<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarter ended February 28, 1995 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
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(Address of principal executive offices)* (Zip Code)
Registrant's telephone number, including area code (206) 625-1233
----------------
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 number of shares of the registrant's common stock outstanding as of
March 31, 1995 was 29,439,580.
- -------------- ----------
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
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<TABLE>
PART I. FINANCIAL INFORMATION
--------------------------------
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (NOTE A)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------------ ------------------
<S> <C> <C>
Net Sales $149,895 $155,607
-------- --------
Cost and expenses:
Cost of goods sold 83,151 82,333
Selling, general and administrative 53,532 51,552
Amortization of intangibles 3,515 3,515
Interest expense, net 7,939 8,576
-------- ---------
148,137 145,976
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Income before income tax 1,758 9,631
Income tax 1,974 4,486
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Net income (loss) $ (216) $ 5,145
========== =======
Earnings (loss) per common share $ (0.01) $ .17
Weighted average number of common
shares and equivalents outstanding
during period 30,971 30,553
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1995 1994
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash Equivalents $20,747 $ 21,309
Accounts receivable, less allowance for doubtful
accounts ( 1995 - $8,072; 1994 - $7,774) 78,918 78,313
Inventories (Note B) 46,192 42,623
Prepaid expenses and deferred taxes 19,442 18,470
-------- --------
165,299 160,715
Property, plant and equipment - at cost 155,612 157,388
Less accumulated depreciation 18,406 16,308
-------- --------
137,206 141,080
Other assets:
Goodwill and other intangibles - net of
accumulated amortization
(1995 - $29,355; 1994 - $25,840) 489,875 493,390
Debt issuance costs and other assets 13,898 15,464
-------- --------
503,773 508,854
-------- --------
$806,278 $810,649
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1995 1994
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion - long-term obligations $ 10,109 $ 20,361
Accounts payable 27,513 28,113
Accrued interest payable 7,648 2,482
Accrued plant consolidation 2,605 2,488
Other accrued expenses 51,735 54,744
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99,610 108,188
Long-term obligations (Note C) 332,008 329,528
Other noncurrent liabilities 28,770 29,605
Deferred income taxes 23,145 21,095
Stockholders' equity:
Common stock 294 294
Additional paid-in capital 270,768 269,229
Retained earnings 53,701 53,917
Foreign currency translation adjustment (2,018) (1,207)
--------- ---------
322,745 322,233
Commitments and contingencies (Note D) -- --
--------- ---------
$806,278 $810,649
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------------ -----------------
<S> <C> <C>
Net cash provided by operating activities $ 5,742 $10,783
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Net cash provided by (used in) investing activities:
Property, plant and equipment, net 1,468 (1,311)
------- -------
Net cash used for financing activities:
Repayment of long-term obligations, net (7,772) (5,422)
------- -------
Change in cash and equivalents (562) 4,050
Cash and equivalents:
Beginning of period 21,309 20,919
------- -------
End of period $20,747 $24,969
======= =======
Supplemental disclosures:
-------------------------
Taxes paid, net $ 1,558 $ 1,402
Interest paid $ 2,519 $ 3,541
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
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SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1995 AND 1994
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NOTE A -- BASIS OF PRESENTATION
This report covers Sealy Corporation and its subsidiaries (collectively, the
"Company").
The accompanying unaudited condensed consolidated financial statements
should be read together with the Company's Annual Report on Form 10-K for the
year ended November 30, 1994.
The accompanying unaudited condensed consolidated financial statements
contain all adjustments which, in the opinion of management, are necessary to
present fairly the financial position of the Company at February 28, 1995, and
its results of operations and cash flows for the periods presented herein. All
adjustments in the periods presented herein are normal and recurring in nature.
The November 30, 1994 condensed consolidated balance sheet included herein is
derived from the audited consolidated balance sheet as of November 30, 1994.
NOTE B -- INVENTORIES
The major components of inventories were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1995 1994
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $36,143 $33,471
Work in process 3,517 3,203
Finished goods 6,532 5,949
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$ 46,192 $ 42,623
======== ========
</TABLE>
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SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1995 AND 1994
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NOTE C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1995 1994
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Secured Credit Agreement:
Revolving Credit Facility $ 16,000 $ 14,000
Term Loan Facility 120,000 130,000
9 1/2% Senior Subordinated Notes Due 2003 200,000 200,000
Other 6,117 5,889
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342,117 349,889
Less current portion 10,109 20,361
--------- ---------
$ 332,008 $329,528
========= ========
</TABLE>
The Secured Credit Agreement provides for loans of up to $245
million, as of February 28, 1995 and consists of the $125 million Revolving
Credit Facility and the $120 million Term Loan Facility. The Revolving Credit
Facility provides 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.
The Term Loan Facility is a $120 million term loan, as of February
28, 1995 with a final maturity of November 30, 1999 and amortizes in even
fiscal quarterly principal payments aggregating $20 million in the fiscal year
ending November 30, 1995, $25 million in each of the fiscal years ending
November 30, 1996 and 1997, and $30 million in each of the fiscal years ending
November 30, 1998 and 1999.
Under terms of the Secured 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 certain financial
ratios. Two separate interest rate options exist under the Secured 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.
During the three months ended February 28, 1995, the maximum amount
outstanding under the revolving Credit Facility, excluding Letters of Credit,
was $21 million. At February 28, 1995, the Company had approximately $97
million available under the Revolving Credit Facility, with $16 million
outstanding and Letters of Credit issued totaling approximately $12 million.
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SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 28, 1995 AND 1994
================================================================================
All obligations of the Company under the Secured Credit Agreement are
jointly and severally guaranteed by each direct and indirect domestic
subsidiary of the Company and secured by first priority liens on and security
interests in substantially all of the assets of the Company and its domestic
subsidiaries and by first priority pledges of substantially all of the capital
stock of most of the subsidiaries of the Company.
NOTE D -- CONTINGENCIES
In accordance with procedures established under the Environmental
Cleanup Responsibility Act (now known as the Industrial Site Recovery Act),
Sealy and one of its subsidiaries are parties to an Administrative Consent
Order ("ACO") issued by the New Jersey Department of Environmental Protection
("DEP") pursuant to which the Company and such subsidiary agreed to conduct
soil and ground water 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. As the current owners of
the facility, however, the Company and its subsidiary are primarily responsible
for the investigation and any necessary clean-up plan approved by the DEP under
the terms of the ACO. In March 1994, the Company filed a claim in the U.S.
District Court for the district of New Jersey against former owners of the site
and their lenders under the Comprehensive Environmental Response, Compensation
and Liability Act seeking contribution for site investigation and remedial
costs.
In March 1995, the DEP approved the Company's soil and groundwater
remediation plans, which include ongoing monitoring by the Company and,
depending upon the results of such monitoring, the possible installation of a
drainage barrier and containment wall. While the Company cannot predict the
ultimate timing or cost to remediate this facility based on facts currently
known, management presently believes the previously established accrual for
site investigation and remediation costs is adequate to cover the Company's
probable liability. If additional remediation is required, however, such as
the installation of a drainage barrier and containment wall, management
estimates it could cost the Company up to an additional $3 million. Management
does not believe that resolution of this matter will have a material adverse
effect on the Company's financial position or future operations.
NOTE E -- RESTRUCTURING
Subsequent to February 28, 1995, management of the Company committed
to a formal plan to cease its unprofitable upholstery operations, which
manufactured convertible sleep sofas, although Sealy brand sleep sofas will
continue to be manufactured by a licensee. These operations contributed net
sales of $2.2 million and $3.7 million to the Company for the three months
ended February 28, 1995 and 1994, respectively, and had net losses of $0.8
million and $0.5 million for the same periods. The fiscal 1994 net sales and
net loss for this product line were approximately $13.3 million and $2.5
million, respectively. Management expects to incur charges of approximately $4
million in the second quarter as a result of the division's operating losses
and costs associated with its closing.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 1995 AND 1994
NET SALES. Net sales decreased $5.7 million (3.7%) for the three
months ended February 28, 1995, as compared to the first quarter of fiscal
1994. The Company's sales decrease was due primarily to a 7.6% (or $10.6
million) decline in conventional bedding unit shipments, offset partially by a
3.6% ($4.7 million) increase in the average unit selling price. Decreased
shipments of lower priced promotional and private label bedding units accounted
for all of the decrease in unit shipments. The decrease in shipments of
private label bedding resulted primarily from the Company's cessation of
production of private label bedding for Sears, Roebuck & Co. ("Sears") during
the third quarter of the fiscal year ending November 30, 1994. Historically,
private label bedding has accounted for a significant percentage of the
Company's net sales. The focus of the Company's marketing emphasis has shifted
to building upon its strong consumer brand recognition and preference, however.
Consequently, private label products will account for a lower percentage of
Sealy's net sales during future periods.
Sales of products other than conventional bedding represented
approximately 11% of net sales for the three months ended February 28, 1995.
Increased sales of wood bedroom furniture products were offset by a reduction
in sales of sofa products. (See Note E to financials.)
COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold
for the three months ended February 28, 1995 increased 2.6 percentage points
to 55.5% due primarily to continued rising material costs. In March 1995,
the Company introduced a new line of Sealy Posturepedic and Comfort Series
brand products. Based upon its historical experience, the Company believes
that the new lines will result in improved gross margins subsequent to their
introduction. However, there can be no assurance that margins will improve.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and
administrative expenses, as a percentage of net sales, increased 2.6
percentage points ($2.0 million) over the level recognized during the first
quarter of fiscal 1994. This increase is the result of a $2.2 million increase
in marketing spending reflecting the Company's focus on building brand
recognition and driving consumer brand preference.
For the three months ended February 28, 1995, the Company incurred
non-cash charges of $1.5 million in connection with the Performance Share Plan
("the Plan") pursuant to which certain members of management were granted
performance share units, each representing the right to receive, after November
30, 1996, up to one share of the Company to the extent the Company meets
defined cumulative cash flow targets over a five-year period. So long as the
Plan is in effect, the Company is expected to incur additional non-cash charges
in future years, based on (a) the fair market value of such Shares, (b) the
number of performance share units outstanding, and (c) management's estimate of
cumulative cash flow during the measurement period. In addition, the amount of
non-cash compensation expense recorded in the future will be adjusted to give
cumulative effect to any change in the expense recorded in prior reporting
periods resulting from (I) subsequent increases of decreases in the fair value
of the Shares and/or in the number of performance share units outstanding since
such reporting period, and (ii) any change in management's estimate of its
ability to achieve the defined cumulative cash flow targets.
INTEREST EXPENSE. Interest expense, net of interest income,
decreased $0.6 million from that incurred during the first quarter of 1994
primarily due to a net reduction of approximately $59 million in total
indebtedness.
INCOME TAX. During the first quarter of Fiscal 1995, the Company's
provision for income taxes was approximately $2.0 million compared to
approximately $4.5 million during the first quarter of fiscal 1994. The lower
level of income before income taxes in the first quarter of fiscal 1995
accounted for the decrease. The Company's effective income tax rates differ
from the Federal statutory rate because of the application of purchase
accounting, certain foreign tax rate differentials, and state and local taxes.
As a result of these factors, the Company's income tax expense exceeded its
pre-tax income during the period.
NET LOSS. For the reasons set forth above, the Company incurred a
loss of $0.2 million for the three
9
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months ended February 28, 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended February 28, 1995, the Company's
principal source of funds consisted of cash flow from operating activities and
proceeds from the disposal of property, plant, and equipment in the normal
course of business. Its principal use of funds consisted of payments of
principal, interest, and capital expenditures. Capital expenditures totaled
$2.5 million for the three months ended February 28, 1995. Management believes
that annual capital expenditure limitations in its Secured Credit Agreement
will not significantly inhibit the Company from meeting its ongoing operating
needs. At February 28, 1995, the Company had approximately $97 million
available under its Revolving Credit Facility with $16 million outstanding and
Letters of Credit issued totaling approximately $12 million. At February 28,
1995, the weighted average interest rate on the Revolving Credit Facility was
7.3% and on the Term Loan Facility was 7.4%.
Subsequent to February 28, 1995, management of the Company committed
to a formal plan to cease its unprofitable upholstery operations, which
manufactured convertible sleep sofas, although Sealy brand sleep sofas will
continue to be manufactured by a licensee. These operations contributed net
sales of $2.2 million and $3.7 million to the Company for the three months
ended February 28, 1995 and 1994, respectively, and had net losses of $0.8
million and $0.5 million for the same periods. The fiscal 1994 net sales and
net loss for this product line were approximately $13.3 million and $2.5
million, respectively. Management expects to incur charges of approximately $4
million in the second quarter as a result of the division's operating losses
and costs associated with its closing.
Management believes that the Company will have the necessary liquidity
for the next several years to fund its expected capital expenditures,
obligations under its credit agreement and subordinated note indenture,
environmental liabilities, and for other needs required to manage its business,
through cash flow from operations, and availability under the Revolving
Credit Facility.
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PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings
See Note D to the Condensed Consolidated Financial Statements, Part
I, Item 1 included herein.
Item 5 - Other Information
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. The size and timing of the proposed offering had not
been determined. However, the offering was expected to occur during May-July
1995. Subsequently, on March 30, 1995, the Company announced that it will
postpone the planned filing of the registration statement with the Securities
and Exchange Commission in connection with the proposed offering. A decision
regarding the future timing of the filing of a registration statement will be
based upon the then existing market conditions.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Sealy Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
By: /s/ Lyman M. Beggs Chairman, President and Chief Executive Officer
------------------------ (Principal Executive Officer)
Lyman M. Beggs
By: /s/ Jesse E. Hogan Senior Vice President and Chief Financial Officer
------------------------ (Principal Accounting Officer)
Jesse E. Hogan
Date: April 10, 1995
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000748015
<NAME> SEALY CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> FEB-28-1995
<CASH> 2,128
<SECURITIES> 18,619
<RECEIVABLES> 86,990
<ALLOWANCES> 8,072
<INVENTORY> 46,192
<CURRENT-ASSETS> 165,299
<PP&E> 155,612
<DEPRECIATION> 18,406
<TOTAL-ASSETS> 806,278
<CURRENT-LIABILITIES> 99,610
<BONDS> 332,008
<COMMON> 294
0
0
<OTHER-SE> 322,451
<TOTAL-LIABILITY-AND-EQUITY> 806,278
<SALES> 149,895
<TOTAL-REVENUES> 149,895
<CGS> 83,151
<TOTAL-COSTS> 83,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,939
<INCOME-PRETAX> 1,758
<INCOME-TAX> 1,974
<INCOME-CONTINUING> (216)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (216)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
