<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 2, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------------
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 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 April 3,
1997 was 29,934,340.
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 2, MARCH 3,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 168,904 $ 159,475
--------- ---------
Costs and expenses:
Cost of goods sold 96,014 89,892
Selling, general and administrative 56,257 51,972
Amortization of intangibles 3,480 3,515
Interest expense, net 6,801 7,537
--------- ---------
162,552 152,916
--------- ---------
Income before income tax and
extraordinary item 6,352 6,559
Income tax 3,164 3,705
--------- ---------
Income before extraordinary item 3,188 2,854
Extraordinary item - loss from early
extinguishment of debt (net of income
tax benefit of $1,353) 2,030 --
--------- ---------
Net income $ 1,158 $ 2,854
========= =========
Earnings per common share:
Before extraordinary item $ 0.11 $ 0.09
Extraordinary item (0.07) --
--------- ---------
Net $ 0.04 $ 0.09
========= =========
Weighted average number of
common shares and equivalents
outstanding during period 29,726 30,192
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 2, DECEMBER 1,
1997 1996
-------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,133 $ 16,619
Accounts receivable, less allowance for doubtful
accounts (1997 - $6,984; 1996 - $6,814) 85,115 77,179
Inventories 37,363 33,992
Net assets held for sale -- 35,492
Prepaid expenses and deferred taxes 17,281 10,446
--------- ---------
149,892 173,728
Property, plant and equipment - at cost 159,770 156,063
Less: accumulated depreciation (37,590) (34,697)
--------- ---------
122,180 121,366
Other assets:
Goodwill and other intangibles - net of
accumulated amortization
(1997 - $54,095; 1996 - $50,719) 430,929 434,304
Debt issuance costs and other assets 12,452 10,530
--------- ---------
443,381 444,834
--------- ---------
$ 715,453 $ 739,928
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 2, DECEMBER 1,
1997 1996
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term obligations $ 75 $ 18,620
Accounts payable 36,346 35,797
Accrued incentives and advertising 23,921 20,704
Accrued interest payable 6,626 1,708
Accrued income taxes 6,597 133
Accrued compensation 6,305 14,047
Other accrued expenses 21,301 21,850
--------- ---------
101,171 112,859
Long-term obligations 356,400 269,507
Other noncurrent liabilities 34,905 34,822
Deferred income taxes 28,693 29,746
Stockholders' equity:
Common stock 295 294
Additional paid-in capital 256,643 256,489
Retained (deficit) earnings (61,200) 37,418
Foreign currency translation adjustment (1,454) (1,207)
--------- ---------
194,284 292,994
Commitments and contingencies -- --
--------- ---------
$ 715,453 $ 739,928
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 2, MARCH 3,
1997 1996
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 27 $ (2,632)
-------- --------
Investing activities:
Proceeds from sale of subsidiary 35,000 --
Purchase of property and equipment, net (3,955) (1,956)
-------- --------
Net cash provided by (used in) investing activities 31,045 (1,956)
-------- --------
Financing activities:
Dividend (99,776) --
Proceeds from (repayment of) long-term obligations, net 68,348 (2,678)
Debt issuance costs (6,130) --
-------- --------
Net cash used in financing activities (37,558) (2,678)
-------- --------
Change in cash and cash equivalents (6,486) (7,266)
Cash and cash equivalents:
Beginning of period 16,619 17,348
-------- --------
End of period $ 10,133 $ 10,082
======== ========
Supplemental disclosures:
- -------------------------
Cash paid for:
Taxes paid, net $ 3,250 $ 4,125
Cash interest paid $ 1,361 $ 1,887
Selected noncash expenses:
Depreciation $ 3,141 $ 2,618
Noncash compensation $ 290 $ 440
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 2, 1997
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 December 1, 1996.
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 March 2, 1997, 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.
NOTE B -- INVENTORIES
The major components of inventories were as follows:
<TABLE>
<CAPTION>
MARCH 2, DECEMBER 1,
1997 1996
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $20,371 $18,300
Work in process 12,419 11,624
Finished goods 4,573 4,068
------- -------
$37,363 $33,992
======= =======
</TABLE>
NOTE C -- LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
MARCH 2, DECEMBER 1,
1997 1996
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
$275,000,000 Second Restated Secured
Credit Agreement - Revolving Credit
Facility $156,400 $ --
1994 Restated Credit Agreement:
Revolving Credit Facility -- 25,000
Term Loan Facility -- 63,052
10 1/4% Senior Subordinated Notes Due 2003 200,000 200,000
Other 75 75
-------- --------
356,475 288,127
Less current portion 75 18,620
-------- --------
$356,400 $269,507
======== ========
</TABLE>
6
<PAGE> 7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 2, 1997
The $275,000,000 Second Restated Secured Credit Agreement (the "1997
Credit Agreement") was consummated on February 25, 1997 and consists of a $275
million reducing revolving credit facility with a $25 million discretionary
letter of credit facility and a discretionary swing loan facility of up to $20
million ("Revolving Credit Facility"). The 1997 Credit Agreement has a final
maturity date of January 15, 2003, and provides for periodic reductions in the
amounts of available credit in accordance with the following schedule:
<TABLE>
<CAPTION>
REMAINING
COMMITMENT REVOLVER
REDUCTION DATE REDUCTION COMMITMENT
---------------- ------------ -----------
<S> <C> <C>
November 29, 1998 $15 million $260 million
November 28, 1999 $20 million $240 million
December 3, 2000 $30 million $210 million
December 2, 2001 $30 million $180 million
June 2, 2002 $30 million $150 million
</TABLE>
Additional mandatory commitment reductions will occur equal to 100% of net
after-tax cash proceeds from any sale of assets in excess of $15 million in each
fiscal year, and equal to 50% of net proceeds from the issuance of permitted
subordinated debt.
Base rate loans and Eurodollar rate loans are based on a pricing grid
which provides for an interest rate plus a margin. The margin is adjustable
based on the Company's total senior debt to adjusted EBITDA ratio. For the first
six months of the 1997 Credit Agreement, the margin on Eurodollar rate
borrowings will be the greater of 1.25% or the applicable level of the pricing
grid. The initial commitment fee, which is also subject to a pricing grid, is
0.375%.
During the quarter ended March 2, 1997, the maximum amount outstanding
under the Revolving Credit Facility, excluding Letters of Credit, was $156
million. At March 2, 1997, the Company had approximately $106 million available
under the Revolving Credit Facility, with Letters of Credit issued totaling
approximately $13 million.
All obligations of the Company under the 1997 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; however, such security is subject to release
upon the Company attaining specified senior unsecured (either actual or implied)
credit ratings. The Company also is subject to certain affirmative and negative
covenants under both the 1997 Credit Agreement and the Indenture relating to its
10 1/4% Senior Subordinated Notes due 2003, including requirements and
restrictions with respect to capital expenditures, dividends, maximum leverage
and other financial ratios.
7
<PAGE> 8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 2, 1997
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 the ACO the Company and such subsidiary agreed to conduct soil and
groundwater investigation and remediation at the plant owned by the subsidiary
in South Brunswick, New Jersey. The Company does not believe that its
manufacturing processes were a source of the contaminants found to exist above
regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.
The DEP previously approved both the Company's soil remediation plans and
its initial groundwater remediation plans. Further investigation in 1996
revealed certain additional areas of soil contamination resulting from
activities at the South Brunswick facility prior to the Company's acquisition of
the site. The Company anticipates that in 1997, subject to DEP approval, it will
complete essentially all soil remediation and will conduct a pilot test for a
Company-proposed revision to the groundwater remediation program.
While the Company cannot predict the ultimate timing or cost to remediate
this facility based on facts currently known, management believes the previously
established accrual for site investigation and remediation costs is adequate to
cover the Company's reasonably estimable liability and does not believe the
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.
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. Subsequent to
March 2, 1997, the Company received $1.7 million from a former owner of the site
and one of the lenders to the former owner in final settlement of this
litigation.
The Company also has voluntarily proceeded to develop a remediation plan
for isolated soil and groundwater contamination at its Oakville, Connecticut
property that the Company believes is solely attributable to the manufacturing
operations of previous unaffiliated occupants. Based on the facts currently
known, management does not believe that resolution of this matter will have a
material adverse effect on the Company's financial position or future
operations.
8
<PAGE> 9
Item 2 - SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 2, 1997 AND MARCH 3, 1996
NET SALES Net sales increased $9.4 million, or 5.9% for the quarter ended
March 2, 1997, when compared to the quarter ended March 3, 1996. The increase is
attributable to a $21.6 million increase in conventional bedding sales and a
$12.2 million decrease in sales of wood bedroom furniture.
The bedding sales increase represents a $21.3 million, or 15.0% increase
in conventional bedding unit shipments, along with a $0.3 million, or 0.2%
increase in the average unit selling price. This bedding performance was
primarily due to strong sales of Posturepedic and Stearns & Foster products.
Increased sales of the Company's flagship Posturepedic line is due to a
combination of new products, enhanced products and selective pricing
initiatives. The Stearns & Foster line of luxury bedding continues to experience
strong sales growth as a result of increased customer base, increased volume
from existing customers and the introduction of new products.
The decrease in sales of wood bedroom furniture, sold under the Samuel
Lawrence brand, is due to the sale of this business on January 15, 1997. A
description of the disposition of this business unit is provided in Note 14 to
the consolidated financial statements contained in the Company's Form 10-K for
the year ended December 1, 1996.
COST OF GOODS SOLD Cost of goods sold for the quarter, as a percentage of
net sales, increased 0.4 percentage point to 56.8%. This increase is primarily
attributable to the introduction of lower price point Posturepedic products,
along with selective price rollbacks and closeout pricing initiatives. These
items were partially offset by the impact of lower sales of the lower margin
wood bedroom furniture.
SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $4.3 million primarily due to increases in marketing
spending, $3.5 million, and delivery expenses, $0.9 million, as a result of
increased sales volume. Marketing spending also was impacted by an increased
spending rate for cooperative advertising and promotions partially offset by
lower national advertising.
INTEREST EXPENSE Interest expense, net of interest income, decreased $0.7
million primarily as a result of lower average debt levels and debt issuance
cost amortization.
INCOME TAX The Company's provision for income taxes decreased $0.5 million
due to a decrease in pretax income and a lower effective tax rate in 1997. The
effective income tax rate differs from the Federal statutory rate as a result of
the application of purchase accounting, certain foreign tax rate differentials,
and state and local taxes. The effective income tax rate for 1997 is
approximately 49.8% as compared to 56.5% in 1996.
EXTRAORDINARY ITEM The Company recorded a $2.0 million charge, net of
income tax benefit of $1.4 million, representing the write-off of the remaining
unamortized debt issuance costs related to long-term obligations repaid as a
result of the February 25, 1997 refinancing.
NET INCOME For the reasons set forth above, the Company recorded net
income of $1.2 million for the quarter ended March 2, 1997 versus net income of
$2.9 million for the quarter ended March 3, 1996.
9
<PAGE> 10
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are cash flows from operations
and borrowings under its Revolving Credit Facility. The Company's principal use
of funds consists of payments of principal and interest on its secured
indebtedness, the dividend described below, capital expenditures and interest
payments on its outstanding Notes. Capital expenditures totaled $4.0 million for
the quarter ended March 2, 1997. Management believes that annual capital
expenditure limitations in its 1997 Credit Agreement will not significantly
inhibit the Company from meeting its ongoing capital needs. At March 2, 1997,
the Company had approximately $106 million available under its Revolving Credit
Facility with Letters of Credit issued totaling approximately $13 million. The
weighted average interest rate on the Revolving Credit Facility at March 2, 1997
was 6.9%.
On January 15, 1997, the Company sold its subsidiary that manufactured
wood bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from
the sale of $35.0 million were used to reduce amounts outstanding under the 1994
Restated Credit Agreement.
On February 6, 1997, the Company's Board of Directors authorized the
payment of a dividend to all stockholders and holders of Merger Warrants of
record as of February 27, 1997. The dividend, which was paid on February 28,
1997 amounted to approximately $99.8 million, or $3.31 per share and was
financed through borrowings under the Revolving Credit Facility.
Management believes that the Company will have the necessary liquidity
through cash flow from operations, and availability under the Revolving Credit
Facility for the next several years to fund its expected capital expenditures,
obligations under its credit agreement and subordinated note indenture,
environmental liabilities, and for other needs required to manage and operate
its business.
10
<PAGE> 11
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
(a) Subsequent to the end of the quarter, the Company divested the
assets of its mattress insulator pad manufacturing operation in
South Brunswick, New Jersey for approximately net book value.
(b) Jesse E. Hogan, Senior Vice President and Chief Financial
Officer, left the employment of the Company effective March 19,
1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
11
<PAGE> 12
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/ Ronald L. Jones President and Chief Executive Officer
----------------------------- (Principal Executive Officer)
Ronald L. Jones
By: /s/ Richard F. Sowerby Vice President Controller
------------------------------ (Principal Accounting Officer)
Richard F. Sowerby
Date: April 14, 1997
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-02-1996
<PERIOD-END> MAR-02-1997
<CASH> 10,133
<SECURITIES> 0
<RECEIVABLES> 92,099
<ALLOWANCES> 6,984
<INVENTORY> 37,363
<CURRENT-ASSETS> 149,892
<PP&E> 159,770
<DEPRECIATION> 37,590
<TOTAL-ASSETS> 715,453
<CURRENT-LIABILITIES> 101,171
<BONDS> 356,400
<COMMON> 295
0
0
<OTHER-SE> 193,989
<TOTAL-LIABILITY-AND-EQUITY> 715,453
<SALES> 168,904
<TOTAL-REVENUES> 168,904
<CGS> 96,014
<TOTAL-COSTS> 96,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 602
<INTEREST-EXPENSE> 6,801
<INCOME-PRETAX> 6,352
<INCOME-TAX> 3,164
<INCOME-CONTINUING> 3,188
<DISCONTINUED> 0
<EXTRAORDINARY> 2,030
<CHANGES> 0
<NET-INCOME> 1,158
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
