (Principal Executive Officer)
Date: February 28, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
/s/ Jesse E. Hogan Senior Vice President and February 28, 1995
- ----------------------- Chief Financial Officer
Jesse E. Hogan (Principal Financial and
Accounting Officer)
/s/ Samuel Zell Director February 28, 1995
- -----------------------
Samuel Zell
/s/ David M. Schulte Director February 28, 1995
- -----------------------
David M. Schulte
/s/ Joel S. Friedland Director February 28, 1995
- -----------------------
Joel S. Friedland
/s/ George L. Davis Director February 20, 1995
- -----------------------
George L. Davis
/s/ Steven R. Fenster Director February 28, 1995
- -----------------------
Steven R. Fenster
/s/ Christie A. Hefner Director February 28, 1995
- -----------------------
Christie A. Hefner
/s/ James W. Johnston Director February 28, 1995
- -----------------------
James W. Johnston
/s/ Rolf H. Towe Director February 28, 1995
- -----------------------
Rolf H. Towe
55
<PAGE> 58
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE
YEAR ENDED NOVEMBER 30, 1994,
TEN MONTHS ENDED NOVEMBER 30, 1993, TWO MONTHS ENDED JANUARY 31,1993,
YEAR ENDED NOVEMBER 30, 1992
FORMING A PART OF ANNUAL REPORT PURSUANT TO
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
OF
SEALY CORPORATION
56
<PAGE> 59
<TABLE>
SEALY CORPORATION
SCHEDULE VIII -- VALUATION ACCOUNTS
===================================================================================================================
<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
Fiscal year ended November 30, 1994:
Allowance for doubtful accounts
receivable $ 7,650 $1,625 $1,501 $7,774
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
</TABLE>
57
<PAGE> 1
SEALY CORPORATION
AMENDMENT NO. 1 TO
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Sealy Corporation, hereinafter called the "Company", hereby adopts an
amendment to the Company's 1993 Non-Employee Director Stock Option Plan (the
"Plan"), which amendment replaces Section 4 of the Plan, as heretofore in
effect, in its entirety, with the insertion of the following in lieu thereof:
4. Grant of Options. Subject to the terms of the Plan, a
one-time option was previously automatically granted to each of
Messrs. Fenster, Davis, Towe and Johnston and Ms. Hefner as the
then-currently- Eligible Directors under the Plan. Henceforth, and
subject to the terms of the Plan, a one-time option automatically
shall be granted to each person who subsequently becomes an Eligible
Director of the Company for the first time from and after the
effective date of the Plan. The option shall be exercisable for up to
an aggregate of 10,000 Common shares. The date of grant for all
future such options shall be the date that such optionee is elected or
appointed to the Board as an Eligible Director. The option shall be
granted at an option price per share equal to the fair market value of
a Common Share of the Company on the date said option is granted;
provided, however, for the aforementioned options granted before March
1, 1994, the option price per share shall increase by four percent
(4%) on the first anniversary of the date of grant, which price shall
thereafter be the option exercise price per share. Subject to the
provisions of paragraph 5(c), each such option granted shall be
exercisable for a period of ten (10) years from the date of grant.
IN WITNESS WHEREOF, SEALY CORPORATION, by its appropriate officers
duly authorized, has executed this instrument effective as of the 6th day of
April, 1994.
SEALY CORPORATION
L. Beggs
By ____________________________
Its Chief Executive Officer
________________________
John D. Moran
By ____________________________
Its Secretary
________________________
108\21528ABD.354
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<CASH> 1,948
<SECURITIES> 19,361
<RECEIVABLES> 86,087
<ALLOWANCES> 7,774
<INVENTORY> 42,623
<CURRENT-ASSETS> 160,715
<PP&E> 157,388
<DEPRECIATION> 16,308
<TOTAL-ASSETS> 810,649
<CURRENT-LIABILITIES> 108,188
<BONDS> 329,528
<COMMON> 294
0
0
<OTHER-SE> 321,939
<TOTAL-LIABILITY-AND-EQUITY> 810,649
<SALES> 697,664
<TOTAL-REVENUES> 697,664
<CGS> 372,466
<TOTAL-COSTS> 372,466
<OTHER-EXPENSES> 1,625
<LOSS-PROVISION> 1,625
<INTEREST-EXPENSE> 33,454
<INCOME-PRETAX> 56,090
<INCOME-TAX> 26,898
<INCOME-CONTINUING> 29,192
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,192
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
</TABLE>
