<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1998
REGISTRATION NO. 333-48187
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SEALY MATTRESS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 2510 34-0439410
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
JURISDICTION CODE NUMBER)
OFINCORPORATION OR
ORGANIZATION) (continued on next page)
HALLE BUILDING
10TH FLOOR
1228 EUCLID AVENUE
CLEVELAND, OHIO 44115
TELEPHONE: (216) 522-1310
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
KENNETH L. WALKER
HALLE BUILDING
10TH FLOOR
1228 EUCLID AVENUE
CLEVELAND, OHIO 44115
TELEPHONE: (216) 522-1310
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
LANCE C. BALK
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
(continued from preceding page)
SEALY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2510 36-3284147
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
SEALY MATTRESS COMPANY OF PUERTO RICO
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 2510 34-6544153
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
OHIO-SEALY MATTRESS MANUFACTURING CO., INC.
(RANDOLPH)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 2510 04-2611765
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
OHIO-SEALY MATTRESS MANUFACTURING CO.--FT. WORTH
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 2510 75-1491047
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
OHIO-SEALY MATTRESS MANUFACTURING CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 2510 58-1186228
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
OHIO-SEALY MATTRESS MANUFACTURING CO.--HOUSTON
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 2510 74-1275140
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
SEALY MATTRESS COMPANY OF MICHIGAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 2510 38-1256567
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SEALY MATTRESS COMPANY OF KANSAS CITY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 2510 44-0523533
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SEALY OF MARYLAND AND VIRGINIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 2510 52-1192669
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SEALY MATTRESS COMPANY OF ILLINOIS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 2510 36-1853967
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
(continued on next page)
<PAGE>
(continued from preceding page)
A. BRANDWEIN & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 2510 36-2525330
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
SEALY MATTRESS COMPANY OF ALBANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 2510 14-1325596
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
SEALY OF MINNESOTA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 2510 41-1227650
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SEALY MATTRESS COMPANY OF MEMPHIS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 2510 62-0357534
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
THE STEARNS & FOSTER BEDDING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2510 36-2515193
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
THE STEARNS & FOSTER UPHOLSTERY FURNITURE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 2510 34-1449445
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
SEALY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 2510 34-1439379
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION CLASSIFICATION CODE
OFINCORPORATION OR NUMBER)
ORGANIZATION)
THE OHIO MATTRESS COMPANY LICENSING AND COMPONENTS GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2510 36-1750335
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SEALY MATTRESS MANUFACTURING COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2510 36-3209918
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NUMBER)
OFINCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 18, 1998
PROSPECTUS
[LOGO] SEALY MATTRESS COMPANY [LOGO]
OFFER TO EXCHANGE ITS SERIES B 9 7/8% SENIOR SUBORDINATED NOTES DUE
2007 FOR ANY AND ALL OF ITS OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES
DUE 2007 AND ITS SERIES B 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES
DUE 2007
-----------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
-----------
Sealy Mattress Company, an Ohio corporation ("Sealy"), hereby offers (the
"Exchange Offer"), upon the terms and conditions set forth in this Prospectus
(the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange (i) $1,000 principal amount of its Series B 9 7/8%
Senior Subordinated Notes due 2007 (the "Senior Subordinated Exchange Notes")
for each $1,000 principal amount of its outstanding 9 7/8% Senior Subordinated
Notes due 2007 (the "Senior Subordinated Notes"), of which $125,000,000
principal amount is outstanding and (ii) $1,000 principal amount at maturity of
its Series B 10 7/8% Senior Subordinated Discount Notes due 2007 (the "Senior
Subordinated Discount Exchange Notes" and, together with the Senior
Subordinated Exchange Notes, the "Exchange Notes") for each $1,000 of principal
amount at maturity of its outstanding 10 7/8% Senior Subordinated Discount
Notes due 2007 (the "Senior Subordinated Discount Notes" and, together with the
Senior Subordinated Notes, the "Notes"), of which $128,000,000 principal amount
at maturity is outstanding. The Exchange Notes will have been registered under
the Securities Act of 1933, as amended (the "Securities Act") pursuant to a
Registration Statement of which this Prospectus is a part. The form and terms
of the Exchange Notes are the same as the form and term of the Notes (which
they replace) except that the Exchange Notes will bear a Series B designation
and will have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and will not contain certain provisions
relating to an increase in the interest rate which were included in the terms
of the Notes in certain circumstances relating to the timing of the Exchange
Offer. The Exchange Notes will be fully and unconditionally guaranteed, on a
joint and several basis, by Parent and certain of Sealy's subsidiaries. The
Exchange Notes will evidence the same debt as the Notes (which they replace)
and will be issued under and be entitled to the benefits of the Indentures
dated December 18, 1997 among Sealy, the guarantors named therein (the
"Guarantors") and the Bank of New York (the "Indentures") governing the Notes.
See "The Exchange Offer" and "Description of Exchange Notes".
Sealy has not issued, and does not have any current firm arrangements to
issue, any significant indebtedness to which the Exchange Notes would rank
senior or pari passu in right of payment. The Exchange Notes will be
subordinated in right of payment to all Senior Debt of Sealy, including all of
the obligations under the Senior Credit Agreements, and will rank pari passu
with all future senior subordinated debt of the Issuer and will rank senior in
right of payment to all of Issuer's future subordinated debt. As of March 1,
1998, the aggregate amount of outstanding Indebtedness to which the Notes would
have been subordinated was $479.0 million, consisting of secured borrowings
under the Senior Credit Agreements.
Sealy will accept for exchange any and all Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended
by Sealy in its sole discretion (the "Expiration Date"). Notwithstanding the
foregoing, Sealy will not extend the Expiration Date beyond , 1998. Tenders
of Notes may be withdrawn at any time prior to 5:00 p.m. on the Expiration
Date. The Exchange Offer is subject to certain customary conditions. The Notes
were sold by Sealy on December 18, 1997 to the Initial Purchasers (as defined
herein under the caption "Summary--The Offering") in a transaction not
registered under the Securities Act in reliance upon an exemption under the
Securities Act. The Initial Purchasers subsequently placed the Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act and with a limited number of institutional accredited investors that agreed
to comply with certain transfer restrictions and other conditions. Accordingly,
the Notes may not be reoffered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of Sealy under the Registration Rights Agreement entered into
by Sealy in connection with the offering of the Notes. See "The Exchange
Offer".
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, Sealy believes the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder
that is an "affiliate" of Sealy within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and such holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "The Exchange Offer--Resale of the Exchange
Notes". Each broker-dealer (a "Participating Broker-Dealer") that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Notes where such Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. Sealy has agreed that, for a period of
180 days after the Expiration Date, it will make this Prospectus available to
any participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution".
Holders of Notes not tendered and accepted in the Exchange Offer will
continue to hold such Notes and will be entitled to all the rights and benefits
and will be subject to the limitations applicable thereto under the Indenture
and with respect to transfer under the Securities Act. Sealy will pay all the
expenses incurred by it incident to the Exchange Offer. See "The Exchange
Offer".
SEE "RISK FACTORS" ON PAGE 16 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is March , 1998
<PAGE>
There has not previously been any public market for the Notes or the
Exchange Notes. Sealy does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Lack of Public Market;
Transfer Restrictions". Moreover, to the extent that Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form.
Sealy expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Certificate (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Certificate representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Certificate, Exchange Notes in certified form will be issued in exchange for
the Global Certificate only on the terms set forth in the Indenture. See
"Description of Exchange Notes--Book-Entry; Delivery and Form".
AVAILABLE INFORMATION
Sealy has filed with the Commission a Registration Statement on Form S-4
(the "Exchange Offer Registration Statement", which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Notes being offered hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to Sealy and the Exchange Offer, reference is
made to the Exchange Offer Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices
of the commission at 75 Park Place, New York, New York 10007 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Additionally, the Commission maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission, including the Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, Sealy will become subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The obligation of Sealy to file periodic
reports and other information with the Commission will be suspended if the
Exchange Notes are held of record by fewer than 300 holders as of the
beginning of any fiscal year of Sealy other than the fiscal year in which the
Exchange Offer Registration Statement is declared effective. Sealy will
nevertheless be required to continue to file reports with the Commission if
the Exchange Notes are listed on a national securities exchange. In the event
Sealy ceases to be subject to the informational requirements of the Exchange
Act, Sealy will be required under the Indentures to continue to file with the
Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
i
<PAGE>
Exchange Act. Under the Indentures, Sealy shall file with the Trustee annual,
quarterly and other reports within fifteen days after it files such reports
with the Commission. Further, to the extent that annual or quarterly reports
are furnished by Sealy to stockholders generally it will mail such reports to
holders of Exchange Notes. Sealy will furnish annual and quarterly financial
reports to stockholders of Sealy and will mail such reports to holders of
Exchange Notes pursuant to the Indenture, thus holders of Exchange Notes will
receive financial reports every quarter. Annual reports delivered to the
Trustee and the holders of Exchange Notes will contain financial information
that has been examined and reported upon, with an opinion expressed by an
independent public or certified public accountant. Sealy will also furnish
such other reports as may be required by law.
FORWARD LOOKING STATEMENTS
THE PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO
THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY", "UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL INFORMATION", "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS". ALL
OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS
MADE BY THE MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH BELIEVED TO BE
REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE
PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY
OF SUCH ESTIMATES WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION;
(2) INCREASED COSTS; (3) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4)
INCREASES IN THE COMPANY'S COST OF BORROWING OR INABILITY OR UNAVAILABILITY OF
ADDITIONAL DEBT OR EQUITY CAPITAL; (5) ADVERSE STATE OR FEDERAL LEGISLATION OR
REGULATION OR ADVERSE DETERMINATIONS IN PENDING LITIGATION; AND (6) CHANGES IN
GENERAL ECONOMIC CONDITIONS AND/OR IN THE MARKETS IN WHICH THE COMPANY MAY,
FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS ARE BEYOND THE CONTROL OF THE
COMPANY AND ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH
COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD LOOKING
STATEMENTS, SEE "RISK FACTORS".
----------------
TRADEMARKS AND TRADENAMES
THE FOLLOWING ITEMS REFERRED TO IN THIS DOCUMENT ARE TRADEMARKS WHICH ARE
FEDERALLY REGISTERED IN THE UNITED STATES PURSUANT TO APPLICABLE INTELLECTUAL
PROPERTY LAWS AND ARE THE PROPERTY OF SEALY CORPORATION OR ITS SUBSIDIARIES:
SEALY, POSTUREPEDIC, STEARNS & FOSTER, CROWN JEWEL, CORRECT COMFORT
(STYLIZED), BACK SAVER, ORTHO-ZONE (STYLIZED), POSTURE PREMIER, EVEREDGE,
EDGEGUARD, MIRACLE EDGE, POSTURETECH, SENSE & RESPOND, STEELSPAN, TRU-LOK,
ULTRAEDGE, ULTRASTEEL, AND UNIVERSITY OF SLEEP.
THE FOLLOWING ITEMS REFERRED TO IN THIS DOCUMENT ARE TRADEMARKS OWNED BY
SEALY CORPORATION, OR ITS SUBSIDIARIES, FOR WHICH APPLICATIONS FOR
REGISTRATION ARE PENDING IN THE UNITED STATES PURSUANT TO APPLICABLE
INTELLECTUAL PROPERTY LAWS. SEALY POSTUREPEDIC, SEALY POSTUREPEDIC CROWN
JEWEL, INFINILUX, AND POSTURESTEEL.
ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes therein, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the "Issuer" refer to Sealy Mattress Company and
references to "Sealy" or the "Company" (other than in the presentation of
financial data) refer collectively to Sealy Mattress Company, its wholly-owned
subsidiaries, and its sole shareholder, Sealy Corporation ("Parent"), after
giving effect to the Transactions (as defined herein under the caption "The
Transactions"). For purposes of the presentation of all financial data herein,
the "Company" refers to Parent and its consolidated subsidiaries with respect
to historical information and to the Issuer and its consolidated subsidiaries
with respect to pro forma information. All references to the Company's domestic
operations include its operations in Puerto Rico. All references in this
Prospectus to "fiscal year" for years prior to 1996 refer to the year ended on
November 30 of that calendar year and for subsequent years refer to the year
ended on the Sunday closest to November 30 of that calendar year. For example,
fiscal 1997 and 1996 refer to the years ended November 30, 1997 and December 1,
1996, respectively.
OVERVIEW
THE COMPANY
Sealy Mattress Company, headquartered in Cleveland, Ohio, has been the
leading conventional bedding manufacturer in North America for over two decades
and the Sealy brand name has been in existence for over 100 years. The Company
manufactures, distributes and sells a broad line of conventional bedding
products, including mattresses and foundations, under the Sealy, Sealy
Posturepedic, Stearns & Foster and recently introduced Sealy Correct Comfort
and Sealy Posturepedic Crown Jewel brand names. The Company's branded
merchandise accounted for approximately 99% of total net sales for the fiscal
year ended November 30, 1997. Based on market growth estimates by the
International Sleep Products Association ("ISPA"), the Company estimates that
it held a 22% share of the U.S. bedding market for 1997. The Company offers a
complete line of conventional bedding options in the promotional, premium,
ultra-premium and luxury categories, which sell at retail price points from
under $200 to approximately $3,000 per queen-size set. For the fiscal year
ended November 30, 1997, on a pro forma basis, the Company generated net sales
and Adjusted EBITDA (as defined herein) of $799.5 million and $103.1 million,
respectively.
The Company has a diversified customer base and serves all major bedding
distribution channels. The Company manufactures and supplies conventional
bedding to over 7,000 retail outlets, representing approximately 3,200
customers, including furniture stores, department stores, specialty sleep shops
and warehouse clubs. The Company operates 21 domestic bedding manufacturing
facilities and four international bedding manufacturing facilities,
strategically located to reduce transportation costs and facilitate just-in-
time deliveries. The Company also operates three component manufacturing
facilities which produce substantially all of the Company's mattress
innersprings and approximately 50% of its foundation component parts. The
Company believes that because it is vertically integrated and operates its own
manufacturing facilities, it possesses numerous advantages over certain of its
national, brand-name competitors that operate as a group of independent
licensees. These benefits include: (i) production of consistent, high-quality
products, (ii) centralized decision-making, (iii) consistent local marketing
and servicing of national accounts and (iv) effective and balanced utilization
of manufacturing facilities.
INDUSTRY
The U.S. conventional bedding industry is mature and stable. For the year
ended December 31, 1996, manufacturers and retailers generated revenue of $3.3
billion and $6.2 billion, respectively,
1
<PAGE>
according to ISPA. Over the last 20 years, sales have declined only once (1.9%
in 1982), and the industry has grown an average of 6.4% per year. Industry
growth is driven primarily by: (i) population expansion, (ii) demographic
shifts and (iii) manufacturer and retailer advertising and education
emphasizing larger-size, higher quality beds. Because consumers shop for
bedding infrequently and often have limited specific product knowledge, they
typically rely on the retail salesperson in the purchase decision process.
Management believes that those manufacturers best able to meet the retailers'
needs--including differentiated, brand name products, retail salesforce
training in product specifications and merchandising and logistics support--
should continue to gain market share. From 1989 to 1996, the combined market
share of the top four manufacturers has steadily increased from 48% to 59%.
COMPANY STRENGTHS AND BUSINESS STRATEGY
The Company's main objective is to grow sales and market share by maximizing
its share of the retailers' floor space while managing costs. The key elements
of the Company's strategy are as follows:
LEVERAGE MARKET LEADERSHIP POSITION AND HIGH BRAND AWARENESS. The Company is
the largest manufacturer of conventional bedding products in the United States,
a position it has held for more than two decades. Based on 1997 industry growth
estimated by the ISPA, management estimates that the Company held a 22% share
of the U.S. market, approximately 1.3 times that of its next largest
competitor. Strong relative market share, coupled with numerous strong brands,
including Sealy, Sealy Posturepedic and Stearns & Foster, provide the Company
with significant marketing strength relative to its competitors, who primarily
offer only one brand to retailers. Brand recognition is critical in the bedding
industry, where strong brand names help define consumer preference and drive
retail floor space allocation.
ENHANCE POSITION AS LEADING SUPPLIER TO THE BEDDING INDUSTRY. The Company is
uniquely positioned to benefit from current industry trends, including the
consolidation of manufacturers and the increase in sole-source vendor
arrangements. Management believes that its: (i) broad product offering, (ii)
product design leadership, (iii) national manufacturing and distribution and
(iv) commitment to retailer education and training provide support to its
existing dealer network while helping to attract new accounts. Such strong
dealer relationships should result in sales growth through increased floor
space allocation, superior product positioning and enhanced commitment by
retail salesforces.
. BROAD PRODUCT OFFERING. Management believes that the Company currently
offers the most complete line of conventional bedding products in the
industry, enabling retailers to offer consumers a full range of bedding
alternatives from a single source. The Company's product line ranges from
higher-margin, higher-priced mattresses, sold under the Sealy
Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort and
Stearns & Foster names, to lower-priced promotional, private label and
contract bedding products. The consistently advertised, lower-priced
product line is instrumental in attracting customers, thereby offering
retailers the in-store opportunity to promote higher-priced products with
incrementally higher margins. In addition, the Company's broad product
line has enabled it to secure sole-source, multi-year arrangements with
several retailers, including a significant number of those in the high-
growth, specialty channel, such as Mattress Discounters, Mattress Firm
and Bedding Experts.
. PRODUCT DESIGN LEADERSHIP. Since December 1, 1994 the Company has, on
average, invested approximately 0.75% of its net sales in research and
development, a rate which management believes to be in excess of twice
that of its next largest competitor, to create and commercialize
innovative products that broaden the Company's product lines and
differentiate its products from those of its competitors. Management
believes that this investment in product
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enhancements and new products, such as Sealy Correct Comfort, the
Company's recently introduced, individually-wrapped coil product, allows
the Company to claim additional floor space and compete effectively for
sole-source vendor positions. A majority of the Company's net sales for
the fiscal year ended November 30, 1997 were from products introduced or
reengineered in the prior two years.
. NATIONAL MANUFACTURING AND DISTRIBUTION. In surveys, retailers have
stated that delivery times and product quality are among the most
important criteria used to evaluate manufacturers. The Company believes
that its current structure and operating strategy directly address these
needs. The Company is one of only two national manufacturers operating as
a single company rather than as a group of independent licensees. Because
it owns 21 manufacturing and distribution facilities strategically
located throughout the United States, the Company can quickly respond to
retailers' logistical and product design requirements. Such just-in-time
deliveries enable retailers to minimize inventory carrying costs and meet
the growing demand of consumers for product variety and shortened
delivery times. Additionally, the Company is the only national
manufacturer to have taken advantage of vertical integration in a
majority of its product lines. Vertically integrated manufacturing
permits the Company to safeguard proprietary technology and new product
design while better controlling costs.
. COMMITMENT TO RETAILER EDUCATION AND SUPPORT. The Company assists its
retailers in re-merchandising their showrooms and actively marketing more
profitable lines of bedding through ongoing investment in retailer
relationships. The Company supports its retailers by providing: (i)
cooperative advertising dollars and creative assistance, (ii) ongoing
retail sales force training focused on product education and
merchandising instruction, (iii) customized product lines which allow
retailers to differentiate their products from those of their competitors
and (iv) direct mail campaigns. Management believes that retail support
serves to educate consumers about the benefits of higher-end models and
therefore encourages additional sales at higher price points.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. By
virtue of its size and leadership position in the bedding industry, the Company
benefits from significant operational efficiencies. The Company is able to
capture economies of scale in research and development, advertising and raw
material purchases. Management believes that several opportunities remain to
leverage the current infrastructure to realize meaningful cost reductions,
including greater utilization of existing facilities, improved scrap management
and improved distribution and transportation. Additionally, the Company is in
the process of upgrading its management information systems ("MIS") to improve
manufacturing operations and profitability analysis.
LEVERAGE THE SEALY NAME THROUGH LICENSEES. Significant opportunities exist to
leverage the strong Sealy brand names in bedding-related product categories
through strategic licensing agreements rather than through direct
manufacturing. In the past year, the Company has entered into a number of
licensing arrangements with various manufacturers, including: (i) Klaussner
Furniture Industries, one of the largest upholstered furniture manufacturers in
the United States, for the manufacture of upholstered furniture under the Sealy
Furniture brand name; (ii) Pacific Coast Feather Company for the manufacture
and sale of pillows, comforters and mattress pads under the Sealy brand name;
and (iii) Dorel Industries for the manufacture and sale of futons under the
Sealy Furniture brand name. Management believes that these licensing agreements
broaden consumer recognition of the Sealy name while generating significant
income for the Company.
CAPITALIZE ON STRONG MANAGEMENT TEAM. Led by Chief Executive Officer Ron
Jones, who joined the Company in early 1996, the Company has assembled one of
the strongest management
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teams in the bedding industry. The Company's senior management team has
approximately 150 years of experience in the bedding and home furnishings
industries and has made a significant equity investment in Sealy Corporation at
the close of the Transactions. This management team has instituted a number of
strategic initiatives, including: (i) divestiture of non-core operations and
renewed focus on the Company's core bedding business, (ii) improved long-term
strategic and product planning which has resulted in a new product rollout
schedule through 1999, (iii) increased focus on retailer relationships, (iv) a
shift to a more balanced marketing program that includes significant
cooperative and focused national advertising and (v) the implementation of a
disciplined international strategy. The execution of these and other
initiatives has resulted in significant improvements in the financial and
market position of the Company. Since December 1995, the Company has increased
its market share from 18% to an estimated 22% in 1997. Additionally, on a pro
forma basis, net sales and Adjusted EBITDA have increased 26.7% and 10.1%,
respectively, for the fiscal year ended November 30, 1997 versus fiscal 1996.
THE SPONSOR
Bain Capital, Inc. ("Bain") manages capital in excess of $2.0 billion and has
invested in more than 100 companies. Bain is one of the most experienced and
successful private equity investors in the United States and the firm's
principals have extensive experience working with companies on a wide range of
operational challenges. Bain's investment strategy is to acquire companies in
partnership with exceptional management teams and to improve the long-term
value of businesses. The firm typically identifies companies with strong
strategic positions and significant opportunities for growth. Bain's investment
in the Company is among its largest to date.
THE TRANSACTIONS
On December 18, 1997, the Company consummated (i) the Merger whereby, among
other things, funds managed by Bain (the "Bain Funds"), together with other
equity investors, including the Company's Chief Executive Officer and other
members of senior management (the "Management Investors" and collectively with
the other investors, the "Investors"), acquired an approximate 90% equity stake
(85.3% voting stake) in Parent, (ii) the Tender Offer (as defined herein under
the caption "The Transactions") to purchase for cash all of the Parent Notes
(as defined herein under the caption "The Transactions") and the related
Consent Solicitation (as defined herein under the caption "The Transactions")
to modify certain terms of the Parent Note Indenture (as defined herein), (iii)
a refinancing (the "Refinancing") whereby the Company entered into and borrowed
under the Senior Credit Agreements (as defined herein under the caption "The
Transactions") and repaid Parent indebtedness outstanding under the Old Credit
Agreement (as defined herein under the caption "The Transactions") and the
offerings of the Notes (the "Offerings"). The Merger has been accounted for as
a recapitalization (the "Recapitalization"). The Offerings, the Merger and
Recapitalization, the Tender Offer and related Consent Solicitation and the
Refinancing are collectively referred to herein as the "Transactions". See "The
Transactions" and "Security Ownership."
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THE OFFERING
NOTES....................... The Notes were sold by the Company on December
18, 1997 to Goldman, Sachs & Co., J.P. Morgan
Securities Inc. and BT Alex. Brown Incorporated
(the "Initial Purchasers") pursuant to a Purchase
Agreement dated December 11, 1997 (the "Purchase
Agreement"). The Initial Purchasers subsequently
resold the Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities
Act and to a limited number of institutional
accredited investors that agreed to comply with
certain transfer restrictions and other
conditions.
REGISTRATION RIGHTS Pursuant to the Purchase Agreement, the Company
AGREEMENT................... and the Initial Purchasers entered into a
Registration Rights Agreement dated December 11,
1997, which grants the holder of the Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED.......... $125.0 million in aggregate principal amount of
Series B 9 7/8% Senior Subordinated Notes due
December 15, 2007 (the "Senior Subordinated
Exchange Notes") and $128.0 million in aggregate
principal amount at maturity of Series B 10 7/8%
Senior Subordinated Discount Notes due December
15, 2007 (the "Senior Subordinated Discount
Exchange Notes" and, together with the Senior
Subordinated Exchange Notes, the "Exchange
Notes").
THE EXCHANGE OFFER.......... $1,000 principal amount of the Senior
Subordinated Exchange Notes in exchange for each
$1,000 principal amount of Senior Subordinated
Notes and $1,000 principal amount of the Senior
Subordinated Discount Exchange Notes in exchange
for each $1,000 principal amount of Senior
Subordinated Discount Notes. As of the date
hereof, $125.0 million in aggregate principal
amount of Senior Subordinated Notes and $128.0
million in aggregate principal amount at maturity
of Senior Subordinated Discount Notes are
outstanding. The Company will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Notes may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than any such holder which
is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are
acquired in the ordinary course of such
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<PAGE>
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Notes where such Notes
were acquired by such Participating Broker-Dealer
as a result of market-making activities or other
trading activities. The Company has agreed that,
for a period of 180 days after the Expiration
Date, it will make this Prospectus available to
any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution".
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the
Exchange Notes could not rely on the position of
the staff of the Commission enunciated in no-
action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
EXPIRATION DATE............. 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE Each Senior Subordinated Exchange Note will bear
NOTES...................... interest from its issuance date. No interest will
accrue or be payable on the Senior Subordinated
Discount Exchange Notes prior to December 15,
2002. Holders of Senior Subordinated Notes that
are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the Senior Subordinated
Exchange Notes. Such interest will be paid with
the first interest payment on the Senior
Subordinated Exchange Notes. Interest on the
Senior Subordinated Notes accepted for exchange
will cease to accrue upon issuance of the Senior
Subordinated Exchange Notes.
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<PAGE>
CONDITIONS TO THE EXCHANGE
OFFER...................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions".
PROCEDURES FOR TENDERING
NOTES...................... Each holder of Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Notes and any other required documentation to the
Exchange Agent (as defined under the caption "The
Exchange Offer") at the address set forth herein.
Delivery of the Notes may also be made by book-
entry transfer in accordance with the procedures
described below. Confirmation of such book-entry
transfer must be received by the Exchange Agent
prior to the Expiration Date. By executing the
Letter of Transmittal or effecting delivery by
book-entry transfer, each holder will represent
to the Company that, among other things, the
Exchange Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course
of business of the person receiving such Exchange
Notes, whether or not such person is the holder,
that neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and that neither the holder nor
any such other person is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Company. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "--Procedures
for Tendering".
UNTENDERED NOTES............ Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who
do not tender their Notes will not have any
further exchange rights and such Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the
market for such Notes could be adversely
affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE................... The Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Notes may be resold only (i) to
the Company, (ii) pursuant to Rule 144A or Rule
144 under the Securities Act or pursuant to some
other exemption under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Rule 904 under
the Securities Act, or (iv) pursuant to an
effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange".
SHELF REGISTRATION If any holder of the Notes (other than any such
STATEMENT.................. holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) is not eligible under applicable
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<PAGE>
securities laws to participate in the Exchange
Offer, and such holder has provided information
regarding such holder and the distribution of
such holder's Notes to the Company for use
therein, the Company has agreed to register the
Notes on a shelf registration statement (the
"Shelf Registration Statement") and use its best
efforts to cause it to be declared effective by
the Commission as promptly as practical on or
after the consummation of the Exchange Offer. The
Company has agreed to maintain the effectiveness
of the Shelf Registration Statement for, under
certain circumstances, a period of at least 2
years, to cover resales of the Notes held by any
such holders. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS.......... Any beneficial owner whose Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Notes, either make appropriate
arrangements to register ownership of the Notes
in such owner's name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time. The Company will keep the
Exchange Offer open for not less than twenty days
in order to provide for the transfer of
registered ownership.
GUARANTEED DELIVERY Holders of Notes who wish to tender their Notes
PROCEDURES................. and whose Notes are not immediately available or
who cannot deliver their Notes, the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
(or comply with the procedures for book-entry
transfer) prior to the Expiration Date must
tender their Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures".
WITHDRAWAL RIGHTS........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
ACCEPTANCE OF NOTES AND
DELIVERY OF EXCHANGE The Company will accept for exchange any and all
NOTES...................... Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer".
USE OF PROCEEDS............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.............. The Bank of New York.
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<PAGE>
THE EXCHANGE NOTES
GENERAL..................... The form and terms of each class of Exchange
Notes are the same as the form and terms of the
relevant class of Notes (which they replace)
except that (i) the Exchange Notes bear a Series
B designation, (ii) the Exchange Notes have been
registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of
Exchange Notes will not be entitled to certain
rights under the Exchange and Registration Rights
Agreement, including the provisions providing for
an increase in the interest rate on the Notes in
certain circumstances relating to the timing of
the Exchange Offer, which rights will terminate
when the Exchange Offer is consummated. See "The
Exchange Offer--Purpose and Effect of the
Exchange Offer". Each class of Exchange Notes
will evidence the same debt as the relevant class
of Notes and will be entitled to the benefits of
the Indentures. See "Description of Exchange
Notes". The Notes and the Exchange Notes are
referred to herein collectively as the "Senior
Subordinated Notes".
GUARANTEES..................
The Issuer's payment obligations under the
Exchange Notes will be fully and unconditionally
guaranteed on a senior subordinated and joint and
several basis (the "Note Guarantees") by Parent
and certain of the Issuer's current and all of
the Issuer's future U.S. Subsidiaries (the
"Subsidiary Guarantors" and, together with
Parent, the "Guarantors"). The Exchange Notes
will not be guaranteed by certain other of the
Issuer's U.S. Subsidiaries or by any of its
current or future foreign Subsidiaries. For the
years ended November 30, 1995, December 1, 1996
and November 30, 1997, the Non-Guarantor
Subsidiaries (as defined herein under the caption
"Description of Exchange Notes") accounted for
14.7%, 17.2% and 9.3% of net sales, respectively,
and generated Adjusted EBITDA of $7.9 million,
$19.6 million and $10.0 million, respectively.
For additional information relating to the Non-
Guarantor Subsidiaries, see Note 19 of the
Consolidated Financial Statements. The Guarantees
will be subordinated to the guarantees of Senior
Debt issued by the Guarantors under the Senior
Credit Agreements. See "Description of Exchange
Notes--Note Guarantees".
CERTAIN COVENANTS...........
The indenture governing the Senior Subordinated
Notes (the "Senior Subordinated Note Indenture")
and the indenture governing the Senior
Subordinated Discount Notes (the "Senior
Subordinated Discount Note Indenture" and,
together with the Senior Subordinated Note
Indenture, the "Indentures") contain certain
covenants that, among other things, limit the
ability of the Issuer and its Restricted
Subsidiaries (as defined herein under the caption
"Description of Exchange Notes") to incur
additional indebtedness and
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<PAGE>
issue Disqualified Stock (as defined herein under
the caption "Description of Exchange Notes"), pay
dividends or distributions or make investments or
make certain other Restricted Payments (as
defined herein under the caption "Description of
Exchange Notes"), enter into certain transactions
with affiliates, dispose of certain assets, incur
liens and engage in mergers and consolidations.
See "Description of Exchange Notes".
SENIOR SUBORDINATED EXCHANGE NOTES
MATURITY DATE............... December 15, 2007.
INTEREST PAYMENT DATES...... Interest accrues from the date of issuance at an
annual rate of 9 7/8% and will be payable in cash
semi-annually in arrears on June 15 and December
15 of each year, commencing on June 15, 1998.
OPTIONAL REDEMPTION......... Except as described below, the Senior
Subordinated Exchange Notes are not redeemable at
the Issuer's option prior to December 15, 2002.
From and after December 15, 2002, the Senior
Subordinated Exchange Notes will be subject to
redemption at the option of the Issuer, in whole
or in part, at the redemption prices set forth in
the Senior Subordinated Note Indenture, plus
accrued and unpaid interest, if any, thereon to
the applicable redemption date. See "Description
of Exchange Notes--Optional Redemption".
In addition, prior to December 15, 2000, up to
35% of the aggregate principal amount of Senior
Subordinated Exchange Notes will be redeemable at
the option of the Issuer, in whole or in part, on
one or more occasions, from the net proceeds of
any Equity Offerings (as defined herein under the
caption "Description of Exchange Notes"), at a
price of 109.875% of the principal amount of the
Senior Subordinated Exchange Notes, together with
accrued and unpaid interest, if any, to the date
of the redemption; provided that at least $80.0
million in aggregate principal amount of Senior
Subordinated Exchange Notes remains outstanding
immediately after the occurrence of such
redemption. See "Description of Exchange Notes--
Optional Redemption".
CHANGE OF CONTROL........... In the event of a Change of Control, Holders of
the Senior Subordinated Exchange Notes will have
the right to require the Issuer to repurchase
their Senior Subordinated Notes, in whole or in
part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The
Senior Subordinated Note Indenture will require
that prior to such a repurchase, the Issuer must
either repay all outstanding indebtedness under
the Senior Credit Agreements or obtain any
required consent to such repurchase.
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<PAGE>
At any time on or prior to December 15, 2002, the
Senior Subordinated Exchange Notes may also be
redeemed in whole, but not in part, at the option
of the Company, upon the occurrence of a Change
of Control (but in no event more than 90 days
after the occurrence of such Change of Control),
at a redemption price equal to 100% of the
principal amount thereof plus the Senior
Subordinated Note Applicable Premium as of the
Senior Subordinated Note Redemption Date (subject
to the right of holders on the relevant record
date to receive interest due on the relevant
interest payment date). See "Description of
Exchange Notes--Optional Redemption".
SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES
MATURITY DATE............... December 15, 2007.
EFFECTIVE YIELD............. 10 7/8% per annum (computed on a semi-annual bond
equivalent basis).
INTEREST PAYMENT DATES...... The Senior Subordinated Discount Exchange Notes
will be sold at a substantial discount to their
face amount. See "Certain Federal Income Tax
Considerations". No interest will accrue or be
payable on the Senior Subordinated Discount
Exchange Notes prior to December 15, 2002 (the
"Full Accretion Date"). Interest on the Senior
Subordinated Discount Exchange Notes will accrue
and will be payable in cash semi-annually in
arrears on June 15 and December 15 of each year,
commencing on June 15, 2003.
OPTIONAL REDEMPTION......... Except as described below, the Senior
Subordinated Discount Exchange Notes are not
redeemable at the Issuer's option prior to
December 15, 2002. From and after December 15,
2002, the Senior Subordinated Discount Exchange
Notes will be subject to redemption at the option
of the Issuer, in whole or in part, at the
redemption prices set forth in the Senior
Subordinated Discount Note Indenture, plus
accrued and unpaid interest thereon to the
applicable redemption date. See "Description of
Notes--Optional Redemption".
In addition, prior to December 15, 2000, up to
35% of the Accreted Value of the Senior
Subordinated Discount Exchange Notes will be
redeemable at the option of the Issuer, in whole
or in part, on one or more occasions, from the
net proceeds of any Equity Offerings, at a price
of 110.875% of the Accreted Value of the Senior
Subordinated Discount Exchange Notes plus accrued
and unpaid interest, if any; provided, that at
least $50.0 million in aggregate Accreted Value
of Senior Subordinated Discount Exchange Notes
remains outstanding immediately after the
occurrence of such redemption. See "Description
of Exchange Notes--Optional Redemption".
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<PAGE>
CHANGE OF CONTROL........... In the event of a Change of Control, Holders of
the Senior Subordinated Discount Exchange Notes
will have the right to require the Issuer to
repurchase their Senior Subordinated Discount
Exchange Notes, in whole or in part, at a price
equal to 101% of the Accreted Value thereof (or,
if after the Full Accretion Date, 101% of the
principal amount thereof plus accrued and unpaid
interest, including Liquidated Damages, if any,
to the date of repurchase). The Senior
Subordinated Discount Note Indenture will require
that prior to such a repurchase, the Issuer must
either repay all outstanding indebtedness under
the Senior Credit Agreements or obtain any
required consent to such repurchase.
At any time on or prior to December 15, 2002, the
Senior Subordinated Discount Exchange Notes may
also be redeemed in whole, but not in part, at
the option of the Company, upon the occurrence of
a Change of Control (but in no event more than 90
days after the occurrence of such Change of
Control), at a redemption price equal to 100% of
the Accreted Value thereof plus the Senior
Subordinated Discount Note Applicable Premium as
of, and Liquidated Damages, if any, to the Senior
Subordinated Discount Note Redemption Date. See
"Description of Exchange Notes--Optional
Redemption".
ORIGINAL ISSUE DISCOUNT..... For Federal income tax purposes, each Senior
Subordinated Discount Exchange Note will be
deemed to be issued with "original issue
discount" equal to the difference between the
issue price thereof and the sum of all cash
payments (whether denominated as principal or
interest) to be made thereon. Each Holder of a
Senior Subordinated Discount Exchange Note must
include in gross income for Federal income tax
purposes the sum of the daily portions of such
original issue discount for each day during each
taxable year in which the Senior Subordinated
Discount Exchange Note is held, even though no
interest payments will be received prior to
December 15, 2002.
RISK FACTORS
Holders of the Notes should consider carefully all of the information set
forth in this Prospectus and, in particular, the information set forth under
"Risk Factors" before tendering any Notes.
ADDITIONAL INFORMATION
For additional information regarding the Exchange Notes, see "Notice to
Investors", "Description of Exchange Notes" and "Certain Federal Income Tax
Considerations".
12
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
Set forth below are (i) summary historical consolidated financial data of
Parent, as of and for the fiscal years ended November 30, 1995, December 1,
1996 and November 30, 1997 and as of and for the three months ended March 2,
1997 and March 1, 1998, and (ii) pro forma condensed consolidated financial
data for the Issuer for the year ended November 30, 1997 and for the three
months ended March 1, 1998. The summary historical financial data as of
November 30, 1995, December 1, 1996, November 30, 1997, March 2, 1997 and March
1, 1998 were derived from the Consolidated Financial Statements and Condensed
Consolidated Financial Statements of Parent. Consolidated information of Parent
is presented for historical periods and dates and consolidated information of
the Issuer is presented for the pro forma periods. For a discussion of pro
forma adjustments, see "Unaudited Pro Forma Condensed Consolidated Financial
Data".
The information contained in this table should be read in conjunction with
"Selected Historical Consolidated Financial and Other Data", "Unaudited Pro
Forma Condensed Consolidated Financial Data", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", the Consolidated
Financial Statements and the Condensed Consolidated Financial Statements and
accompanying notes thereto appearing elsewhere in this Prospectus.
13
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED PRO FORMA(1) PRO FORMA(1)
------------------------ ----------------- ------------ ------------
THREE MONTHS
MARCH 2, MARCH 1, FISCAL YEAR ENDED
1995 1996 1997 1997 1998 1997 3/1/98
------ ------ ------ -------- -------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $653.9 $697.6 $804.8 $168.9 $209.3 $799.5 $209.3
Costs and expenses...... 610.9 672.8 764.2 162.5 227.8 793.0 209.9
Income (loss) before
income tax,
extraordinary item and
cumulative effect of
change in accounting
principle.............. 43.0 24.8 40.6 6.4 (18.5) 6.5 0.6
Extraordinary loss, net
of taxes(2)............ -- -- 2.0 2.0 14.5 2.0 14.5
Cumulative effect of
change in accounting
principle, net of
taxes(3)............... -- -- 4.3 -- -- 4.3 --
Net income (loss)....... $ 19.5 $ (0.5)(4) $ 11.7 $ 1.2 $(32.2) $ (7.8) $(16.1)
OTHER DATA:
Operating income
(loss)(5).............. $ 74.0 $ 53.6 $ 72.0 $ 13.2 $ (3.0) $ 70.5 $ 15.8
Depreciation and
amortization of
intangibles............ 24.2 26.6 24.1 6.6 5.9 24.0 5.9
Capital expenditures.... 11.8 12.0 29.1 4.0 5.4 29.1 5.4
Interest expense, net... 31.0 28.8 31.4 6.8 15.5 64.0 16.4
Ratio of pro forma earnings to fixed
charges(6).................................................... 1.1x 1.0x
Adjusted EBITDA(7)...... $ 86.0 $ 93.7 $103.1 $ 20.4 $ 22.7 $103.1 $ 22.7
Ratio of pro forma Adjusted EBITDA to cash interest expense.... 2.0x 1.7x
Ratio of pro forma Adjusted EBITDA to total interest expense,
net........................................................... 1.6x 1.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------
NOV. 30, DEC. 1, NOV. 30, MAR. 2, MAR. 1,
1995 1996 1997 1997 1998
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $776.2 $739.9 $721.1 $715.5 $ 750.7
Long-term obligations............... 269.4 269.5 330.0 356.4 705.3
Total debt.......................... 286.9 288.1 330.0 356.5 709.0
Stockholder's equity (deficit)...... 330.9 293.0 205.1 194.3 (127.8)
</TABLE>
14
<PAGE>
NOTES TO SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
(1) Amounts represent the pro forma condensed statement of income data and
other financial data of the Issuer after giving effect to the Transactions,
the Samuel Lawrence Divestiture (as defined in note 4 below) and the
divestiture of the Company's South Brunswick, New Jersey mattress pad
manufacturing plant (together with the Samuel Lawrence Divestiture, the
"Divestitures") in the manner described under "Unaudited Pro Forma
Condensed Consolidated Financial Data".
(2) During February 1997, the Company recorded an extraordinary loss of $2.0
million, net of an income tax benefit of $1.4 million representing the
remaining unamortized debt issuance costs related to long-term obligations
repaid as a result of a refinancing transaction. During December 1997, the
Company recorded an extraordinary loss of $14.5 million, net of an income
tax benefit of $9.6 million representing the Tender Offer premium and
consent fees and the write-off of unamortized debt issuance costs related
to the Transactions.
(3) On November 20, 1997 the Emerging Issues Task Force ("EITF") reached a
final consensus that business process reengineering costs incurred in
connection with an overall information technology transformation project
should be expensed as incurred ("EITF 97-13"). Previously capitalized
business process reengineering costs were required to be identified and
written-off as a cumulative effect of a change in accounting principle. The
Company adopted EITF-97-13 which resulted in the Company recording a loss
of $4.3 million, net of income tax benefits of $2.9 million during the
fourth quarter of fiscal 1997.
(4) On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly-owned subsidiary that manufactured and
marketed solid wood bedroom furniture under the "Samuel Lawrence" brand
name (the "Samuel Lawrence Divestiture"). The Samuel Lawrence Divestiture
resulted in an aggregate book loss of $17.6 million, which was recorded in
the fiscal year ended December 1, 1996. The loss is comprised of a loss on
net assets held for sale of $11.8 million and income tax expense of $5.8
million arising from the tax gain on the transaction.
(5) Operating income is calculated by adding interest expense, net to net sales
less costs and expenses.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income tax, extraordinary items and
cumulative effect of change in accounting principle, 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.
(7) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as
described below) certain items of income and expense consisting of: (i)
discontinued stock-based compensation plans, (ii) executive severance and
transition costs, (iii) loss on write-off of Montgomery Ward accounts
receivable and related factoring expense incurred in connection with
bankruptcy of Montgomery Ward, (iv) annual Bain management fee of $2.0
million, (v) operating results and closure costs associated with the
Divestitures and other prior year discontinued businesses, (vi) any
expenses related to addressing the Company's "Year 2000" information
systems issue and EITF 97-13 reengineering efforts and (vii) non-recurring
expenses related to the Company's Recapitalization. EBITDA is calculated by
adding interest expense, net and depreciation and amortization of
intangibles to income (loss) before income tax, extraordinary items and
cumulative effect of change in accounting principle. EBITDA 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. Adjusted EBITDA is presented because it
conforms to the definition of "Consolidated EBITDA" in the Notes Indenture
(see "'Description of Exchange Notes" and "Certain Definitions" within such
section).The Company's measure of EBITDA and Adjusted EBITDA may not be
comparable to those reported by other companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
The following is a summary of the historical adjustments to EBITDA:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED PRO FORMA
------------------ -------------- -------------------
MAR. 2, MAR 1, FISCAL THREE MONTHS
1995 1996 1997 1997 1998 1997 ENDED 3/1/98
------ ----- ---- ------- ------ ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustments:
Samuel Lawrence
Divestiture........... $ (4.2) $ 5.0 $-- $-- $ -- $-- $ --
South Brunswick pad
manufacturing plant... 0.7 1.9 0.4 0.3 -- -- --
Other discontinued
businesses............ 4.5 -- -- -- -- -- --
Stock-based
compensation.......... (13.3) 4.7 1.6 0.3 -- 1.6 --
Executive severance and
transition............ -- 1.9 -- -- -- -- --
Recapitalization non-
recurring expenses.... -- -- -- -- 18.8 -- 18.8
Bain management fee.... -- -- -- -- 0.4 2.0 0.4
Montgomery Ward bad
debt and factoring
losses................ -- -- 4.0 -- -- 4.0 --
EITF 97-13
reengineering
efforts............... -- -- 1.0 -- 0.6 1.0 0.6
------ ----- ---- ---- ----- ---- -----
Total adjustments..... $(12.3) $13.5 $7.0 $0.6 $19.8 $8.6 $19.8
====== ===== ==== ==== ===== ==== =====
</TABLE>
15
<PAGE>
RISK FACTORS
Holders of the Notes should consider carefully the following factors as well
as the other information and data included in this Prospectus prior to
tendering their Notes in the Exchange Offer.
SUBSTANTIAL LEVERAGE
The Issuer has incurred significant debt in connection with the
Transactions. As of March 1, 1998 the Issuer had outstanding indebtedness of
$681.2 million and its stockholders' deficit was $92.1 million. In addition,
the Issuer would have available borrowings of up to $59.0 million under the
Senior Credit Agreements with Letters of Credit issued totaling $12.0 million.
In addition, subject to restrictions in the Senior Credit Agreements and the
Indentures, the Issuer may incur additional indebtedness from time to time to
finance acquisitions or capital expenditures. For the fiscal year ended
November 30, 1997, after giving pro forma effect to the Transactions and the
Divestitures, the Company's ratio of earnings to fixed charges would have been
1.1 to 1.0 (1.0 to 1.0 for the three months ended March 1, 1998).
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Exchange Notes), or to fund planned capital
expenditures will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the
current level of operations, management believes that cash flow from
operations and available cash, together with available borrowings under the
Senior Credit Agreements, will be adequate to meet the Company's future
liquidity needs for at least the next several years. The Company, however,
will need to refinance all or a portion of the principal of the Exchange Notes
on or prior to maturity. There can be no assurance that the Company will be
able to effect any such refinancing on commercially reasonable terms or at
all. In addition, there can be no assurance that the Company's business will
generate sufficient cash flow from operations, that anticipated revenue growth
and operating improvements will be realized or that future borrowings will be
available under the Senior Credit Agreements in an amount sufficient to enable
the Company to service its indebtedness, including the Exchange Notes, or to
fund its other liquidity needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
The degree to which the Company will be leveraged following the Transactions
could have important consequences to holders of the Exchange Notes, including,
but not limited to: (i) making it more difficult for the Company to satisfy
its obligations with respect to the Exchange Notes, (ii) increasing the
Company's vulnerability to general adverse economic and industry conditions,
(iii) limiting the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, research and development and
other general corporate requirements, (iv) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment
of principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures,
research and development or other general corporate purposes, (v) limiting the
Company's flexibility in planning for, or reacting to, changes in its business
and the industry and (vi) placing the Company at a competitive disadvantage
relative to less leveraged competitors. In addition, the Parent Indenture, the
Indentures and the Senior Credit Agreements contain financial and other
restrictive covenants that will limit the ability of the Company to, among
other things, borrow additional funds. Failure by the Company to comply with
such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company's financial
condition or results of operations. In addition, the degree to which the
Company is leveraged could prevent it from repurchasing all of the Exchange
Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Exchange Notes--Repurchase at Option of Holders--Change of
Control" and "Description of Senior Credit Agreements".
16
<PAGE>
SUBORDINATION OF EXCHANGE NOTES; GUARANTEES
The Exchange Notes will be contractually subordinated to all Senior Debt
including all obligations under the Senior Credit Agreements. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, the holders of
Senior Debt will be entitled to be paid in full in cash before any payment may
be made with respect to the Exchange Notes. In addition, the subordination
provisions of the Indentures provide that payments with respect to the
Exchange Notes will be blocked in the event of a payment default on Senior
Debt. In the event of a bankruptcy, liquidation or reorganization of the
Company, holders of the Exchange Notes will participate ratably with all
holders of subordinated indebtedness of the Company that is deemed to be of
the same class as the Exchange Notes, and potentially with all other general
creditors of the Company, based upon the respective amounts owed to each
holder or creditor, in the remaining assets of the Company. In any of the
foregoing events, there can be no assurance that there would be sufficient
assets to pay amounts due on the Notes. As a result, holders of Exchange Notes
may receive less, ratably, than the holders of Senior Debt. As of March 1,
1998, the aggregate amount of consolidated indebtedness and other liabilities
to which the Exchange Notes are subordinated was approximately $479.0 million,
consisting of secured borrowings under the Senior Credit Agreements. In
addition, the Company will have available additional borrowings of up to $59.0
million under the Senior Credit Agreements, (with Letters of Credit issued
totaling $12.0 million) all of which would constitute Senior Debt. Subject to
certain limitations, the Indentures will permit the Company to incur
additional indebtedness. See "The Transactions" and "Description of Exchange
Notes". Substantially all of the assets of the Company will or may in the
future be pledged to secure other indebtedness of the Issuer or its
subsidiaries. See "Description of Senior Credit Agreements".
The Exchange Notes will be guaranteed on a senior subordinated basis by
certain of the Issuer's current and all of the Issuer's future U.S.
Subsidiaries. The Exchange Notes will not be guaranteed by certain other of
the Issuer's U.S. Subsidiaries or by any of foreign Subsidiaries of the
Issuer. For the fiscal years ended November 30, 1995, December 1, 1996 and
November 30, 1997, the Non-Guarantor Subsidiaries accounted for 14.7%, 17.2%
and 9.3% of net sales, respectively, and generated Adjusted EBITDA of $7.9
million, $19.6 million and $10.0 million, respectively. The claims of
creditors (including trade creditors) of any Non-Guarantor Subsidiary will
generally have priority as to the assets of such subsidiaries over the claims
of the holders of the Exchange Notes. As of March 1, 1998, the amount of
liabilities of such Non-Guarantor Subsidiaries was approximately $43.6 million
(of which $29.6 million represent intercompany liabilities). For additional
information relating to Non-Guarantor Subsidiaries, see Note I of the
Condensed Consolidated Financial Statements.
RECENT LOSSES
The Company has experienced a pro forma loss for the year ended November 30,
1997 and historical and pro forma losses for the three months ended March 1,
1998. These losses were chiefly attributable to the incurrence of expenses
related to the Recapitalization. The Company expects to incur a significant
additional charge (estimated to be approximately $8.5 million on a pre-tax
basis) in connection with the relocation of its corporate headquarters, such
charge is expected to be recognized primarily in fiscal 1998 with the balance
in fiscal 1999. If the Company continues to experience losses, the Company
will be required to find additional sources of financing to fund its debt
service, working capital requirements and anticipated capital expenditures.
There can be no assurance that such financing will be available on terms and
conditions acceptable to the Company in such circumstances or that, if debt
financing is required, such financing would be permitted under the terms of
the Company's indebtedness. If the Company experiences operating losses in the
future, that fact, combined with the absence of additional financing, could
impair the Company's ability to pay principal and interest on the Exchange
Notes. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
17
<PAGE>
RESTRICTIONS IMPOSED BY THE SENIOR CREDIT AGREEMENTS AND THE INDENTURES
The Senior Credit Agreements require the Issuer to maintain specified
financial ratios and tests, among other obligations, including a minimum
interest coverage ratio, a maximum leverage ratio, and a minimum EBITDA
requirement. In addition, the Senior Credit Agreements restrict, among other
things, the Issuer's ability to incur additional indebtedness and to make
acquisitions and capital expenditures beyond a certain level. A failure to
comply with the restrictions contained in the Senior Credit Agreements could
lead to an event of default thereunder which could result in an acceleration
of such indebtedness. Such an acceleration would constitute an event of
default under the Indentures relating to the Exchange Notes. In addition, the
Indentures restrict, among other things, the Issuer's ability to incur
additional indebtedness, sell assets, make certain payments and dividends or
merge or consolidate. A failure to comply with the restrictions in the
Indentures could result in an event of default under the Indentures. See
"Description of Senior Credit Agreements" and "Description of Exchange Notes".
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Senior Subordinated Discount Exchange Notes will be issued at a
substantial discount from their principal amount. Consequently, the purchasers
of the Senior Subordinated Discount Exchange Notes generally will be required
to include amounts in gross income for Federal income tax purposes in advance
of receipt of any cash payment on the Senior Subordinated Discount Exchange
Notes to which the income is attributable. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the Federal income tax
consequences to the holders of the Senior Subordinated Discount Exchange Notes
of the purchase, ownership and disposition of the Senior Subordinated Discount
Exchange Notes.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code (the "Bankruptcy Code") after the issuance of the Senior
Subordinated Discount Exchange Notes, the claim of a holder of Senior
Subordinated Discount Exchange Notes with respect to the principal amount
thereof will likely be limited to an amount equal to the sum of (i) the
Accreted Value of the Senior Subordinated Discount Exchange Notes as of the
date of issuance of the Senior Subordinated Discount Exchange Notes and (ii)
the original issue discount that is not deemed to constitute "unmatured
interest" for the purposes of the Bankruptcy Code. Any original issue discount
that was not amortized as of any such bankruptcy filing would most likely
constitute "unmatured interest".
COMPETITION
The bedding industry is highly competitive, and the Company encounters
competition from several manufacturers in both domestic and foreign markets.
Certain of the Company's principal competitors are less highly-leveraged than
the Company and may be better able to withstand market conditions within the
bedding industry. Additionally, there can be no assurance that the Company
will not encounter increased future competition, which could have a material
adverse effect on the Company's financial condition or results of operations.
See "Business--Competition".
YEAR 2000 ISSUE; COMPUTER SYSTEM UPGRADE
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to
be Year 2000 compliant. The Company has conducted a comprehensive impact
analysis to determine what computing platforms and date-aware functions with
respect to its existing computer operating systems will be disrupted by the
Year 2000
18
<PAGE>
Issue. In January, 1998, the Company completed a prioritization of the
impacted areas identified to date and commenced the detailed program code
changes through a contracted third party vendor which has experience in Year
2000 conversions for the Company's existing system including the same release
of such system. The Company is in the preliminary stages of assessment of its
vendors and customers status with respect to the Year 2000 Issue. The required
code changes, testing and implementation necessary to address the Year 2000
Issue is projected to be completed by May, 1999, and is expected to cost
approximately $4.0 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Issue" and
"Business--Manufacturing and Facilities".
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. Although the Company believes it could replace key employees in an
orderly fashion should the need arise, the loss of such key personnel could
have a material adverse effect on the Company's financial condition or results
of operations. The Company does not maintain key-man life insurance on any of
its employees. See "Management--Directors and Executive Officers".
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
The Company's top five conventional bedding customers accounted for
approximately 21% of the Company's net sales for the fiscal year ended
November 30, 1997 and no single customer represented more than 6% of the
Company's net sales for such period. While the Company believes its
relationships with such customers are stable, most arrangements are by
purchase order and are terminable at will at the option of either party. In
addition, the Company's business depends upon the financial viability of its
customers, which operate largely within the retail industry. The bankruptcy of
Montgomery Ward in 1997 resulted in increased bad debt reserves of $2.7
million and related factoring expense of $1.3 million by the Issuer. A
significant decrease or interruption in business from the Company's
significant customers could result in write-offs or in the loss of future
business, and could have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Customers, Sales and
Marketing".
POSSIBLE FLUCTUATIONS IN THE COST OF RAW MATERIALS; POSSIBLE LOSS OF SUPPLIERS
The major raw materials that the Company purchases for production are
cotton, insulator pads, innersprings, fabrics and roll goods consisting of
foam, fiber and non-wovens. The price and availability of these raw materials
are subject to market conditions affecting supply and demand. The Company's
financial condition or results of operations may be materially and adversely
affected by increases in raw material costs to the extent the Company is
unable to pass on such higher costs to customers.
The Company purchases its raw materials and certain components from a
variety of vendors, including Hoover Wire Products, a division of Leggett &
Platt, Inc. ("Hoover"), Foamex International and other national raw material
and component suppliers. The Company purchases substantially all of its
Stearns & Foster foundation parts and approximately 50% of its Sealy
foundation parts from Hoover, which has patents on various interlocking wire
configurations. While the Company attempts to reduce the risks of dependence
on a single external source, there can be no assurance that there would not be
an interruption of production if Hoover or any other supplier were to
discontinue supplying the Company for any reason. See "Business--Manufacturing
and Facilities".
DEPENDENCE ON COMPONENTS DIVISION
The Company currently purchases substantially all of its mattress
innerspring unit requirements, including 100% of the proprietary innersprings
for the Posturepedic and Stearns & Foster lines, from
19
<PAGE>
its components division (the "Components Division"), which operates three
manufacturing facilities. There are limited alternative suppliers for these
classes of components. Although several months of supplies of such components
are currently available from the Company's inventories, any reductions or
interruptions in future supply or limitations in the Company's manufacturing
capacity could cause the Company to suffer disruptions or delays in the
operation of its business or incur higher than expected costs, which could
have a material adverse effect on the Company's financial condition or results
of operations. See "Business--Manufacturing and Facilities".
RELIANCE ON TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The Company holds over 200 trademarks, which management believes have
significant value and are important to the marketing of its products to
retailers. The Company owns numerous U.S. and foreign patents and has patent
applications pending domestically and abroad. In addition, the Company owns
U.S. and foreign registered trade names and service marks and has applications
for the registration of trade names and service marks pending domestically and
abroad. The Company also owns several U.S. copyright registrations. In
addition, the Company owns a wide array of unpatented proprietary technology
and know-how. Further, the Company licenses certain intellectual property
rights from third parties.
The Company's ability to compete effectively with other companies depends,
to a significant extent, on its ability to maintain the proprietary nature of
its owned and licensed intellectual property. Although the Company's
trademarks are currently registered in all 50 states and registered or pending
in 87 foreign countries, there can be no assurance that the Company's
trademarks cannot and will not be circumvented, do not or will not violate the
proprietary rights of others, or that the Company would not be prevented from
using its trademarks if challenged. Any challenge to the Company for its use
of its trademarks could have a material adverse effect on the Company's
financial condition or results of operations, through either a negative ruling
with regard to the Company's use, validity or enforceability of its
trademarks, or through the time consumed and the legal costs of defending
against such a claim. In addition, there can be no assurance that the Company
will have the financial resources necessary to enforce or defend its
trademarks. In addition, there can be no assurance as to the degree of
protection offered by the various patents, the likelihood that patents will be
issued for pending patent applications or, with regard to the licensed
intellectual property, that the licenses will not be terminated. If the
Company were unable to maintain the proprietary nature of its intellectual
property and its significant current or proposed products, the Company's
financial condition or results of operations could be materially adversely
affected. See "Business--Proprietary Technology; Trademarks and Patents".
LABOR RELATIONS
As of November 30, 1997, the Company had 5,456 full-time employees.
Approximately 66% of the Company's employees at its 28 North American
facilities are represented by various labor unions 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. Although the Company believes that its
relations with its union employees are generally satisfactory, there can be no
assurance that the Company will not at some point be subject to work stoppages
by some of its employees and, if such events were to occur, that there would
not be a material adverse effect on the Company's financial condition or
results of operations. See "Business--Employees".
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts significant international operations. Such operations
are subject to the customary risks of operating in an international
environment, including the potential imposition of trade
20
<PAGE>
or foreign exchange restrictions, tariff and other tax increases, fluctuations
in exchange rates, inflation and unstable political situations. Fluctuations
in the rate of exchange between the U.S. dollar and other currencies may
affect stockholders' equity and the results of operations. The Company does
not currently engage in any material hedging activities, but continues to
evaluate the possibility of doing so. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Foreign Operations
and Export Sales".
CONTROLLING SHAREHOLDERS
As a result of the Transactions, the Bain Funds and related investors and
certain other institutional investors, the Management Investors and Zell (as
herein defined), beneficially own all of the outstanding common stock of
Parent, and through collective majority voting rights, can effectively control
the affairs and policies of the Company. Circumstances may occur in which the
interests of these shareholders conflict with the interests of the holders of
the Exchange Notes. In addition, these shareholders may have an interest in
pursuing acquisitions, divestitures or other transactions that, in their
judgment, enhance their equity investment, even though such transactions might
involve risks to the holders of the Exchange Notes. See "Security Ownership".
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to make an
offer for cash to repurchase the Exchange Notes at 101% of the principal
amount thereof (or Accreted Value, as the case may be), plus accrued and
unpaid interest, if any, thereon to the repurchase date. A Change of Control
will result in an event of default under the Senior Credit Agreements and may
result in a default under other indebtedness of the Company that may be
incurred in the future. The Senior Credit Agreements will prohibit the
purchase of outstanding Exchange Notes prior to repayment of the borrowings
under the Senior Credit Agreements and any exercise by the holders of the
Notes of their right to require the Company to repurchase the Exchange Notes
will cause an event of default under the Senior Credit Agreements. Finally,
there can be no assurance that the Company will have the financial resources
necessary to repurchase the Exchange Notes upon a Change of Control. See
"Description of Exchange Notes--Repurchase at the Option of Holders--Change of
Control".
RISK OF FRAUDULENT TRANSFER
A significant portion of the net proceeds of the Offerings were paid as a
dividend to Parent and used to consummate the Merger and to repay the Parent
Notes. Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance laws, if the Company, at
the time it issued the Notes, (i) incurred such indebtedness with intent to
hinder, delay or defraud creditors, or (ii)(a) received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and
(b)(1) was insolvent at the time of incurrence, (2) was rendered insolvent by
reason of such incurrence (and the application of the proceeds thereof), (3)
was engaged or was about to engage in a business or transaction for which the
assets remaining with the Company constituted unreasonably small capital to
carry on its businesses, or (4) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, then, in
each case, a court of competent jurisdiction could void, in whole or in part,
the Notes and/or the Exchange Notes, or, in the alternative, subordinate the
Notes and/or the Exchange Notes to existing and future indebtedness of the
Company. The measure of insolvency for purposes of the foregoing will vary
depending upon the law applied in such case. Generally, however, the Company
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at fair valuation or if the
present fair saleable value of its assets was less than the amount that would
be required to pay the probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured. Management
believes that, for purposes of all such insolvency, bankruptcy and fraudulent
transfer or conveyance laws, the Notes were issued and the Exchange
21
<PAGE>
Notes are being issued without the intent to hinder, delay or defraud
creditors and for proper purposes and in good faith and that the Company,
after the issuance of the Notes and the application of the proceeds thereof,
was solvent and, after the issuance of the Exchange Notes, will be solvent,
will have sufficient capital for carrying on its business and will be able to
pay its debts as they mature. There can be no assurance, however, that a court
passing on such questions would agree with management's view.
ENVIRONMENTAL, HEALTH AND SAFETY REQUIREMENTS
The Company is subject to Federal, state and local laws and regulations
relating to pollution, environmental protection and occupational health and
safety. There can be no assurance that the Company is at all times in complete
compliance with all such requirements. The Company has made and will continue
to make capital and other expenditures to comply with environmental
requirements. As is the case with manufacturers in general, if a release of
hazardous substances occurs on or from the Company's properties or any
associated offsite disposal location, or if contamination from prior
activities is discovered at any of the Company's properties, the Company may
be held liable and the amount of such liability could be material. The Company
is conducting environmental cleanups at a formerly owned facility in South
Brunswick, New Jersey and at an inactive facility in Oakville, Connecticut.
The Company has recorded accruals to reflect future costs associated with
these cleanups. However, because of the uncertainties associated with
environmental remediation, it is possible that the costs incurred with respect
to the cleanups could exceed the recorded accruals. See "Business--
Environmental, Health and Safety Matters".
LACK OF PUBLIC MARKET; TRANSFER RESTRICTIONS
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in
this Exchange Offer. The holders of Notes (other than any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the Exchange Offer are
entitled to certain registration rights, and the Company is required to file a
Shelf Registration Statement with respect to such Notes. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer." The Exchange Notes are a new
issue of securities for which there is currently no trading market. Because
the Exchange Notes are being sold pursuant to an exemption from registration
under the applicable securities laws and, therefore, may not be publicly
offered, sold or otherwise transferred in any jurisdiction where such
registration may be required, no public market for the Exchange Notes will
develop. The Exchange Notes are eligible for trading by qualified buyers in
the Private Offering, Resales and Trading through Automated Linkages
("PORTAL") market. The Issuer has been advised by the Initial Purchasers that
following the completion of the Exchange Offer, the Initial Purchasers
currently intend to make a market in the Exchange Notes. However, they are not
obligated to do so and any market-making activities with respect to the
Exchange Notes may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act, and may be limited during the Exchange
Offer pendency of any Shelf Registration Statement. Although under the
Registration Rights Agreement, the Issuer is required to consummate an offer
to exchange the Notes for equivalent registered securities, or to register the
Notes under the Securities Act, there can be no assurance that an active
trading market for the Notes or the Exchange Notes will develop. If a market
were to exist, the Exchange Notes could trade at prices that may be lower than
the initial offering price thereof depending on many factors, including
prevailing interest rates and the markets for similar securities, general
economic conditions and the financial condition and performance of, and
prospects for, the Company. See "The Exchange Offer."
22
<PAGE>
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to the tenders of Notes for exchange.
Notes that are not tendered or are tendered but not accepted will, following
the consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and, upon consummation of the Exchange
Offer, certain registration rights under the Registration Rights Agreement
will terminate. In addition, any holder of Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transactions. Each
Participating Broker-Dealer that receives Exchange Notes for its own account
in exchange for Notes, where such Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution". To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Notes could be adversely
affected. See "The Exchange Offer".
23
<PAGE>
THE TRANSACTIONS
OVERVIEW
On December 18, 1997, Parent consummated a merger (the "Merger") pursuant to
an agreement and plan of merger, dated as of October 30, 1997, as amended,
(the "Merger Agreement"), with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a
Delaware limited partnership ("Zell"). Prior to the Merger, Zell beneficially
owned approximately 87% of the voting securities of Parent. Pursuant to the
Merger Agreement, Sandman was merged with and into Parent with Parent being
the surviving corporation. Prior to the Merger, Parent converted certain of
the existing common stock held by Zell into shares of Parent's voting
preferred stock (the "Preference Stock"). In connection with the Merger (i)
the Preference Stock was converted into $25.0 million in aggregate principal
amount of junior subordinated notes of Parent (the "Parent Junior Subordinated
Notes") and the Zell Equity (as defined below) and (ii) the aggregate issued
and outstanding shares of the existing common stock at the time of the Merger
were converted into the right to receive an aggregate amount of cash equal to
(x) $419.3 million minus (y) certain fees and expenses of the Merger minus (z)
certain costs in connection with the extinguishment of certain outstanding
options and warrants of Parent.
The transactions contemplated by the Merger Agreement, including the Merger,
the Tender Offer and related Consent Solicitation (each as defined below) and
the refinancing of Parent's existing indebtedness were funded by: (i) $450.0
million of term loan borrowings by the Company pursuant to the Senior Credit
Agreements (as defined below); (ii) $10.0 million of revolving borrowings
under the Senior Credit Agreements; (iii) the Offerings, with aggregate gross
proceeds of $200.4 million; (iv) the issuance of the Junior Subordinated Notes
to Zell; (v) an equity investment in Parent by funds managed by Bain, its
related investors, including members of management, and other institutional
investors (collectively, the "New Investors") of approximately $130.4 million
and (vi) a retained equity investment in Parent by Zell with fair value of
approximately $14.3 million (such equity investment, the "Zell Equity"). As a
result of the Merger and Recapitalization, the New Investors beneficially own
approximately 85.3% of the voting securities of Parent.
STRUCTURE OF THE RECAPITALIZATION
Immediately prior to the closing of the Transactions (the "Closing"), Parent
contributed (the "Capital Contribution") all of the issued and outstanding
capital stock of Sealy, Inc., an Ohio corporation, The Stearns & Foster
Bedding Company, a Delaware corporation, Advanced Sleep Products, a California
corporation, Sealy Components-Pads, Inc., a Delaware corporation, and Sealy
Mattress Company of San Diego, a California corporation, to the capital of the
Issuer. As a result of the Capital Contribution, the Issuer is the only direct
subsidiary of Parent and owns 100% of the operations of Parent.
TENDER OFFER AND CONSENT SOLICITATION
On November 18, 1997, Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Old
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the indenture under which the Old Notes were issued.
The purchase price paid in respect of validly tendered Old Notes was $1,057.03
per $1,000 of principal amount tendered and the payment with respect to the
Consent Solicitation was $20 per $1,000 of principal amount tendered prior to
the consent expiration date therefor. Old Notes in the aggregate principal
amount of $197.8 million were tendered and accepted for payment and the
related consents received. The Tender Offer was consummated concurrently with
the Merger and a supplemental indenture with respect to the Old Notes took
effect at such time.
24
<PAGE>
SENIOR CREDIT AGREEMENTS
Upon consummation of the Merger, the Issuer entered into the AXELs* credit
agreement (the "Senior AXELs Credit Agreement") and a credit agreement
providing for Tranche A term Loans and revolving borrowings (the "Senior
Revolving Credit Agreement" and, together with the Senior AXELs Credit
Agreement, the "Senior Credit Agreements") with Goldman Sachs Credit Partners
L.P., as arranger and syndication agent, Morgan Guaranty Trust Company of New
York, as administrative agent, and Bankers Trust Company, as documentation
agent; and other institutions party thereto. The Senior Credit Agreements
provide for loans of up to $550.0 million, consisting of a $450.0 million term
loan facility (the "Term Loan Facility") and a $100.0 million revolving credit
facility (the "Revolving Credit Facility"). The Issuer distributed the
proceeds of the Term Loan Facility and its initial borrowings under the
Revolving Credit Facility to Parent to provide a portion of the funds
necessary to consummate the Merger and related Recapitalization transactions.
Indebtedness of the Issuer under the Senior Credit Agreements is secured and
guaranteed by Parent and certain of the Issuer's current and all of the
Issuer's future U.S. subsidiaries and will bear interest at a floating rate.
The Senior Credit Agreements require the Company to meet certain financial
tests, including minimum levels of EBITDA, minimum interest coverage and
maximum leverage ratio. The Senior Credit Agreements also contain covenants
which, among other things, limit capital expenditures, indebtedness and/or the
incurrence of additional indebtedness, investments, dividends, transactions
with affiliates, asset sales, mergers and consolidations, prepayments of other
indebtedness (including the Notes and the Exchange Notes), liens and
encumbrances and other matters customarily restricted in such agreements. See
"Description of Senior Credit Agreements".
- --------
* "AXELs" is a registered servicemark of Goldman, Sachs & Co.
25
<PAGE>
USE OF PROCEEDS
The Exchange Offers are intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes in the
Exchange Offer. The aggregate gross proceeds from the issuance of the Notes,
together with borrowings under the Senior Credit Agreements and proceeds from
the equity infusion by the Investors, were used to consummate the Merger,
refinance existing debt, repurchase the Parent Notes pursuant to the Tender
Offer and pay the related fees and expenses. See "The Transactions".
The following table illustrates the total sources and uses of funds for the
Transactions, on a pro forma basis, assuming the Transactions occurred as of
November 30, 1997.
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Existing cash(1)................................... $ 9.0
Senior Credit Agreements:
Revolving Credit Facility(2)..................... 10.0
Term Loans....................................... 450.0
Senior Subordinated Notes.......................... 125.0
Senior Subordinated Discount Notes................. 75.4
Parent Junior Subordinated Notes(3)................ --
Zell Equity(3)..................................... --
Equity proceeds to Parent(5)....................... 121.3
------
Total sources.................................. $790.7
======
USES OF FUNDS:
Merger consideration(4)............................ $411.0
Repurchase of Parent Notes(6)...................... 215.7
Repayment of borrowings under the Old Credit
Agreement(1)...................................... 130.0
Accrued interest................................... 0.6
Estimated fees and expenses(7)..................... 33.4
------
Total uses..................................... $790.7
======
</TABLE>
- --------
(1) Funding requirements as of the Closing were less than pro forma
requirements as of November 30, 1997 due to positive operating cash flows
from post-November 30, 1997 results and certain expenses not being paid at
Closing.
(2) The Revolving Credit Facility has a total availability of $100.0 million,
with $10.0 million drawn at Closing.
(3) The Parent Junior Subordinated Notes of $25.0 million, together with the
Zell Equity, with an implied fair value of $14.3 million, represent non-
cash Merger consideration paid to Zell. Payment of cash interest to Parent
to service this debt will be limited by the Senior Credit Agreements and
the Indentures. The Parent Junior Subordinated Notes are scheduled to
mature after the Notes.
(4) Includes cash payments to Zell, warrant and option holders and for Seller
Expenses of $411.0 million. Excludes non-cash Merger consideration of
$25.0 million of Parent Junior Subordinated Notes, the retained Zell
Equity (fair value of $14.3 million) and the converted management equity
and deferred compensation ($8.3 million).
(5) Excludes approximately $8.3 million of equity held by current management
of the Company that was converted at Closing into deferred compensation
accounts and options to acquire common stock.
(6) Includes the tender premium and consent payment of 107.703% or $15.2
million and the accrued interest on the tendered Parent Notes of
approximately $2.7 million for the period from November 2, 1997 through
the Tender Offer closing date of December 18, 1997. Parent Notes in the
aggregate principal amount of approximately $197.8 million were tendered
and the related consents received.
(7) Reflects fees and expenses associated with issuance of the Notes and
borrowings under the Senior Credit Agreements and estimated fees and
expenses of approximately $13.8 million of Attorneys, Accountants, Bain,
Printers and other professionals related to the Transactions. See "Certain
Transactions".
26
<PAGE>
CAPITALIZATION
The following table sets forth the actual cash and cash equivalents and the
capitalization of the Parent and of the Issuer as of March 1, 1998. The
information in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Consolidated Financial Statements and the Condensed Consolidated Financial
Statements and accompanying notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
---------------------------
PARENT ISSUER
MARCH 1, 1998 MARCH 1, 1998
(ACTUAL) (ACTUAL)
------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents...................... $ -- $ --
======= ======
Long-term debt obligations, including current
portion:
Senior Credit Agreements:
Revolving Credit Facility(1)............... $ -- $ 29.0
Term Loans................................. -- 450.0
Senior Subordinated Notes.................... -- 125.0
Senior Subordinated Discount Notes(2)........ -- 77.2
Junior Subordinated Notes(2)................. 25.6 --
Untendered Parent Notes(3)................... 2.2 --
------- ------
Total long-term debt..................... 27.8 681.2
------- ------
Stockholders' equity (deficit)(4).............. (127.8) (92.1)
------- ------
Total capitalization..................... $(100.0) $589.1
======= ======
</TABLE>
- --------
(1) The Revolving Credit Facility has total availability of $100.0 million,
with $29.0 million drawn at March 1, 1998 and Letters of Credit issued
totaling $12.0 million.
(2) Includes accretion of interest on the Senior Subordinated Discount Notes
of approximately $1.8 million and accrued interest on the Junior
Subordinated Notes of $0.6 million.
(3) On March 30, 1998, the Company announced a call for redemption of all of
its outstanding Parent Notes. The redemption price of 106.33%, plus
accrued interest, of approximately $2.5 million was paid on May 1, 1998,
after which time interest will cease to accrue on the Notes. The
redemption was funded with the Revolving Credit Facility.
(4) Parent's stockholders' deficit is larger than the Issuer's deficit
primarily due to Parent's distribution of the $25.0 million Parent Junior
Subordinated Notes and $2.2 million of Parent Notes not tendered.
27
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below are selected historical consolidated financial and other
data of the Parent (some periods of which are less than one year due to
accounting requirements for acquisition transactions) for the years ended
November 30, 1997, December 1, 1996, November 30, 1995 and 1994, for the ten
months ended November 30, 1993 and for the two months ended January 31, 1993,
as well as the three months ended March 1, 1998 and March 2, 1997. During the
period from December 1, 1991 through December 1, 1996, the Parent's capital
structure changed significantly, in large part as a result of the purchase of
the Parent in February, 1993 by an investor group led by Zell (the "1993
Acquisition"). Due to required purchase accounting adjustments relating to
such transactions, and the resultant changes in control, the selected
historical consolidated financial and other data reflected in the following
table during this period are not comparable to such data for the other such
periods. The selected historical consolidated financial and other data set
forth in the following tables have been derived from the Parent's audited
consolidated financial statements and unaudited financial statements as of and
for the three months ended March 2, 1997 and March 1, 1998. The report of KPMG
Peat Marwick LLP, independent auditors, covering the Parent's Consolidated
Financial Statements for the years ended November 30, 1997, December 1, 1996
and November 30, 1995 is included elsewhere herein.
The information contained in this table and accompanying notes should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the audited Consolidated Financial
Statements and the Condensed Consolidated Financial Statements and
accompanying notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWO TEN THREE MONTHS
MONTHS MONTHS FISCAL YEAR ENDED
ENDED ENDED -------------------------------------- ----------------
JAN. 31, NOV. 30, MAR. 2, MAR. 1,
1993 1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ------- -------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $103.5 $579.7 $697.7 $653.9 $697.6 $804.8 $168.9 $209.3
Costs and expenses...... 100.9 531.0 641.6 610.9 672.8 764.2 162.5 227.8
Income (loss) before
income tax,
extraordinary item and
cumulative effect of
change in accounting
principle.............. 2.6 48.7 56.1 43.0 24.8 40.6 6.4 (18.5)
Extraordinary loss, net
of taxes(1)............ -- 2.9 -- -- -- 2.0 2.0 14.5
Cumulative effect of
change in accounting
principle, net of
taxes(2)............... -- -- -- -- -- 4.3 -- --
Net income (loss)....... $ 1.0 $ 24.7 $ 29.2 $ 19.5 $ (0.5)(3) $ 11.7 $ 1.2 $(32.2)
OTHER DATA:
Operating income
(loss)(4).............. $ 9.3 $ 79.9 $ 89.5 $ 74.0 $ 53.6 $ 72.0 $ 13.2 $ (3.0)
Net cash provided by
(used in) operating
activities............. (1.3) 82.7 69.0 63.3 44.4 42.0 -- (23.3)
Depreciation and
amortization of
intangibles............ 4.3 19.1 23.6 24.2 26.6 24.1 6.6 5.9
Capital expenditures.... 3.3 10.4 12.8 11.8 12.0 29.1 4.0 5.4
Interest expense, net... 6.7 31.2 33.4 31.0 28.8 31.4 6.8 15.5
Ratio of earnings to
fixed charges(5)....... 1.4x 2.4x 2.5x 2.3x 1.8x 2.2x 1.8x --
EBITDA(6)............... $ 13.7 $ 99.0 $113.1 $ 98.3 $ 80.2 $ 96.1 $ 19.8 $ 2.9
Adjusted EBITDA(7)...... 14.3 103.3 120.1 86.0 93.7 103.1 20.4 22.7
<CAPTION>
AS OF
----------------------------------------------------------------
NOV. 30, NOV. 30, NOV. 30, DEC. 1, NOV. 30, MAR. 2, MAR. 1,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $823.1 $810.6 $776.2 $739.9 $721.1 $715.5 $750.7
Long-term obligations............ 384.5 329.5 269.4 269.5 330.0 356.4 705.3
Total debt....................... 406.2 349.9 286.9 288.1 330.0 356.5 709.0
Stockholders' equity............. 284.3 322.2 330.9 293.0 205.1 194.3 (127.8)
</TABLE>
28
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(1) During 1993 and in February 1997, Parent recorded an extraordinary loss of
$2.9 million and $2.0 million, respectively, net of an income tax benefit
of $1.5 million and $1.4 million, respectively, representing the remaining
unamortized debt issuance costs related to long-term obligations repaid as
a result of refinancing transactions in such years. In December 1997, the
Parent recorded an extraordinary loss of $14.5 million, net of an income
tax benefit of $9.6 million, related to the Tender Offer premium and
consent fees and the write-off of unamortized debt issuance costs arising
from the Transactions.
(2) On November 20, 1997 the EITF reached a final consensus that business
process reengineering costs incurred in connection with an overall
information technology transformation project should be expensed as
incurred (EITF-97-13). Previously capitalized business process
reengineering costs were required to be identified and written-off as a
cumulative effect of a change in accounting principle. The Company adopted
EITF-97-13 which resulted in the Company recording a loss of $4.3 million,
net of income tax benefits of $2.9 million during the fourth quarter of
fiscal 1997.
(3) On January 15, 1997, Parent completed the Samuel Lawrence Divestiture,
which resulted in an aggregate book loss of $17.6 million, which was
recorded in the fiscal year ended December 1, 1996. The loss is comprised
of a loss on net assets held for sale of $11.8 million and income tax
expense of $5.8 million arising from the tax gain on the transaction.
(4) Operating income is calculated by adding interest expense, net to net
sales less costs and expenses.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income (loss) before income tax, extraordinary items
and cumulative effect of change in accounting principle, 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. Earnings for the quarter ended March 1, 1998
were insufficient to cover fixed charges by $18.5 million.
(6) EBITDA is calculated as described in footnote (6) below.
(7) Adjusted EBITDA is calculated by adding to or deducting from EBITDA (as
described below) certain items of income and expense consisting of: (i)
discontinued stock-based compensation plans, (ii) executive severance and
transition costs, (iii) loss on write-off of Montgomery Ward accounts
receivable and related factoring expense incurred in connection with
bankruptcy of Montgomery Ward, (iv) operating results and closure costs
associated with the Divestitures and other prior year discontinued
businesses, (v) any expenses related to addressing the Company's "Year
2000" information systems issue and EITF 97-13 reengineering efforts and
(vi) non-recurring expenses related to the Company's Recapitalization.
EBITDA is calculated by adding interest expense, net and depreciation and
amortization of intangibles to income (loss) before income tax,
extraordinary items and cumulative effect of change in accounting
principle. EBITDA 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 GAAP and does not
necessarily indicate whether cash flows will be sufficient to fund cash
needs. Adjusted EBITDA is presented because it conforms to the definition
of "Consolidated EBITDA" in the Notes Indenture (see "Description of
Exchange Notes" and "Certain Definitions" within such section). Parent's
measure of EBITDA and Adjusted EBITDA may not be comparable to those
reported by other companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The following is a
reconciliation of EBITDA to Adjusted EBITDA:
<TABLE>
<CAPTION>
TWO TEN THREE MONTHS
MONTHS MONTHS FISCAL YEAR ENDED
ENDED ENDED ---------------------------- -------------
JAN. 31, NOV. 30, MAR 2, MAR 1,
1993 1993 1994 1995 1996 1997 1997 1998
-------- -------- ------ ------ ----- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $13.7 $ 99.0 $113.1 $ 98.3 $80.2 $ 96.1 $19.8 $ 2.9
----- ------ ------ ------ ----- ------ ----- -----
Adjustments:
Samuel Lawrence
Divestiture........... (0.5) (3.6) (6.6) (4.2) 5.0 -- -- --
South Brunswick pad
manufacturing plant... -- -- -- 0.7 1.9 0.4 0.3 --
Other discontinued
businesses............ 0.2 5.7 3.9 4.5 -- -- -- --
Stock-based
compensation.......... 0.9 2.2 9.7 (13.3) 4.7 1.6 0.3 --
Executive severance and
transition............ -- -- -- -- 1.9 -- -- --
Recapitalization non-
recurring expenses.... -- -- -- -- -- -- -- 18.8
Bain management fee.... -- -- -- -- -- -- -- 0.4
Montgomery Ward bad
debt and factoring
losses................ -- -- -- -- -- 4.0 -- --
EITF 97-13
reengineering
efforts............... -- -- -- -- -- 1.0 -- 0.6
----- ------ ------ ------ ----- ------ ----- -----
Total adjustments..... 0.6 4.3 7.0 (12.3) 13.5 7.0 0.6 19.8
----- ------ ------ ------ ----- ------ ----- -----
Adjusted EBITDA......... $14.3 $103.3 $120.1 $ 86.0 $93.7 $103.1 $20.4 $22.7
===== ====== ====== ====== ===== ====== ===== =====
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The Unaudited Pro Forma Condensed Consolidated Financial Data are based on
the historical financial statements of Parent and the adjustments described in
the accompanying notes. Since Parent is a holding company with no operations
other than those of Issuer, and its subsidiaries, the consolidated financial
statements represent the results of operations of Issuer. However, interest
expense on approximately $27.2 million of Parent debt is excluded from
Issuer's pro forma and historical results of operations.
The following Unaudited Pro Forma Condensed Consolidated Statements of
Income for the year ended November 30, 1997 and the three months ended March
1, 1998 give effect to the Divestitures and the Transactions as if they each
had occurred on December 2, 1996. The Unaudited Pro Forma Condensed
Consolidated Statements of Income do not (a) purport to represent what the
Issuer's results of operations actually would have been if the Divestitures
and the Transactions had occurred as of the date indicated or what such
results will be for any future periods or (b) reflect the non-recurring
charges, which were recorded during the three months ended March 1, 1998, of
approximately: (i) $3.4 million related to a special bonus to certain members
of the Issuer's management in connection with the Transactions of which $3.2
million was paid at Closing; (ii) $14.9 million related to deferred
compensation agreements and accelerated vesting and cash out of stock options
and restricted stock as a result of the Transactions; (iii) $0.5 million of
Seller Expenses of Parent or (iv) the $14.5 million after-tax extraordinary
loss of Parent related to the refinancing of the Old Credit Agreement and the
redemption of the Parent Notes in connection with the Tender Offer and Consent
Solicitation.
The Unaudited Pro Forma Condensed Consolidated Financial Data are based upon
assumptions that the Issuer believes are reasonable and should be read in
conjunction with the Consolidated Financial Statements and the Condensed
Consolidated Financial Statements of Parent and the accompanying notes thereto
included elsewhere in this Prospectus.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED NOVEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARENT DIVESTITURES ADJUSTED FOR THE ISSUER
HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA
---------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales............... $804,834 $(5,331)(1) $799,503 $ -- $799,503
-------- ------- -------- -------- --------
Costs and expenses:
Cost of goods sold..... 455,905 (5,221)(1)(2) 450,684 -- 450,684
Selling, general and
administrative........ 262,023 (574)(1) 261,449 2,000 (3) 263,449
Stock based
compensation.......... 1,635 -- 1,635 -- 1,635
Amortization of
intangibles........... 13,264 -- 13,264 -- 13,264
Interest expense, net.. 31,396 -- 31,396 32,580 (5) 63,976
-------- ------- -------- -------- --------
Total costs and
expenses.............. 764,223 (5,795) 758,428 34,580 793,008
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle............. 40,611 464 41,075 (34,580) 6,495
Income tax (benefit)
expense............... 22,509 260 (1) 22,769 (14,865)(6) 7,904
-------- ------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............. $ 18,102 $ 204 $ 18,306 $(19,715) $ (1,409)
======== ======= ======== ======== ========
OTHER DATA:
Ratio of earnings to fixed charges(7).................................. 1.1x
Adjusted EBITDA(8)..................................................... $103,095
Depreciation........................................................... 10,731
Capital expenditures................................................... 29,124
Ratio of Adjusted EBITDA to cash
interest expense...................................................... 2.0x
Ratio of Adjusted EBITDA to total
interest expense, net................................................. 1.6x
</TABLE>
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 1, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PARENT DIVESTITURE ADJUSTED FOR THE ISSUER
HISTORICAL ADJUSTMENTS HISTORICAL TRANSACTIONS PRO FORMA
---------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales............... $209,259 $ -- $209,259 $ -- $209,259
-------- ----- -------- ------- --------
Costs and expenses:
Cost of goods sold..... 121,484 -- 121,484 -- 121,484
Selling, general and
administrative........ 87,597 -- 87,597 55 (3) 68,825
(18,827)(4)
Amortization of
intangibles........... 3,162 -- 3,162 -- 3,162
Interest expense, net.. 15,528 -- 15,528 912 (5) 16,440
-------- ----- -------- ------- --------
Total costs and
expenses.............. 227,771 -- 227,771 (17,860) 209,911
Income (loss) before
income taxes and
extraordinary item.... (18,512) -- (18,512) 17,860 (652)
Income tax (benefit)
expense............... (747) -- (747) 1,751(6) 1,004
-------- ----- -------- ------- --------
Income (loss) before
extraordinary item.... $(17,765) $ -- $(17,765) $16,109 $ (1,656)
======== ===== ======== ======= ========
OTHER DATA:
Ratio of earnings to fixed charges(7)................................. 1.0x
Adjusted EBITDA(8).................................................... $ 22,748
Depreciation.......................................................... 2,711
Capital expenditures.................................................. 5,400
Ratio of Adjusted EBITDA to cash
interest expense..................................................... 1.7x
Ratio of Adjusted EBITDA to total
interest expense, net................................................ 1.4x
</TABLE>
32
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED NOVEMBER 30, 1997 AND THREE MONTHS ENDED MARCH 1, 1998
(DOLLARS IN THOUSANDS)
(1) Reflects exclusion of net sales, cost of goods sold, selling, general and
administrative expenses and income tax expense related to the Samuel
Lawrence Divestiture in January 1997.
(2) Reflects the net reduction in cost of goods sold of $464 as a result of
the Company divesting the operations of the South Brunswick, New Jersey
mattress pad plant (the "Brunswick Plant") in March 1997 and entering into
a mattress pad supply agreement with the buyer of the Brunswick Plant.
While in operation, the Brunswick Plant had no sales to third parties as
it was a vertically integrated supply plant. Management has determined the
net reduction in costs of goods sold for the periods presented by
computing the difference between the costs incurred by the Brunswick Plant
to make mattress pads at actual, historical production levels and the
price the Issuer is now paying under terms of the long-term supply
agreement entered into with the buyer.
(3) Represents $2,000 annual management fee ($500 per quarter, of which only
$445 was recorded during the three months ended March 1, 1998) to be paid
to an affiliated party for consulting and financial services to be
provided to the Issuer. See "Certain Relationship and Related
Transactions--Management Services Agreement".
(4) Represents reduction in selling, general and administrative expense for
the three months ended March 1, 1998 as a result of the following non-
recurring charges recorded in connection with the Transactions: (a) $3.4
million of a special bonus to certain members of the Issuer's management
as compensation for completing the Transactions of which $3.2 was paid at
Closing; (b) $13.3 million of accelerated vesting and cash out of stock
options and restricted stock; (c) $1.6 million related to deferred
compensation agreements entered into as non-recurring signing bonuses in
connection with the Transactions and (d) $0.5 million of Seller Expenses.
An additional $0.6 million of special bonus will be earned over the
balance of fiscal 1998 and will be paid in early fiscal 1999.
(5) The increase in pro forma interest expense as a result of the Transactions
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
NOVEMBER 30, MARCH 1,
1997 1998(D)
------------ ------------------
<S> <C> <C>
Elimination of historical interest expense.. $(31,396) $(1,542)(d)
-------- -------
Interest on new borrowings:
Senior Credit Agreements(a)............... 39,749 1,960
Senior Subordinated Notes (9.875% rate)... 12,344 609
-------- -------
Cash interest expense................... 52,093 2,569
Senior Subordinated Discount Notes(b)....... 8,205 405
Amortization of deferred financing fees(c).. 3,678 181
-------- -------
Total interest from the debt
requirements of the Transactions....... 63,976 3,155
-------- -------
Less: Interest expense on the Parent Junior
Subordinated Notes and untendered Parent
Notes(e)................................... -- (701)
-------- -------
Net increase in interest expense........ $ 32,580 $ 912
======== =======
</TABLE>
--------
(a) Represents interest on each tranche of bank debt at the LIBOR rate
option (5.94%) plus: (i) 2.25% for the Revolving Credit Facility
($10,000) and Term A tranche ($120,000); (ii) 2.50% for AXELs Series B
($125,000); (iii) 2.75% for AXELs Series C ($90,000); and (iv) 3.00%
for AXELs Series D ($115,000), as well as an unused commitment fee of
0.50% on the unused portion of the Revolving Credit Facility ($90,000).
(b) Senior Subordinated Discount Notes will be accreting at an annual rate
of 10.875% for the first five years after date of issuance and will be
cash pay thereafter.
(c) Represents amortization expense utilizing a weighted average maturity
on all borrowings of 8.32 years.
(d) As the Transactions were effected on December 18, 1997, the pro forma
interest expense calculation for the three months ended March 1, 1998
reflects the period from December 1, 1997 through December 18, 1997.
Consequently, the $1,542 represents the reversal of actual historical
interest expense during this period.
(e) Historical interest expense relative to Parent's Junior Subordinated
Notes and untendered Parent Notes has been excluded from pro forma
interest expense of Issuer for the three months ended March 1, 1998 as
such debt represents obligations of the Parent and not of the Issuer.
33
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED NOVEMBER 30, 1997 AND THREE MONTHS ENDED MARCH 1, 1998
(DOLLARS IN THOUSANDS)
(6) Represents the income tax adjustment required to result in a pro forma
income tax provision based on: (a) the Issuer's pro forma pretax income
plus nondeductible amortization of intangibles; and (b) the direct tax
effects at an estimated effective tax rate of 40%.
(7) For purposes of computing this ratio, earnings consist of income (loss)
before income taxes, extraordinary item and cumulative effect of change in
accounting principle, plus fixed charges. Fixed charges consist of total
interest expense and the estimated interest portion of rent expense.
(8) Adjusted EBITDA is defined herein as income (loss) before provision for
income taxes, extraordinary item and cumulative effect of change in
accounting principle, plus depreciation, amortization of intangibles and
interest expense, net, adjusted for certain items of income and expense
consisting of: (a) stock-based compensation related to Parent's
Performance Share Plan and Restricted Stock Plan (both of which will not
continue post-Closing) in the aggregate of $1,635 for the year ended
November 30, 1997; (b) loss on write-off of Montgomery Ward accounts
receivable and related factoring expense incurred in connection with
bankruptcy of Montgomery Ward of $4,027 for the year ended November 30,
1997; (c) Bain management fee of $2,000 for the year ended November 30,
1997 and $500 for the three months ended March 1, 1998; (d) operating
results and closure costs associated with the Divestitures for the year
ended November 30, 1997; (e) non-recurring expenses incurred in connection
with the Transactions (see Note (4) above) and (f) $967 and $587 of
expenses for the year ended November 30, 1997 and three months ended March
1, 1998, respectively, related to business process reengineering costs as
defined by EITF 97-13. See further explanation of these items in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations". Adjusted EBITDA is presented because it conforms to the
definition of "Consolidated EBITDA" in the Notes Indenture (see
"Description of Exchange Notes" and "Certain Definitions" within such
section) and the Issuer believes it is frequently used by security
analysts in the evaluation of companies. However, Adjusted EBITDA should
not be considered as an alternative to net income as a measure of
operating results or to cash flows from operations as a measure of
liquidity in accordance with GAAP.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial and Other Data", the Consolidated Financial
Statements and accompanying notes thereto included elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 1, 1998 COMPARED WITH QUARTER ENDED MARCH 2, 1997
NET SALES. Net sales increased $40.4 million, or 23.9% for the quarter ended
March 1, 1998, when compared to the quarter ended March 2, 1997. The increase
is attributable to a $45.7 million increase in conventional bedding sales
offset by a $5.3 million decrease in sales of wood bedroom furniture.
Conventional bedding sales increased 27.9% over the prior year, driven by a
25.0% or $40.9 million increase in conventional bedding unit shipments and a
2.3% or $4.8 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives that included sole-source, multi-year
arrangements of varying lengths with several retailers. The increase in
average unit selling price is primarily attributable to the introduction of
new or re-engineered higher-end 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 November 30, 1997.
COST OF GOODS SOLD. Cost of goods sold for the quarter, as a percentage of
net sales, increased 0.8 percentage point to 58.1%. This increase is primarily
attributable to the introduction of lower price point Posturepedic products,
along with selective pricing initiatives partially offset by economies of
scale from increased volume and the impact of lower sales of the lower margin
wood bedroom furniture.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased $32.0 million due to increased operating expenses of $13.5
million and compensation related costs associated with the Recapitalization of
$18.5 million. Increased operating costs were primarily due to increases in
marketing spending, $8.9 million, and delivery expenses, $2.5 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. Recapitalization costs of $18.5 million
were primarily comprised of accelerated vesting of stock options and
restricted stock and other incentive based compensation payments to employees
in connection with the transaction.
OPERATING INCOME. Operating income was a loss of $3.0 million for the
quarter ended March 1, 1998, a decrease of $16.2 million, as compared to
income of $13.2 million for the quarter ended March 2, 1997.
EBITDA. EBITDA decreased $16.9 million or 85.4% to $2.9 million, or 1.4% of
net sales, for the quarter ended March 1, 1998 versus $19.8 million, or 11.7%
of net sales, for the quarter ended March 2, 1997.
ADJUSTED EBITDA. Adjusted EBITDA increased $2.3 million or 11.3% to $22.7
million, or 10.8% of net sales, for the quarter ended March 1, 1998 versus
$20.4 million, or 12.1% of net sales, for the quarter ended March 2, 1997.
INTEREST EXPENSE. Interest expense, net of interest income, increased $8.7
million primarily as a result of significantly higher debt levels due to the
Recapitalization and a higher interest rate spread.
35
<PAGE>
INCOME TAX. The Company"s provision for income taxes decreased $3.9 million
to a benefit of $0.7 million, due to an $18.5 million pretax loss as compared
to $6.4 million pretax income, respectively for the quarter ended March 1,
1998 and March 2, 1997, partially offset by a lower effective tax rate. The
effective income tax rate for 1998 is approximately 4.0% as compared to 49.8%
in 1997. The relatively low effective tax rate is due to low full year
projected pretax income resulting from increased leverage and compensation
charges associated with the Recapitalization.
EXTRAORDINARY ITEM. The Company recorded a $14.5 million charge, net of
income tax benefit of $9.6 million, representing the writeoff of the remaining
unamortized debt issue costs related to long-term obligations repaid in
connection with the Recapitalization as well as consent fees and premiums paid
related to the Tender Offer of the Parent Notes in connection with the
Recapitalization.
NET (LOSS) INCOME. For the reasons set forth above, the Company recorded a
net loss of $32.2 million for the quarter ended March 1, 1998 versus net
income of $1.2 million for the quarter ended March 2, 1997.
NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating activities
was $23.3 million for the quarter ended March 1, 1998, a decrease of $23.3
million as compared to the quarter ended March 2, 1997 of $0.0. The
significant increase in net cash used is directly attributed to the
Recapitalization.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Net sales for the fiscal 1997 were $804.8 million, an increase of
$107.2 million, or 15.4% from fiscal 1996. This increase is attributable to a
$168.3 million increase in conventional bedding sales offset by a $61.1
million decrease in sales of wood bedroom furniture. Conventional bedding
sales increased 26.7% over the prior year, driven by a 24.1% increase in
conventional bedding unit shipments and a 2.1% increase in average unit
selling price. These increases were due to sales growth in the Posturepedic,
Stearns & Foster and promotional product lines, in addition to successful
strategic distribution initiatives that included sole-source, multi-year
arrangements of varying lengths with several retailers. The increase in
average unit selling price is primarily attributable to the introduction of
new or reengineered higher-end 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 this business unit is provided in Note 14 to the Consolidated
Financial Statements.
COST OF GOODS SOLD. Cost of goods sold as a percentage of net sales
decreased 0.3% to 56.6%. This improvement is primarily attributable to the
impact of lower sales of the lower margin wood bedroom furniture, partially
offset by an increase in bedding cost of goods sold. The increase in bedding
cost of goods sold as a percentage of net sales is primarily attributable to
the introduction of lower price point Posturepedic products, along with
selective pricing initiatives, partially offset by economies of scale from
increased sales volume.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $45.3 million, and increased as a percent of net sales
from 31.1% to 32.6%. This increase was primarily attributable to increases in
bedding marketing spending of $35.1 million, delivery expenses of $5.7 million
and incentive compensation of $3.5 million. Increased marketing spending was
due to increased sales volume, along with an increased spending rate for
cooperative advertising and promotions. The increase in delivery expense was
due to the increase in sales volume. The Company also experienced a $4.9
million increase in bad debt and other financing expenses, of which $4.0
million related to the bankruptcy filing of Montgomery Ward.
OPERATING INCOME. Operating income was $72.0 million for fiscal 1997, an
increase of $18.4 million or 34.4% over fiscal 1996.
EBITDA. EBITDA increased $15.9 million or 19.9%, to $96.1 million, or 11.9%
of net sales, for fiscal 1997 versus $80.2 million, or 11.5% of net sales, for
fiscal 1996.
36
<PAGE>
ADJUSTED EBITDA. Adjusted EBITDA increased $9.4 million or 10.0% to $103.1
million, or 12.8% of net sales, for fiscal 1997 versus $93.7 million, or 13.4%
of net sales, for fiscal 1996.
INTEREST EXPENSE. Interest expense, net for fiscal 1997 increased $2.6
million primarily as a result of increased average debt levels resulting from
the February 1997 dividend and increased rate related to the February 1997
restructuring of the Parent Notes.
INCOME TAXES. The Company's effective income tax rates for fiscal 1997 and
1996 differ from the Federal statutory rate because of the application of
purchase accounting, the effect of certain foreign tax rate differentials and
state and local income taxes. The Company's effective tax rate for fiscal 1997
was approximately 55.4% compared to 102.0% for fiscal 1996. The higher
effective tax rate for fiscal 1996 was due primarily to taxes arising from the
Samuel Lawrence Divestiture and the impact of the permanent differences
related to the 1993 Acquisition. See Note 6 to the Consolidated Financial
Statements.
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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. During the fourth quarter
of fiscal 1997, the Company changed its accounting policy to comply with EITF
97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract
that Combines Business Process Reengineering and Information Technology
Transformation," which resulted in a loss of $4.3 million, net of income tax
of $2.9 million, representing the write-off of previously capitalized costs
primarily related to the Company's new Business Systems project. All business
process reengineering costs subsequent to August 31, 1997 have been expensed
and totaled $1.0 million for the fourth quarter of fiscal 1997.
NET INCOME (LOSS). For the reasons set forth above, net income was $11.7
million for fiscal 1997 versus a loss of $0.5 million for fiscal 1996.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Net cash provided by operating
activities was $42.0 million for fiscal 1997, a decrease of $2.4 million, or
5.4% versus fiscal 1996.
FISCAL 1996 COMPARED WITH FISCAL 1995
NET SALES. Net sales for fiscal 1996 were $697.6 million, an increase of
$43.7 million, or 6.7%, from fiscal 1995. This increase was primarily
attributable to a $37.0 million increase in conventional bedding sales and a
$10.0 million increase in wood bedroom furniture sales. These increases were
partially offset by the elimination of sleep sofa sales as a result of the
closing of this business unit in March 1995.
The strong bedding sales performance represents an 8.2%, or $48.6 million,
increase in conventional bedding unit shipments, offset partially by a 1.8%,
or $11.6 million, decrease in the average unit selling price. Increased unit
volume was attributable to increased distribution and same store sales of
Stearns & Foster luxury bedding, along with incremental placements of new
Sealy Posturepedic products. The decrease in average unit selling price was
primarily attributable to pricing initiatives and increased volume of lower
priced Sealy Posturepedic products.
Sales of wood bedroom furniture increased due to increased product
distribution and same store sales, primarily due to favorable results from new
furniture collections.
COST OF GOODS SOLD. Cost of goods sold was $397.3 million for fiscal 1996,
compared to $362.4 million for fiscal 1995, and increased from 55.4% to 56.9%
of net sales. This increase was primarily attributable to the previously
mentioned decrease in average unit selling price, the start-up costs
associated with the insulator pad facility that was subsequently sold and
inflationary bedding raw material increases.
37
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were flat versus the prior year, but decreased as a
percent of net sales from 33.1% to 31.1%. Increased operating expenses of
$16.8 million were offset by a decrease in marketing spending of $14.1 million
and a prior year $2.7 million charge associated with closing the sleep sofa
business. The increase in operating expenses was due primarily to increases in
incentive bonuses and administrative and sales salaries. Additionally, the
Company incurred executive severance and transition expenses of $1.9 million.
Marketing spending declined from $117.8 million in fiscal 1995 to $103.7
million in fiscal 1996 as a result of adjustments in the Company's marketing
strategies.
LOSS ON NET ASSETS HELD FOR SALE. Loss on net assets held for sale of $11.8
million relates to the Samuel Lawrence Divestiture, and is comprised of excess
of net assets sold over the proceeds received, as well as transaction costs
related to the sale. See Note 14 to Consolidated Financial Statements.
STOCK BASED COMPENSATION. The Company recorded a non-cash charge of $4.5
million, representing final year vesting in the Company's Performance Share
Plan (the "Plan"). During fiscal 1995, the Company recorded a non-cash credit
of $13.3 million for the estimated reduction in the value of the benefits
issuable under the Plan. See Note 10 to Consolidated Financial Statements.
OPERATING INCOME. Operating income was $53.6 million for fiscal 1996, a
decrease of $20.4 million, or 27.6%, versus fiscal 1995.
EBITDA. EBITDA decreased $18.0 million, or 18.4%, to $80.2 million, or 11.5%
of net sales, for fiscal 1996 versus $98.2 million, or 15.0% of net sales, for
fiscal 1995.
ADJUSTED EBITDA. Adjusted EBITDA increased $7.7 million, or 9.0%, to $93.7
million, or 13.4% of net sales, for fiscal 1996 versus $86.0 million, or 13.2%
of net sales, for fiscal 1995.
INTEREST EXPENSE. Interest expense, net for fiscal 1996 decreased $2.2
million primarily due to a $27.8 million decrease in average outstanding debt,
along with lower debt issuance cost amortization.
INCOME TAXES. The Company's effective income tax rates for fiscal 1996 and
1995 differ from the Federal statutory rate because of the application of
purchase accounting, the effect of certain foreign tax rate differentials and
state and local income taxes. The Company's effective tax rate for fiscal 1996
was approximately 102.0% compared to 54.8% for fiscal 1995. The higher
effective tax rate for fiscal 1996 was due primarily to taxes arising from the
Samuel Lawrence Divestiture and the impact of permanent differences related to
the 1993 Acquisition. See Note 6 to the Consolidated Financial Statements.
NET INCOME (LOSS). For the reasons set forth above, net income for fiscal
1996 declined $20.0 million to a loss of $0.5 million.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Net cash provided by operating
activities was $44.4 million for fiscal 1996, a decrease of $18.9 million, or
29.9%, versus fiscal 1995.
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 Senior Credit
Agreements, capital expenditures and interest payments on its outstanding
Notes. Capital expenditures totaled $5.4 million for the quarter ended March
1, 1998 as compared to $4.0 million for the quarter ended March 2, 1997.
Capital expenditures totaled $29.1 million and $12.0 million during fiscal
1997 and 1996, respectively. The increase in capital spending in fiscal 1997
versus fiscal 1996 and for the quarter ended March 1, 1998 versus the quarter
ended March 2, 1997 was primarily attributed to the Company's upgrade of its
computer system. Management believes that annual capital expenditure
limitations in its current debt agreements will not significantly inhibit the
Company from meeting its ongoing capital needs. However, the Company is
currently reviewing financing alternatives with respect to its property
purchase and corporate
38
<PAGE>
headquarters construction in connection with its relocation to Archdale, North
Carolina and the ultimate financing may require an amendment to current year
capital expenditure limitations. See "'Business--Properties." The projected
full year capital expenditures for fiscal 1998 are $35.0 million.
Additionally, the Company estimates total costs associated with this
relocation will result in a pretax charge of approximately $8.5 million which
will be recognized primarily in fiscal 1998 with the balance in fiscal 1999.
At March 1, 1998, the Company had approximately $59.0 million available under
its Revolving Credit Facility with Letters of Credit issued totaling
approximately $12.0 million. The Company's net weighted average borrowing cost
was 8.7% for the quarter ended March 1, 1998 and 9.0% for fiscal 1997 and
fiscal 1996, respectively.
The Old Credit Agreement, the Parent Note Indentures, the Senior Credit
Agreements and the Indentures contain certain negative and affirmative
covenants including, but not limited to, requirements and restrictions
relating to capital expenditures, dividends, working capital, net worth and
other financial ratios. At November 30, 1997, the Company was in compliance
with the financial covenants contained in the Old Credit Agreement and the
Parent Note Indenture. See "Description of Exchange Notes" and "Description of
Senior Credit Agreements".
The Parent Notes are unsecured, subordinated obligations of Parent. Interest
on the Parent Notes is payable in semi-annual installments, currently at the
rate of 10 1/4% per annum (see below). The outstanding principal amount of the
Parent Notes is payable on May 1, 2003. The Parent Notes may be redeemed at
the option of the Company on or after May 1, 1998, under the conditions and at
the redemption prices specified in the Parent Note Indenture.
In March 1997, the Company divested the assets of its mattress insulator pad
manufacturing operation in South Brunswick, New Jersey for approximately net
book value.
On February 25, 1997, the Company entered into the Old Credit Agreement with
a majority of its then current group of senior lenders, which modified the
terms of the prior credit agreement by increasing the amounts available under
the revolving credit portion of the facility from $125.0 million to $275.0
million, and eliminating the term loan portion of such agreement, amending the
pricing terms, certain covenants and other provisions and revising the
composition of the lending group. The Old Credit Agreement was terminated upon
consummation of the Transactions.
On February 6, 1997, the board of directors of the Company authorized the
payment of a dividend to all stockholders and holders of certain 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 Old Credit Agreement.
On January 15, 1997, the Company sold its subsidiary that manufactured wood
bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from
the Samuel Lawrence Divestiture amounted to $35.0 million, and the Company
recorded a loss of $17.6 million in connection with such transaction. The loss
is comprised of a loss on net assets held for sale of $11.8 million and income
tax expense of $5.8 million arising from the tax gain on the transaction. See
Note 14 of Notes to Consolidated Financial Statements.
On November 18, 1997, Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Old
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the indenture under which the Old Notes were issued.
The purchase price paid in respect of validly tendered Old Notes was $1,057.03
per $1,000 of principal amount tendered and the payment with respect to the
Consent Solicitation was $20 per $1,000 of principal amount tendered prior to
the consent expiration date therefor. Old Notes in the aggregate principal
amount of $197.8 million were tendered and accepted for payment and the
related consents received. The Tender Offer was consummated concurrently with
the Merger and a supplemental indenture with respect to the Old Notes took
effect at such time.
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On March 30, 1998, the Company announced a call for redemption of all of its
remaining outstanding Parent Notes. The redemption price of 106.33%, plus
accrued interest, or approximately $2.5 million, was paid on May 1, 1998 and
interest ceased to accrue on the Notes.
The Company financed the Merger, the Tender Offer and related Consent
Solicitation and repaid borrowings under the Old Credit Agreement with the net
proceeds of the Offerings, borrowings under the Senior Credit Agreements and
the equity infusion of approximately $128.7 million from the New Investors. As
a result of the Transactions, interest payments on the Notes and the Exchange
Notes and interest and principal payments under the Senior Credit Agreements
are one of the Company's primary uses of cash. The Notes and the Exchange
Notes require semi-annual cash interest payments of approximately $6.2 million
(at an interest rate on the Senior Subordinated Notes and Senior Subordinated
Exchange Notes of 9.875%). Borrowings under the Senior Credit Agreements bear
interest at floating rates and require interest payments on varying dates
depending on the interest option selected by the Company. The Senior Credit
Agreements consist of a $120.0 million Tranche A Term Facility, a $125.0
million AXELs Series B Facility, an $90.0 million AXELs Series C Facility, a
$115.0 million AXELs Series D Facility and a $100.0 million Revolving Credit
Facility. Such facilities will require aggregate annual principal amortization
payments of $1.5 million, $11.5 million and $28.5 million over the first three
years. Interest rates are variable and, based on current interest rates, pro
forma annual interest expense under the Senior Credit Agreements is estimated
to be $39.7 million. See "Description of Senior Credit Agreements".
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,
the estimated $8.5 million of headquarters relocation costs, obligations under
its Senior Credit Agreement and subordinated note indentures, environmental
liabilities, and for other needs required to manage and operate its business.
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures
will depend on its future performance, which, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of
operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Senior Credit Agreements,
will be adequate to meet the Company's future liquidity needs for at least the
next several years. The Company will, however, need to refinance all or a
portion of the principal of the Notes on or prior to maturity. There can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all. In addition, there can be no
assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated revenue growth and operating improvements will be
realized or that future borrowings will be available under the Senior Credit
Agreements in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. See
"Risk Factors--Substantial Leverage".
FOREIGN OPERATIONS AND EXPORT SALES
The Company has three manufacturing facilities in Canada and one in Mexico.
The Company's licensee for Mexico agreed to terminate its license, permitting
Sealy to enter the market directly and commence production in May, 1996. The
Company began marketing its Sealy brand in South Korea during 1995 upon
expiration of its Korean license agreement. In addition, the Company has
licensing agreements in Thailand, Japan, the United Kingdom, Australia, New
Zealand, southern Africa, Israel and Jamaica. The Company is exploring
additional international opportunities in the Pacific Rim, Latin America and
Western Europe with test markets currently operating in Spain and Brazil. 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. See
"Risk Factors--Risks Associated with International Operations".
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INFLATION
The Company maintains operations in Mexico which has experienced high
inflation levels. Neither the operations of Mexico nor the effects of the
inflation are material to the results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection
with an overall information technology transformation project should be
expensed as incurred (EITF 97-13). The transition provisions require companies
that had previously capitalized such business process reengineering costs to
identify these costs and quantify the unamortized amounts remaining on the
balance sheet as of the beginning of the quarter which includes November 20,
1997. These unamortized amounts are required to be written off as a cumulative
effect of a change in accounting principle in such quarter. The Company has
adopted EITF 97-13 resulting in a loss of $4.3 million, net of income tax
benefit of $2.9 million, representing the cumulative write-off of previously
capitalized costs as of August 31, 1997 primarily relating to the Company's
new Business Systems project. All business process reengineering costs
subsequent to August 31, 1997 have been expensed and totaled $1.0 million for
the fourth quarter of fiscal 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS
No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"),
and requires the calculation and dual presentation of basic and diluted
earnings per share ("EPS"), replacing the measures of primary and fully-
diluted EPS as reported under Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
earlier application is not permitted. Accordingly, EPS presented on the
accompanying statements of income are calculated under the guidance of Opinion
15. Under SFAS No. 128, the basic and diluted EPS on net income for fiscal
1997 would have been $0.39 and $0.38, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information",
were issued. The Company plans to adopt these standards when required in
fiscal 1999.
SEASONALITY
The Company has experienced in the past and will experience in the future
quarterly variations in net sales and net income as a result of many factors,
including product cycles of suppliers that are not controlled or influenced by
the Company, product availability, supplier relationships, customer
relationships, the level of selling, general and administrative expenses and
the condition of the bedding industry in general. In the bedding supply
industry, seasonality generally affects quarterly sales performance.
Historically, the Company's quarterly sales are lowest in the first fiscal
quarter and highest in the third fiscal quarter.
CHANGE IN FISCAL YEAR
A Form 8-K was filed October 11, 1995 reporting that the Board of Directors
of Parent approved the change of the Company's fiscal year from one ending on
November 30 in each year to a 52-53 week fiscal year. The first such fiscal
year commenced on Friday, December 1, 1995 and ended on the 53rd Sunday
thereafter or Sunday, December 1, 1996. Subsequent fiscal years will end on
the Sunday nearest the last day of November.
YEAR 2000 ISSUE
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the
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dating system flaw inherent in most operating systems (the "Year 2000 Issue").
There can be no assurance, however, that the new Business Systems will be
installed and fully operational at all locations and for all applications
prior to the turn of the century, and management has therefore deemed it
necessary to convert its current system to be Year 2000 compliant. The Company
has conducted a comprehensive impact analysis to determine what computing
platforms and date-aware functions with respect to its existing computer
operating systems will be disrupted by the Year 2000 Issue. In January, 1998,
the Company completed a prioritization of the impacted areas identified to
date and commenced the detailed program code changes through a contracted
third party vendor which has experience in Year 2000 conversions for the
Company's existing system including the same release of such system. The
Company is in the preliminary stages of assessment of its vendors and
customers status with respect to the Year 2000 Issue. The required code
changes, testing and implementation necessary to address the Year 2000 Issue
is projected to be completed by May, 1999, and is expected to cost
approximately $4.0 million.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements. Although the Company
believes its plans are based upon reasonable assumptions as of the current
date, it can give no assurances that such expectations can be attained.
Factors that could cause actual results to differ materially from the
Company's expectations include: general business and economic conditions,
competitive factors, raw materials pricing, and fluctuations in demand.
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BUSINESS
Sealy Mattress Company, headquartered in Cleveland, Ohio, has been the
leading conventional bedding manufacturer in North America for over two
decades and the Sealy brand name has been in existence for over 100 years. The
Company manufactures, distributes and sells a broad line of conventional
bedding products, including mattresses and foundations, under the Sealy, Sealy
Posturepedic, Stearns & Foster and recently introduced Sealy Correct Comfort
and Sealy Posturepedic Crown Jewel brand names. The Company's branded
merchandise accounted for approximately 99% of total net sales for the fiscal
year ended November 30, 1997. Based on market growth estimates by the ISPA,
the Company estimates it held a 22% share of the U.S. bedding market for 1997.
The Company offers a complete line of conventional bedding options in the
promotional, premium, ultra-premium and luxury categories, which sell at
retail price points from under $200 to approximately $3,000 per queen-size
set. For the fiscal year ended November 30, 1997, on a pro forma basis, the
Company generated net sales and Adjusted EBITDA of $799.5 million and $103.1
million, respectively.
INDUSTRY OVERVIEW
The U.S. conventional bedding industry is mature and stable. For the year
ended December 31, 1996, manufacturers and retailers generated revenue of $3.3
billion and $6.2 billion, respectively, according to ISPA. Over the last 20
years, sales have declined only once (1.9% in 1982) and the industry has grown
on average 6.4% per year. Industry growth is driven primarily by: (i)
population expansion, (ii) demographic shifts and (iii) manufacturer and
retailer advertising and education emphasizing larger-size, higher quality
beds. Because consumers shop for bedding infrequently and often have limited
specific product knowledge, they typically rely on the retail salesperson in
the purchase decision process. Management believes that those manufacturers
best able to meet the retailers' needs--including differentiated, brand name
products, retail salesforce training in product specifications and
merchandising and logistics support--should continue to gain market share.
From 1989 to 1996, the combined market share of the top four manufacturers has
steadily increased from 48% to 59%.
INDUSTRY GROWTH. The market for conventional bedding is growing, both in
sales and in average unit selling price ("AUSP"). The industry's revenue
growth rate has averaged approximately 6.4% per year since 1976. The growth in
unit sales is due to population growth, as well as trends toward more beds per
home and more frequent replacement of bedding products. The growth in AUSP is
a result of a demographic shift to older consumers who spend more per unit on
average than younger consumers, an increase in the level of education among
retailers relating to product quality and merchandising and continued growth
in industry advertising relating to the health benefits of more supportive
bedding.
INDUSTRY STABILITY. The bedding industry has been relatively insulated from
cyclical swings, experiencing only a single year of sales decline in the past
20 years, when, in 1982, sales declined approximately 1.9%. The industry has
remained stable largely as a result of the following characteristics: (i) low
manufacturer and retail inventory levels mitigate the swings experienced by
the furniture and appliance industries, since mattresses are largely
manufactured to order; (ii) a significant portion of costs, especially cost of
goods sold expenses, are variable, which limits the impact of an economic
downturn on margins and, accordingly, allows industry participants to continue
to invest in necessary sales promotion and research and development; (iii)
major raw materials costs for the Company's mattresses have historically
cycled with the economy, thereby limiting potential margin contraction; (iv)
replacement sales, which account for approximately 70% of conventional bedding
sales, contribute to the market's relative stability as the average household
purchases a new mattress set every seven to eight years; and (v) bedding
manufacturers fund a substantial portion of consumer promotional expenses
("cooperative advertising") which invites retailers to continue to advertise
bedding products
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even in a weak economic environment. The conventional bedding industry's
stability is evidenced by its average annual 2% to 3% growth throughout the
1989-1992 recession during which the home furnishings industry as a whole
experienced a decline in sales.
RETAILERS INCREASINGLY DEMAND BRANDED, BROAD, AND DIFFERENTIATED PRODUCT
LINE. Retailers have recognized that a broad product line with identifiable
value gradations is an effective way to market bedding to consumers. According
to market surveys, most consumer bedding purchases are made within one month
of the customer's initial decision to buy a new mattress and customers are
most likely to buy at the first or second store shopped. As such, a strong
brand name and favorable opinion of the product's quality by the retail floor
sales staff are crucial to the sales process. As a result, manufacturers and
retailers typically focus on popular price points with most major
manufacturers producing a flagship mattress at a retail price of $399 per
queen-size set (which includes both the mattress and the foundation) in an
effort to generate store traffic. However, once consumers are in the store,
retailers are often able to motivate consumers to make purchases at retail
price points of $599, $699, $799 and above for a queen-size set. This strategy
requires a manufacturer to supply retailers with a broad product line which in
turn results in increased sales of incrementally higher margin products for
retailers and increased market share for the manufacturer.
COMPANY STRENGTHS AND BUSINESS STRATEGY
The Company's main objective is to grow sales and market share by maximizing
its share of the retailers' floor space while managing costs. The key elements
of the Company's strategy are as follows:
LEVERAGE MARKET LEADERSHIP POSITION AND HIGH BRAND AWARENESS. The Company is
the largest manufacturer of conventional bedding products in the United
States, a position it has held for more than two decades. Based on 1997
industry growth estimated by the ISPA, management estimates that the Company
held a 22% share of the U.S. market, approximately 1.3 times that of its next
largest competitor. Strong relative market share, coupled with numerous strong
brands, including Sealy, Sealy Posturepedic and Stearns & Foster, provide the
Company with significant marketing strength relative to its competitors, who
primarily offer only one brand to retailers. Brand recognition is critical in
the bedding industry, where strong brand names help define consumer preference
and drive retail floor space allocations.
ENHANCE POSITION AS LEADING SUPPLIER TO THE BEDDING INDUSTRY. The Company is
uniquely positioned to benefit from current industry trends, including the
consolidation of manufacturers and the increase in sole-source vendor
arrangements. Management believes that its: (i) broad product offering, (ii)
product design leadership, (iii) national manufacturing and distribution and
(iv) commitment to retailer education and training all provide support to its
existing dealer network while helping to attract new accounts. Such strong
dealer relationships should result in sales growth through increased floor
space allocation, superior product positioning and enhanced commitment by
retail salesforces.
. BROAD PRODUCT OFFERING. Management believes that the Company currently
offers the most complete line of conventional bedding products in the
industry, enabling retailers to offer consumers a full range of bedding
alternatives from a single source. The Company's product line ranges from
higher-margin, higher-priced mattresses, sold under the Sealy
Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort and
Stearns & Foster names, to lower-priced promotional, private label and
contract bedding products. The consistently advertised, lower-priced
product line is instrumental in attracting customers, thereby offering
retailers the in-store opportunity to promote higher-priced products with
incrementally higher margins. In addition, the Company's broad product
line has enabled it to secure sole-source, multi-year arrangements with
several retailers, including a significant number of those in the high-
growth, specialty channel, such as Mattress Discounters, Mattress Firm
and Bedding Experts.
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. PRODUCT DESIGN LEADERSHIP. Since December 1, 1994 the Company has, on
average, invested approximately 0.75% of its net sales in research and
development, a rate which management believes to be in excess of twice
that of its next largest competitor, to create and commercialize
innovative products that broaden the Company's product lines and
differentiate its products from those of its competitors. Management
believes that this investment in product enhancements and new products,
such as Sealy Correct Comfort, the Company's recently introduced,
individually-wrapped coil product, allows the Company to claim additional
floor space and compete effectively for sole-source vendor positions. A
majority of the Company's net sales for the fiscal year ended November
30, 1997 were from products introduced or reengineered in the prior two
years.
. NATIONAL MANUFACTURING AND DISTRIBUTION. In surveys, retailers have
stated that delivery times and product quality are among the most
important criteria used to evaluate manufacturers. The Company believes
that its current structure and operating strategy directly address these
needs. The Company is one of only two national manufacturers operating as
a single company rather than as a group of independent licensees. Because
it owns 21 manufacturing and distribution facilities strategically
located throughout the United States, the Company can quickly respond to
retailers' logistical and product design requirements. Such just-in-time
deliveries enable retailers to minimize inventory carrying costs and meet
the growing demand of consumers for product variety and shortened
delivery times. Additionally, the Company is the only national
manufacturer to have taken advantage of vertical integration in a
majority of its product lines. Vertically integrated manufacturing
permits the Company to safeguard proprietary technology and new product
design while better controlling costs.
. COMMITMENT TO RETAILER EDUCATION AND SUPPORT. The Company assists its
retailers in re-merchandising their showrooms and actively marketing more
profitable lines of bedding through ongoing investment in retailer
relationships. The Company supports its retailers by providing: (i)
cooperative advertising dollars and creative assistance, (ii) ongoing
retail sales force training focused on product education and
merchandising instruction, (iii) customized product lines which allow
retailers to differentiate their products from those of their competitors
and (iv) direct mail campaigns. Management believes that retail support
serves to educate consumers about the benefits of higher-end models and
therefore encourages additional sales at higher price points.
INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. By
virtue of its size and leadership position in the bedding industry, the
Company benefits from significant operational efficiencies. The Company is
able to capture economies of scale in research and development, advertising
and raw material purchases. Management believes that several opportunities
remain to leverage the current infrastructure to realize meaningful cost
reductions, including greater utilization of existing facilities, improved
scrap management and improved distribution and transportation. Additionally,
the Company is in the process of an MIS upgrade to improve manufacturing
operations and profitability analysis.
LEVERAGE THE SEALY NAME THROUGH LICENSEES. Significant opportunities exist
to leverage the strong Sealy brand names in bedding-related product categories
through strategic licensing agreements rather than through direct
manufacturing. In the past year, the Company has entered into a number of
licensing arrangements with various manufacturers, including: (i) Klaussner
Furniture Industries, one of the largest upholstered furniture manufacturers
in the United States, for the manufacture of upholstered furniture under the
Sealy Furniture brand name; (ii) Pacific Coast Feather Company for the
manufacture and sale of pillows, comforters and mattress pads under the Sealy
brand name; and (iii) Dorel Industries for the manufacture and sale of futons
under the Sealy Furniture brand name. Management believes that these licensing
agreements broaden consumer recognition of the Sealy name while generating
significant income for the Company.
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MAINTAIN CORE FOCUS ON CONVENTIONAL BEDDING. The Company's management team
is committed to focusing on the core bedding business, which includes
manufacturing, distributing and selling a broad line of mattresses and
foundations, while continuing to leverage the Sealy name through licensing
arrangements. To this end, the Company completed the sale of its Woodstuff
Manufacturing, Inc. subsidiary which manufactured wood bedroom furniture under
the Samuel Lawrence brand name in January 1997. Management believes that
maintaining its manufacturing focus on conventional bedding is the best way to
maximize profitability.
PURSUE INTERNATIONAL GROWTH OPPORTUNITIES. The Company is currently
implementing a disciplined and focused international strategy based on
leveraging its strong reputation and brand recognition in the United States to
build solid international franchises. The Company currently manufactures
products in Canada and Mexico, distributes products directly in Korea and has
licensing agreements in Thailand, Japan, the United Kingdom, Australia, New
Zealand, southern Africa, Israel and Jamaica. The Company is exploring
additional international opportunities in the Pacific Rim, Latin America and
Western Europe, with test markets currently operating in Spain and Brazil. The
Company plans to continue to operate via licensing and/or distribution
agreements in new international markets until sales reach a level that
warrants the building or purchase of a Company-operated facility.
PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company will evaluate
potential acquisition and joint venture opportunities that should help to
support and strengthen its core business. Such acquisitions should allow the
Company to capitalize on its existing marketing, manufacturing and
distribution capabilities and to expand its presence in selected geographical
regions. From time to time the Company reviews potential acquisition
candidates, but it is not currently in discussions with respect to any
material acquisition.
CAPITALIZE ON STRONG MANAGEMENT TEAM. Led by Chief Executive Officer Ron
Jones, who joined the Company in early 1996, the Company has assembled one of
the strongest management teams in the bedding industry. The Company's senior
management team has approximately 150 years of experience in the bedding and
home furnishings industries and has made a significant equity interest in
Sealy Corporation at the close of the Transactions. This management team has
instituted a number of strategic initiatives, including: (i) divestiture of
non-core operations and renewed focus on the Company's core bedding business,
(ii) improved long-term strategic and product planning which has resulted in a
new product rollout schedule through 1999, (iii) increased focus on retailer
relationships, (iv) a shift to a more balanced marketing program that includes
significant cooperative and focused national advertising and (v) the
implementation of a disciplined international strategy. The execution of these
and other initiatives has resulted in significant improvements in the
financial and market position of the Company. Since December 1995, the Company
has increased its market share from 18% to an estimated 22% in 1997.
Additionally, on a pro forma basis, net sales and Adjusted EBITDA have
increased 26.7% and 10.1%, respectively, for the fiscal year ended November
30, 1997 versus fiscal 1996.
PRODUCT OFFERINGS
The Company's broad proprietary product line allows retailers to streamline
purchasing and provide consumers with a range of brand names, gradations of
quality and corresponding price points. As a result, the Company has been able
to expand its overall market share and to increase its penetration with sole-
source or Sealy-predominant accounts. The Company's major branded product
lines include Sealy Posturepedic, Sealy Posturepedic Crown Jewel, Stearns &
Foster, Sealy Correct Comfort and Sealy, which collectively represented
approximately 99% of the Company's sales for the fiscal year ended November
30, 1997. Together with its private label products, these brands allow the
Company to offer a full range of products to retailers and provide retail
sales associates with a platform from which to upgrade consumer purchasing
decisions within the Company's product lines. The Company's queen-size sets
range in price from under $200 for promotional bedding to approximately $3,000
for the highest priced Stearns & Foster product.
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Sealy, Sealy Posturepedic and Stearns & Foster are among the strongest brand
names of any bedding manufacturer in North America. According to a consumer
attitude and brand perception study performed by Kaplan MRD, Inc., Sealy
Posturepedic ranked first in value, construction, quality, durability, and
popularity. In addition, according to a consumer survey performed by Home
Furnishings News, Sealy, Sealy Posturepedic and Stearns & Foster ranked first,
fourth and eighth, respectively, in brand recognition within the bedding
category. Moreover, according to Home Furnishing Executive, the Stearns &
Foster brand is recognized by consumers and retailers for industry excellence
in overall product, dealer support and product delivery. The Company
continually reaffirms its strong brand names through both national and
regional advertising campaigns, point-of-sale promotional materials and sales
associate training programs. The Company believes that in the competitive
bedding industry, a strong brand name is paramount in the selling process,
where the retail sales associate is an integral part of the sale and where
consumers most often make purchases in the first or second store visited.
SEALY POSTUREPEDIC. Sealy Posturepedic, the Company's flagship brand for
over 40 years, is the largest selling mattress brand in North America and
enjoys unaided brand awareness of 41%, nearly twice that of any other flagship
brand. Perceived as the number one mattress for proper back support, the Sealy
Posturepedic is offered at various retail price points from $399 to $1,299 per
queen-size set. The Sealy Posturepedic features numerous proprietary
components, including the PostureTech innerspring with the Sense & Respond
system, the EdgeGuard and EverEdge edge support systems, and the PostureSteel
and SteelSpan foundations. The EverEdge support system, a rigid foam frame
that completely embraces and locks into the perimeter coils, provides a firmer
seating edge and a more usable sleep surface. Management believes that the
proprietary components provide the Sealy Posturepedic product line with a
variety of advantages over competing products, including the Simmons
BeautyRest(R). These advantages include: (i) coils that automatically adjust
firmness to provide correct support, (ii) edge support systems that increase
sleep surfaces by an average of 10% and (iii) foundations that are more
durable.
SEALY POSTUREPEDIC CROWN JEWEL. Sealy Posturepedic Crown Jewel, an extension
of the Company's successful Sealy Posturepedic line, was introduced in January
1997. The Sealy Posturepedic Crown Jewel utilizes the PostureTech coil,
SteelSpan foundation, EverEdge support system and Resilium cushioning
material, which differentiate the Sealy Posturepedic Crown Jewel from
competing products. The PostureTech coil with the patented Sense & Respond
support system and the SteelSpan II foundation with specially engineered steel
crossbeams combine to provide superior back support. Resilium cushioning
material, a cotton-soft breathable synthetic fiber, retains its plumpness,
shape and support far longer than traditional cushioning material. The Sealy
Posturepedic Crown Jewel is offered at several retail price points from $1,199
to $1,999 per queen-size set.
STEARNS & FOSTER. Known in the bedding industry for over 150 years and
acquired by the Company in 1983, the Stearns & Foster product line consists of
high quality, luxury mattresses. The Company realized that a significant
market gap existed in the high-end product segment and therefore relaunched
the brand in 1995 as a premium priced product line. Stearns & Foster net sales
have grown in excess of 40% annually since the repositioning. Stearns & Foster
products feature proprietary components, including the UltraEdge border and
UltraSteel foundation, for superior comfort and back support. In addition,
Stearns & Foster products are made with premium bedding upholstery; matching
cloth handles, edge closures and foundation surface upholstery; brass-plated
vents and corner guards; and all-steel foundation supports. In 1998, the
Company plans to introduce new styles for its Stearns & Foster products to
enhance further the product's aesthetics and to continue to differentiate the
Stearns & Foster products from competing products. Stearns & Foster mattresses
are offered at a wide variety of retail price points from $719 to
approximately $3,000 per queen-size set. Management believes that Stearns &
Foster products are among the most profitable mattress products offered by
retailers.
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SEALY CORRECT COMFORT. The Sealy Correct Comfort line was introduced in June
1997 as part of a bid to secure a single source contract with Mattress
Discounters, one of the largest sleep shop chains in the United States. The
Sealy Correct Comfort uses an individually wrapped coil and provides retailers
and consumers with a direct Sealy alternative to the Simmons BeautyRest(R). In
addition, the product line offers: (i) the Tru-Lok Stabilizer, a non-woven
fabric that provides a more stable spring unit and prevents pinching of
upholstery between the rows of coils, (ii) the Miracle Edge, which provides
demonstrable edge support on all four sides and increases the sleep surface
and (iii) a steel center rail in the foundation for increased durability, all
of which differentiate the Sealy Correct Comfort from the Simmons
BeautyRest(R). The Sealy Correct Comfort is a premium product with various
retail price points ranging from $699 to $999 per queen-size set.
SEALY PROMOTIONAL. Sealy promotional lines are value oriented introductory
products that are offered at retail price points ranging from under $200 to
$599 per queen-size set. In 1997, the Company repositioned its promotional
products by creating three different promotional brands: Backsaver, Orthozone
and Posture Premier, which replaced a number of discontinued promotional
products. The new lines feature Sealy's 312 Bonnell innerspring at lower price
points and its new high profile 336 Bonnell innerspring at higher price
points. In addition, the Posture Premier utilizes the 520 PostureTech
innerspring at its highest price point and is positioned as a "high-tech"
promotional mattress.
SEALY CONTRACT. The Sealy Contract division sells a wide range of quality
bedding products to institutions in the hospitality, health care and military
markets. Contract products are sold under both Posturepedic and non-
Posturepedic labels, as well as some non-Sealy private labels. Contract
products are sold through a network of independent, commissioned sales
representatives who sell within a defined geographic region. While the largest
segment of the contract business is hospitality, the fastest growing segment
is the military, where the Company sells to military bases for use in sleeping
quarters and for resale to military personnel. The Company's largest
hospitality customers include Hyatt Hotels, Sheraton Hotels, Omni Hotels and
Four Seasons Hotels.
PRIVATE LABEL. Private label products are lower priced, private-branded
products that are offered at a variety of price points as alternatives to
branded merchandise. Sealy's private label products help position the Company
as an ideal vendor for retailers looking to consolidate vendor structures.
CUSTOMERS, SALES AND MARKETING
CUSTOMERS. The Company's broad and stable customer base consists of over
7,000 retail outlets representing approximately 3,200 companies across all
major distribution channels. The Company's key customers are: (i) major
bedding chains including Mattress Discounters, Mattress Firm, and Bedding
Experts; (ii) national furniture retailers including Haverty's; (iii) regional
furniture stores including Art Van in Michigan, Kittle's in Indiana and Ohio,
Louis Shanks and Finger's in Texas, Raymour/Flanigan in upstate New York, and
Rooms To Go in the Southeast; (iv) national chains including Sears and J.C.
Penney; (v) wholesale buying clubs including Costco; (vi) major department
stores including Bloomingdale's, Macy's and Dillards; (vii) and contract
hospitality customers including Sheraton Hotels and Four Seasons Hotels. The
majority of the Company's sales are made to furniture stores, specialty sleep
shops and department stores, which collectively represented 82% of the
Company's 1997 domestic sales.
Because of its strong brand names, national manufacturing and distribution
and broad product line, the Company has been very successful in capitalizing
on the trend of retailers to move toward sole-source vendors. Since the
management transition in early 1996, the Company has secured sole-source
supplier roles with several retailers, including Mattress Discounters,
Mattress Firm and Bedding Experts. As one of only two companies that has
national, company operated manufacturing and distribution capabilities, the
Company is in a strong position to capture additional market share as a sole-
source supplier to high-growth national chains.
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<PAGE>
The Company's sales, including recent market share gains, have been widely
diversified across a broad customer base. The Company's five largest
conventional bedding customers accounted for approximately 21% of the
Company's net sales for the fiscal year ended November 30, 1997 and no single
customer represented more than 6% of the Company's net sales for such period.
While the composition of the five largest customers has varied over time,
their percentage of net sales has remained relatively constant over the last
several years. The Company also has an active customer base of smaller
customers. These customers, composed primarily of family-owned furniture
stores, provide Sealy's products exposure to smaller markets and local
communities.
SALES. Sealy employs a sales organization of approximately 200 people who
sell the Company's products exclusively to authorized dealers of Sealy
products. The Company's major points of distribution are furniture stores,
specialty sleep shops and department stores. The Company's sales force is
aided by a balanced advertising and marketing strategy that focuses both on
retail relationships through the use of cooperative advertising programs and
on brand awareness through focused national advertising campaigns.
The Company believes that it provides the most extensive sales training
program in the bedding industry through its internal program, the University
of Sleep. Every member of the sales team, from Sales Representative to Vice
President of Sales, attends the seven-course program created and facilitated
by the Company. In addition to this program, the Company offers specific
courses on product display, retail sales training, retail advertising and
sales management. The Company's sales force emphasizes follow-up services 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.
ADVERTISING AND MARKETING. The Company's advertising and marketing strategy
emphasizes retail relationships through the use of cooperative advertising
programs, in-store product demonstrations, and promotional incentives to
retail sales associates, balanced with a focused national advertising campaign
to support the Company's strong brand names. Stearns & Foster has developed a
targeted marketing program that allows retailers to identify groups of
potential consumers based on known demographic profiles. This profiling allows
retailers to mail an advertisement to a small group of consumers whose
incidence of purchase is expected to generate more sales than would have been
generated through a mass mailing.
COMPETITION
The Company is the largest conventional bedding manufacturer in North
America and primarily competes with three national companies: Simmons Company,
Serta, Inc. and Spring Air Company. Of the top four manufacturers, only the
Company and Simmons have national, company operated manufacturing and
distribution capabilities. Moreover, the Company is the only national
manufacturer to have taken advantage of vertical integration in a majority of
its product lines, thereby providing it with significant product development
and cost advantages. Additionally, the Company believes that it is the only
such company with international, company operated manufacturing and
distribution capabilities. For the year ended December 31, 1996 the Company
and its three primary competitors accounted for approximately 59% of the
domestic market. The remaining 41% of the market is highly fragmented and
consists of six second tier companies--King Koil, Restonic, Springwall, Ther-
a-Pedic, Bassett and Englander--which collectively represented 15% of the
market, and approximately 700 independent local and regional manufacturers,
which mainly manufacture lower quality products for sale at lower price points
than the products sold by the Company and its primary competitors. While the
Company primarily manufactures higher margin, differentiated bedding products,
it also
49
<PAGE>
manufactures lower priced, lower margin promotional, private label and
contract bedding in order to compete with smaller manufacturers and provide
retailers with a platform from which to upgrade consumer purchases.
INTERNATIONAL OPERATIONS
The Company's international division is separated into six business
segments: Sealy-Canada, Sealy-Mexico, expansion markets, distribution direct
countries, off-shore importers, and licensees. The Company is currently
implementing a disciplined and focused international strategy based on
leveraging its strong reputation and brand recognition in the United States to
build solid international franchises. The Company currently manufactures
products in Canada and Mexico, distributes products directly in Korea and has
licensing agreements in Thailand, Japan, the United Kingdom, Australia, New
Zealand, southern Africa, Israel and Jamaica. The Company is exploring
additional international opportunities in the Pacific Rim, Latin America and
Western Europe and is currently operating test markets in Spain and Brazil.
The Company plans to continue to operate via licensing and/or distribution
agreements in new international markets until sales reach a level that
warrants the building or purchase of a Sealy-operated facility.
PROPRIETARY TECHNOLOGY; TRADEMARKS AND PATENTS
The Company's research and development division has developed numerous
proprietary innovations that the Company uses in select products. Over the
past two years, the Company has introduced the SteelSpan II foundation,
EverEdge edge systems, Infinilux foam and Resilium fiber, and has developed an
advanced technology innerspring and composite foundation system, all of which
have been patented or have patents pending. Since December 1, 1994 the Company
has, on average, invested approximately 0.75% of its net sales in research and
development, a rate which management believes to be in excess of twice that of
its largest competitor. In addition, the Company has increased attention on
cross-functional input into product development. As a result, the Company
believes that it is able to build a more meaningful and differentiated product
pipeline than its primary competitors.
The Company holds over 200 trademarks, which management believes have
significant value and are important to the marketing of its products to
retailers. The Company owns numerous U.S. and foreign patents and has patent
applications pending domestically and abroad. In addition, the Company owns
U.S. and foreign registered trade names and service marks and has applications
for the registration of trade names and service marks pending domestically and
abroad. The Company also owns several U.S. copyright registrations and a wide
array of unpatented proprietary technology and know-how. Further, the Company
licenses certain intellectual property rights from third parties.
As of November 30, 1997, the Company held 25 U.S. patents and more than 52
international patents. Over the last two years, the Company has patented seven
innovations developed by the Company's research and development division.
Currently, nine domestic patents are pending, two domestic patents are in
process and four domestic patents are in the queue for other product
innovations. In addition, the Company owns numerous trademarks, trade names
and logos, including those related to Sealy, Stearns & Foster, Sealy
Posturepedic, Sealy Posturepedic Crown Jewel, Sealy Correct Comfort, and the
University of Sleep.
WARRANTIES
The Company offers a 10-year, non-prorated warranty for all manufactured
Sealy Posturepedic models, Stearns & Foster bedding and other selected Sealy
brand products. According to an independent survey of 1,698 consumers
performed by NPD Group, Inc. in September 1995, Sealy ranked first in the
warranty category among the top three domestic brands. Over the past ten
years, less than 1% of all products sold have been returned to the Company on
warranty.
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LICENSES
The Company currently has 14 separate licensing arrangements in effect,
covering both mattress manufacturing (primarily internationally) and related
products. Of the Company's six North American licensees, Sealy-New Jersey is
the sole North American licensee for adult mattress manufacturing, which is a
result of an historical license arrangement. Sales volume of Sealy-New Jersey
represented approximately 3% of Sealy and Stearns & Foster branded sales in
1997. To maintain quality and control margins, the Company has made a
strategic decision not to further license conventional core bedding products
in North America. The Company has eight international licensees, five of which
are perpetual licensees which manufacture Sealy bedding products in their
respective countries. The Company's current licensees are in Thailand, Japan,
the United Kingdom, Australia, New Zealand, southern Africa, Israel and
Jamaica. In addition, the Company continually explores additional
international licensing opportunities, with test markets currently operating
in Spain and Brazil.
Sealy has licensed its name for use to five manufacturers of furniture
and/or bedding-related products, including Klaussner Furniture Industries,
Sealy Furniture of Maryland, Kolcraft Enterprises, Pacific Coast Feather
Company and Dorel Industries. Klaussner is licensed to manufacture and market
sofas, sleep sofas, and other upholstered furniture products in North America,
primarily under the Sealy Furniture logo. Sealy Furniture of Maryland is
currently producing sleep sofas under the Sealy brand name and Kolcraft
Enterprises is licensed to manufacture and market crib mattresses under the
Sealy name. In October 1997, the Company entered into licenses which will
commence in April 1998 with Pacific Coast Feather Company for the manufacture
and sale of pillows, comforters and mattress pads under the Sealy brand name
and Dorel Industries for the manufacture and sale of futons under the Sealy
Furniture name. The Company believes that additional opportunities exist to
leverage the strong Sealy brand name through licensing of affiliated products.
The Company believes that such licensing should increase sales and strengthen
consumer awareness without diverting manufacturing attention from the core
bedding business.
MANUFACTURING AND FACILITIES
The Company manufactures most conventional bedding to order and has adopted
"just-in-time" inventory techniques in its manufacturing process to more
efficiently serve its dealers' needs and 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 25 bedding manufacturing facilities and three component
manufacturing facilities in 19 states, three Canadian provinces, Puerto Rico
and Mexico. Management believes that through the utilization of extra shifts,
it will be able to continue to meet growing demand for its products without a
significant investment in facilities. 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, trains personnel,
compares the quality of the Company's products with those of its competitors
and develops 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.
MATTRESS MANUFACTURING. The typical Sealy bedding manufacturing facility
assembles a complete line of conventional bedding and is strategically located
to service one or more major metropolitan areas. The average facility contains
approximately 140,000 square feet of manufacturing space, most of which is
devoted to production. Raw material inventory is minimized through just-in-
time delivery from the Company's major suppliers. Finished stock inventory,
which is typically stored at the manufacturing facility until shipped, is also
minimized through made-to-order production. The Company has found that made-
to-order production most efficiently serves the needs of its retailers as well
as
51
<PAGE>
minimizes their inventory carrying costs. As such, the majority of bedding
orders are scheduled, produced and shipped within 72 hours of receipt. Because
the Company adjusts production levels to meet customer order demand, the
Company has no material backlog of orders.
All of the Company's plants use 12 basic units of operation, with customized
layouts based on individual plant geometry and available square footage to
produce mattresses and foundations. The manufacturing process begins with the
receipt of raw materials and component parts such as cotton, insulator pads,
innersprings, fabrics and roll goods consisting of foam, fiber and non-wovens.
The price of the Company's raw materials tends to decline during recessions,
historically insulating the Company's margins in economic downturns. The
manufacturing process takes place simultaneously for both parts of a bedding
set (mattress and foundation) and involves several operations that are common
in the construction of both a mattress and a foundation. In general, both
processes involve the creation of subassemblies from raw materials and then
the assembly of these subassembles into the finished mattress and foundation.
COMPONENTS MANUFACTURING. The Components Division, headquartered in
Rensselaer, Indiana, operates three innerspring manufacturing facilities, two
of which run three shifts, five days a week and one that continuously
operates. The division sells its component parts at current market prices
exclusively to the Company's bedding plants and licensees. The division
provides substantially all of the Company's mattress innerspring unit
requirements, including 100% of the proprietary innersprings for the Sealy
Posturepedic and Stearns & Foster lines. In addition, the division
manufactures approximately 50% of the Company's foundation parts as a licensee
of Hoover.
Over the last eight years, the Company has made substantial commitments to
ensure that the coil-making equipment at its component plants remains state-
of-the-art. Since 1989, the Company has installed 30 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 nearly 100%.
The Company believes the vertical integration resulting from its component
manufacturing capability provides it with a significant competitive advantage
in both cost and technology. Moreover, the Company is the only conventional
bedding manufacturer in the United States with substantial innerspring and
form wire component-making capacity.
INDEPENDENT SUPPLIERS. The Company purchases raw materials and certain
components from a variety of vendors, including Hoover, Foamex International
and other national raw material and component suppliers. The Company purchases
substantially all of its Stearns & Foster foundation parts and approximately
50% of its Sealy foundation parts from Hoover which has patents on various
interlocking wire configurations. To increase profitability and reduce the
risks of dependence on a single external supply source, the Company licenses
these wire patents from Hoover and manufactures the remaining 50% of Sealy
foundation parts through its components division.
RESEARCH AND DEVELOPMENT. The Company's proprietary product pipeline is
driven by its extensive research and development effort focused on developing
new technologies to differentiate its products from those of its competitors.
Since December 1, 1994 the Company has, on average, invested approximately
0.75% of its net sales in research and development, a rate which management
believes to be in excess of twice that of its next largest competitor. In
addition, the Company has increased attention on cross-functional input into
product development. Sealy's research and development efforts allow the
Company to build a strong product pipeline. As a result, the Company currently
has in place plans for new proprietary products through 1999. The Company
operates a research and development facility in Cleveland, Ohio with a 15
person staff that is well-educated in a wide range of physical sciences,
including mechanical and chemical engineering, physics, chemistry, polymer
science and biophysics. Management believes that the Company's research and
development
52
<PAGE>
efforts are critical to maintaining the Company's profitability and are
important to retailers. By keeping the product line fresh and continually
generating new product enhancements that are both visible and meaningful to
the consumer, the Company is able to increase retail floor space allocation
and provide retail salespeople with tools to generate higher AUSP's and higher
overall sales. In 1997, a majority of the Company's net sales were generated
from products developed or reengineered in the prior two years.
The Company's research and development operation has developed numerous
proprietary innovations that the Company uses in select products. Over the
past two years, the Company has introduced the SteelSpan II foundation, Hi-
Performance torsion modules, EdgeGuard and EverEdge edge systems, Infinilux
foam and Resilium fiber, and has developed an advanced innerspring and
composite foundation system, all of which have been patented or have patents
pending.
EFFICIENCY IMPROVEMENTS. The Company is in the process of implementing an
MIS upgrade, which will provide the Company with a platform for further MIS
enhancements to enable it to improve manufacturing operations and
profitability analysis. The MIS upgrade is expected to address the Year 2000
Issue and link the Company's plants, operations and functional departments
into a cohesive network, increasing the Company's corporate agility and
decision-making capabilities. There can be no assurance, however, that the new
Business Systems will be installed and fully operational at all locations and
for all applications prior to the turn of the century, and management has
therefore deemed it necessary to convert its current system to be Year 2000
compliant.
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<PAGE>
PROPERTIES
The offices of Parent are located at 520 Pike Street, Seattle, Washington
98101 and the offices of the Issuer are located at Halle Building, 10th Floor,
1228 Euclid Avenue, Cleveland, Ohio 44115. Corporate, licensing and marketing
services are provided to Issuer and Parent by Sealy, Inc. (a wholly owned
subsidiary), located in Cleveland, Ohio.
The Company services certain national account customers from 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 1997 to 2015, including renewal options.
On March 10, 1998, the Company announced its plans to relocate its Corporate
headquarters and Research & Development Center from Cleveland, Ohio to
Archdale, North Carolina. The Company will also relocate its Lexington, North
Carolina manufacturing plant to Archdale, North Carolina. The Company has
entered into an agreement to purchase a property which currently includes an
office building and a manufacturing facility. The Company will construct an
additional office building on this property to house its Corporate
headquarters. The Company is currently reviewing financing alternatives with
respect to the property purchase and construction project which it expects to
finalize in the second quarter of fiscal 1998. The Company estimates total
costs associated with this relocation will result in a pretax charge of
approximately $8.5 million which will be recognized primarily in fiscal 1998
with the balance in fiscal 1999.
The following table sets forth certain information regarding manufacturing
facilities operated by the Company as of February 23, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE TITLE
----------------------------------------- -------------- -----
<S> <C> <C> <C>
UNITED STATES
Arizona Phoenix 76,000 Owned
California Richmond 238,000 Owned
South Gate 185,000 Owned
Colorado Colorado Springs(1) 70,000 Owned
Denver 92,900 Owned
Florida Orlando 97,600 Owned
Georgia Atlanta 292,500 Owned
Illinois Batavia 212,700 Leased(2)
Indiana Rensselaer(1) 131,000 Owned
Rensselaer(1) 124,000 Owned
Kansas Kansas City 102,600 Leased
Maryland Williamsport 144,000 Leased
Massachusetts Randolph 187,000 Owned
Michigan Taylor 156,000 Leased
Minnesota St. Paul 93,600 Owned
New York Albany 102,300 Owned
North Carolina Lexington 97,400 Owned
Ohio Medina 140,000 Owned
Oregon Portland 140,000 Owned
Pennsylvania Clarion 85,000 Owned
Delano(1) 143,000 Owned
Tennessee Memphis 225,000 Owned
Texas Brenham 220,000 Owned
North Richland Hills 124,500 Owned
CANADA
Alberta Edmonton 144,500 Owned
Quebec Saint Narcisse 76,000 Owned
Ontario Toronto 80,200 Leased
Puerto Rico Carolina 58,600 Owned
Mexico Toluca 95,200 Owned
---------
3,934,600
=========
</TABLE>
- --------
(1) Component manufacturing facility.
(2) The Company has subleased 76,000 square feet to an unaffiliated tenant.
54
<PAGE>
The Company considers its present facilities to be generally well
maintained, in sound operating condition and adequate for its needs. The
Company has excess capacity available in its facilities and the necessary
equipment (as owner or lessee) to carry on its business.
LEGAL PROCEEDINGS
The Company is conducting environmental cleanups at a formerly owned
property in South Brunswick, New Jersey and at an inactive property in
Oakville, Connecticut. The South Brunswick cleanup is being conducted pursuant
to an Administrative Consent Order issued by the New Jersey Department of the
Environment. In 1994, the Company filed a claim in U.S. District Court against
former owners of the South Brunswick site and their lenders under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") seeking contributions for site cleanup costs. In March 1997, the
Company received $1.7 million in final settlement of this litigation. In
January 1997, the Company filed a claim in the U.S. District Court of New
Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case
seeking a judgment of non-liability was filed by some (but not all) of these
insurance companies in the U.S. District Court for the Northern District of
Ohio. The Company is awaiting a ruling by the District Courts involved. In
1994, the Company filed a cost recovery action in U.S. District Court against
former operators of the Oakville facility to require them to complete the
remediation and reimburse the Company for its cleanup costs. This litigation
is pending. See "Business--Environmental, Health and Safety Matters".
On May 22, 1997 the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust
final judgments (the "Judgments") entered on December 30, 1964 and December
26, 1967. These Judgments, among other things, prohibited the Company from
suggesting resale prices to its dealers. During the pendency of the Company's
motion to terminate the Judgments, and based upon allegations received by the
Department of Justice (the "Department") concerning a possible resale price
maintenance agreement with a Stearns & Foster dealer, the Department, on
September 8, 1997, issued to the Company a Civil Investigative Demand seeking
documents relating to, among other things, communications between the Company
and dealers concerning the retail prices of mattresses. In response to the
Civil Investigative Demand, the Company produced certain documents and the
deposition of a Company executive was taken. Immediately following such
document production and deposition, the Department consented to the
termination of the Judgments and an order terminating the Judgments was
entered by the Court on September 19, 1997. After the Court terminated the
Judgments, the Department notified the Company on September 29, 1997 that it
was limiting the Civil Investigative Demand to certain narrow specifications.
In October 1997, the Company produced additional documents in response to the
Civil Investigative Demand. On November 24, 1997 the Company received a
request from the Department for clarification and additional information. The
Company has responded to that request. On April 17, 1998 the Company formally
responded to the Civil Investigative Demand.
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business. The Company does not expect that
these matters will have a material adverse effect on the Company's financial
position or future operations.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to Federal, state, and local laws and regulations
relating to pollution, environmental protection, and occupational health and
safety. In addition, the Company's conventional bedding and other product
lines are subject to various Federal and state laws and regulations relating
to flammability, sanitation and consumer protection standards. The Company
believes that it is in material compliance with these requirements.
The Company is not aware of any pending Federal environmental legislation
which it expects to have a material impact on the Company. The Company does
not expect to make any material capital expenditures for environmental control
facilities during the next two fiscal years.
55
<PAGE>
The Company's principal wastes are nonhazardous materials such as wood,
cardboard, and packaging materials. Nonetheless, as is the case with
manufacturers in general, if a release of hazardous substances occurs on or
from the Company's properties or any associated offsite disposal location, or
if contamination from prior activities is discovered at any of the Company's
properties, the Company may be held liable and the amount of such liability
could be material.
The Company is currently conducting an environmental cleanup at a formerly
owned facility in South Brunswick, New Jersey pursuant to the New Jersey
Industrial Site Recovery Act. The Company 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 its subsidiary agreed to conduct soil and groundwater remediation
at the property. The Company does not believe that its manufacturing processes
were a source of the contamination. The Company sold the property in 1997, but
the Company and its subsidiary retained primary responsibility for the
required remediation. The Company has completed essentially all soil
remediation with DEP approval, and has concluded a pilot test of a groundwater
remediation system.
In 1994, the Company filed a claim in U.S. District Court against former
owners of the site and their lenders under CERCLA seeking contribution for
site investigation and remedial costs. In 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 is currently
pursuing a cost recovery action in U.S. District Court against several of its
past insurers.
The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. Although the Company
is conducting the remediation voluntarily, it obtained Connecticut Department
of Environmental Protection approval of remediation plan. The Company believes
the contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete
the remediation and reimburse the Company for its cleanup costs. This
litigation is pending.
While the Company cannot predict the ultimate timing or cost with respect to
South Brunswick and Oakville remediation, based on facts currently known,
management believes that the accruals are adequate and does not believe the
resolution of these matters will have a material adverse effect on the
Company's financial position or future operations. However, because of the
uncertainties associated with environmental remediation, it is possible that
the costs incurred with respect to these matters could exceed the recorded
accruals.
The Company has been identified as a potentially responsible party pursuant
to CERCLA with regard to two waste disposal sites and under analogous state
law with regard to a third. Although liability under CERCLA and state statutes
is generally joint and several, as a practical matter, liability is usually
allocated among all financially responsible parties. Based on the nature and
quantity of the Company's wastes, the Company believes that its liability at
each of these sites is unlikely to be material.
EMPLOYEES
As of November 30, 1997, the Company had 5,456 full-time employees.
Approximately 66% of the Company's employees at its 28 North American
facilities are represented by various labor unions with separate collective
bargaining agreements. The Company is not a party to any master labor
agreement covering production employees at more than a single manufacturing
facility. The Company has only experienced one day of lost work in one plant
in the last six years due to a labor dispute. In addition, the Company has not
encountered any significant organizing activity at its non-union facilities in
that time frame. The Company believes that its employee relations are
satisfactory.
56
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of March 1998, and a brief
account of the business experience of each person who is a director or
executive officer of Parent and the Issuer.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald L. Jones................. 55 Chief Executive Officer, President and
Director
Bruce G. Barman................. 52 Vice President Research and Development
John G. Bartik.................. 46 Vice President Tax and Assistant Treasurer
Jeffrey C. Claypool............. 50 Vice President Human Resources
Gary T. Fazio................... 47 Vice President Sales
Douglas E. Fellmy............... 48 Vice President Operations
James Goughenour................ 60 Vice President Technology and Strategic
Planning
David J. Mcllquham.............. 43 Vice President Marketing
Sharon J. Petrella.............. 41 Vice President Information Technology
Lawrence J. Rogers.............. 49 Vice President International
Richard F. Sowerby.............. 43 Vice President Controller
Ronald H. Stolle................ 49 Vice President Treasurer
Kenneth L. Walker............... 49 Vice President, General Counsel and
Secretary
Josh Bekenstein................. 39 Director
Paul Edgerley................... 42 Director
James W. Johnston............... 51 Director
Michael Krupka.................. 32 Director
John M. Sallay.................. 42 Director
Jonas Steinman.................. 32 Director
</TABLE>
RONALD L. JONES
Mr. Jones, age 55, since March 1996 has been President and Chief Executive
Officer of the Company. From October, 1988 until joining the Company, Mr.
Jones served as President of Masco Home Furnishings. From 1983 to 1988, Mr.
Jones was President of HON Industries.
BRUCE G. BARMAN
Dr. Barman, age 52, 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.
JOHN G. BARTIK
Mr. Bartik, age 46, since March 1995 has been Vice President Tax and
Assistant Treasurer of the Company. From 1990 to 1995, he was Treasurer of the
Company and from 1985 has served as the Company's Director of Taxation.
JEFFREY C. CLAYPOOL
Mr. Claypool, age 50, since September 1991 has been Vice President Human
Resources of the Company.
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<PAGE>
GARY T. FAZIO
Mr. Fazio, age 47, 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 48, 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.
JAMES F. GOUGHENOUR
Mr. Goughenour, age 60, since June 1997 has been Vice President Technology
and Strategic Planning of the Company. From 1979 until he joined the Company,
Mr. Goughenour had been with the HON Company, serving as Vice President.
DAVID J. MCILQUHAM
Mr. McIlquham, age 43, since April 1990 has been Vice President Marketing of
the Company.
SHARON J. PETRELLA
Ms. Petrella, age 41, since January 1995 has been Vice President Information
Technology of the Company. From 1983 until she joined the Company, Ms.
Petrella had been with The Little Tikes Toy Company, Division of Rubbermaid,
in various positions.
LAWRENCE J. ROGERS
Mr. Rogers, age 49, 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
President-Sealy Canada.
RICHARD F. SOWERBY
Mr. Sowerby, age 43, since April 1995 has been Vice President Controller of
the Company. Previously, from 1991, Mr. Sowerby served as Corporate Controller
of Elliott Company, a manufacturer and servicer of turbo machinery equipment.
RONALD H. STOLLE
Mr. Stolle, age 49, since March 1995 has been Vice President Treasurer of
the Company. Previously, from 1987, Mr. Stolle served as Director, Treasury
Operations for Reliance Electric Company, a manufacturer of industrial and
telecommunication products.
KENNETH L. WALKER
Mr. Walker, age 49, since May 1997 has been Vice President, General Counsel
and Secretary of the Company. Previously, from 1991, Mr. Walker served as Vice
President, General Counsel and Secretary of Varity Corporation, a manufacturer
of automotive components, diesel engines, and farm machinery.
58
<PAGE>
JOSH BEKENSTEIN
Mr. Bekenstein, age 39, is a Managing Director of Bain. Mr. Bekenstein
helped start Bain in 1984 and has been involved in numerous venture capital
and leveraged acquisitions over the past thirteen years. Mr. Bekenstein
presently serves on the Board of Directors of a number of public and private
companies, including Waters Corporation, Bright Horizons Childrens Centers,
Inc. and Small Fry Snack Foods. Prior to Bain, Mr. Bekenstein was a consultant
at Bain & Company, where he worked on strategy consulting projects for a
number of Fortune 500 clients.
PAUL EDGERLEY
Mr. Edgerley, age 42, has been Managing Director of Bain since 1993. From
1990 to 1993 he was a General Partner of Bain Venture Capital, and from 1988
to 1990 he was a Principal of Bain Capital Partners. He serves on the Boards
of Directors of Steel Dynamics, Inc., GS Industries, Inc. and AMF Group Inc.
JAMES W. JOHNSTON
Mr. Johnston, age 51, is President and Chief Executive Officer of
Stonemarker Enterprises, Inc., a consulting and investment company. He has
been a director of Sealy, Inc. since March 4, 1993. Mr. Johnston was Vice
Chairman RJR Nabisco, Inc. from 1995 to 1996. He also served as Chairman and
CEO of R. J. Reynolds Tobacco Co. from 1989 to 1995, Chairman R. J. Reynolds
Tobacco Co. from 1995 to 1996 and Chairman R. J. Reynolds Tobacco
International from 1993 to 1996. Mr. Johnston served on the board of RJR
Nabisco, Inc. and RJR Nabisco Holdings Corp. from 1992 to 1996. From 1984
until joining Reynolds, Mr. Johnston was Division Executive, Northeast
Division, of Citibank, N.A., a subsidiary of Citicorp, where he was
responsible for Citibank's New York Banking Division, its banking activities
in upstate New York, Maine and Mid-Atlantic regions, and its national student
loan business. Mr. Johnston is also a director of The Wachovia Corporation.
MICHAEL KRUPKA
Mr. Krupka, age 32, joined Bain in 1991 and became a Managing Director in
1997. Prior to joining Bain, Mr. Krupka spent several years as a consultant at
Bain & Company where he focused on technology and technology-related
companies. In addition, he has served in several senior operating roles at
Bain portfolio companies. He serves on the Board of Directors of Jostens
Learning Corp. and J Tech, Inc.
JOHN M. SALLAY
Mr. Sallay, age 42, is a Managing Director of Harvard Private Capital Group,
Inc. ("HPC"), which manages the private equity and real estate portfolios of
the Harvard University endowment fund. Prior to joining HPC in 1990, Mr.
Sallay was a consultant with McKinsey & Company, Inc. of New York. Mr. Sallay
serves on the Board of Directors of E-Z Serve Corporation and United Auto
Group, Inc.
JONAS STEINMAN
Mr. Steinman, age 32, since June, 1995 has been a Principal at Chase Capital
Partners. Previously he was employed as an Associate by Chase Capital Partners
and its predecessor, Chemical Venture Partners.
COMPENSATION OF DIRECTORS
Mr. Johnston is being compensated on the same basis as he was for being a
Company director prior to December 18, 1997. For his services as a director he
receives 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 if he is
Committee Chairman) for each Board of Directors Committee meeting attended if
such meeting is on a date other than a Board meeting date. The Company
reimburses all directors for any out-of-pocket expenses incurred by them in
connection with services provided in such capacity. In addition, the Company
may in the future compensate directors for services provided in such capacity.
59
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since December 18, 1997, the Company's Board of Directors has not had any
standing committees. The two compensation matters considered by the Company's
Board of Directors since December 18, 1997 were handled by a temporary
compensation committee made up of all the Company's directors other than Mr.
Jones.
In Fiscal 1997 and through December 18, 1997, the Human Resources Committee
(which functioned as the Compensation Committee) of the Board of Directors
consisted of Mr. Johnston and former directors Mr. Rod Dammeyer (an officer of
Zell/Chilmark) and Mr. Rolf H. Towe.
Pursuant to a stock purchase agreement, Zell/Chilmark, MBLP and the Company
in 1993 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, prior to December 18, 1997, the holder of a majority
of such Acquired Shares had the right to demand, up to five times but no more
than once every six months, registration of their Acquired Shares under the
Securities Act of 1933 as amended. In addition, under certain conditions, the
holders of the Acquired Shares had 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 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.
COMPENSATION OF EXECUTIVE OFFICERS
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, 1997, December 1, 1996, and November 30, 1995, of
those persons who served as (i) the chief executive officer during Fiscal 1996
and 1997, and (ii) the other four most highly compensated executive officers
of the Company for Fiscal 1997 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ -----------------------------------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARD($) OPTIONS/SARS PAYOUTS(A) COMPENSATION(B)
------------------ ---- -------- -------- ------------ ---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald L. Jones(c)...... 1997 $527,516 $633,052 $ 1,168 -- 75,000(d) -- $ 21,583
Chief Executive 1996 381,262 423,584 456,168(c) $637,800(e) 400,000(f) -- 2,476
Officer and President 1995 -- -- -- -- -- -- --
Lyman M. Beggs(g)....... 1997 -- -- -- -- -- -- 1,495,821(g)
Chairman, Chief 1996 153,318 91,988 -- -- -- -- 3,059,545(g)
Executive Officer and 1995 525,336 -- 75,914(h) 107,000(i) -- -- 21,262
President
Gary T. Fazio........... 1997 203,833 182,289 248 203,978(j) 32,000(d) -- 16,524
Vice President-- 1996 196,226 86,559 -- -- -- 426,030 15,864
Sales 1995 187,765 -- -- -- -- -- 15,151
Douglas Fellmy.......... 1997 197,333 177,739 -- 203,978(j) 32,000(d) -- 16,016
Vice President-- 1996 188,134 83,135 -- -- -- 426,030 15,237
Operations 1995 171,052 -- -- -- -- -- 13,434
David J. McIlquham...... 1997 199,167 179,023 242 203,978(j) 32,000(d) -- 16,165
Vice President-- 1996 188,505 83,302 -- -- -- 426,030 15,268
Marketing 1995 171,052 -- -- -- -- -- 13,794
Lawrence J. Rogers...... 1997 180,305 158,953 -- 203,978(j) 32,000(d) -- 14,271
Vice President-- 1996 175,812 100,385 -- -- -- 395,046 13,884
International 1995 164,551 15,503 -- -- -- -- 13,049
</TABLE>
- --------
(a) Such amount reflects the value of Shares earned under the Performance
Share Plan which concluded on December 1, 1996.
60
<PAGE>
(b) Represents amounts paid 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. Jones: (1997-$3,083, $1,000,
$17,500; 1996-$1,943, $533, $0); Mr. Beggs: (1997-$3,083, $0, $0; 1996-
$3,525, $267, $0; 1995-$3,501, $800, $16,960); Mr. Fazio: (1997-$1,257,
$999, $14,268; 1996-$1,305, $849, $13,710; 1995-$1,254, $753, $13,144);
Mr. McIlquham: (1997-$1,227, $996, $13,942; 1996-$1,255, $817, $13,195;
1995-$1,137, $683, $11,974); Mr. Fellmy: (1997-$1,216, $987, $13,813;
1996-$1,252, $816, $13,169; 1995-$1,106, $665, $11,623); Mr. Rogers (1997-
$622, $1,027, $12,621; 1996-$747, $763, $12,374; 1995-$947, $583,
$11,519).
(c) Pursuant to his Employment Agreement, Mr. Jones commenced employment with
the Company as of February 27, 1996. The terms of the Employment Agreement
are described more fully in "Compensation Pursuant to Plans and Other
Arrangements--Executive Employment Agreements." Such amount primarily
consists of a $250,000 payment upon commencement of employment and
$205,000 in relocation and other transitional matters.
(d) On May 31, 1997, the Company issued ten-year non-qualified stock options
at an exercise price of $9.60, pursuant to the Company's 1997 Stock Option
Plan to, among others, certain Named Executive Officers as follows: Ronald
L. Jones: 75,000 shares; Gary T. Fazio: 32,000 shares; David J. McIlquham:
32,000 shares; Douglas Fellmy: 32,000 shares; and Lawrence J. Rogers:
32,000 shares.
(e) Such amount reflects the Company's determination of the fair value at the
date of grant of 67,635 shares issued to Mr. Jones, pursuant to his
Employment Agreement. Although the 1997 Credit Agreement and Note
Indenture contain restrictions on the Company's ability to pay dividends,
if declared and paid on the Company's Shares, such dividends would be paid
on such Shares issued to Mr. Jones. The February 28,1997 Dividend was paid
on such shares. As of November 30,1997, the value of Mr. Jones' restricted
stock holdings was $967,363.
(f) Pursuant to his Employment Agreement, the Company granted Mr. Jones ten-
year options to acquire up to 400,000 Shares at an exercise price of
$10.63 per Share as further described in "Compensation Pursuant to Plans
and Other Arrangements--Executive Employment Agreements."
(g) Mr. Beggs' employment with the Company terminated on March 15, 1996. Mr.
Beggs was awarded $2,578,902 in 1996 and $844,475 in 1997 in connection
with his withdrawal from the Performance Share Plan and settlement of all
related claims. In addition, he received $394,236 in 1996 and $525,648 in
1997 in salary continuation. Mr. Beggs' remaining equity loan balance (see
footnote (h) below) was forgiven in addition to a gross up payment to
cover his tax liability, together totaling $80,890. He was also reimbursed
$1,725 in 1997 for professional fees incurred relating to the preceding
transactions. His Employment Agreement and the terms of his termination
and certain payments made in connection therewith are described more fully
in "Compensation Pursuant to Plans and Other Arrangements--Executive
Employment Agreements."
(h) Mr. Beggs commenced employment with the Company as of August 24, 1992.
Under the terms of his Employment Agreement, Mr. Beggs received $75,914 in
1995 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 of $45,383; (ii) professional fees, personal use of
auto, travel and entertainment expenses; and (iii) payments to cover Mr.
Beggs' tax liabilities on the foregoing items.
(i) Such amount reflects the Company's determination of the fair value at the
date of grant of 10,000 shares issued to Mr. Beggs as of November 30, 1995
pursuant to his Employment Agreement. These Shares were repurchased by the
Company in connection with Mr. Beggs' termination of employment. The
Employment Agreement also provided for the issuance to Mr. Beggs of an
additional 90,000 Shares, which were forfeited upon his termination. See
"Compensation Pursuant to Plans and Other Arrangements--Executive
Employment Agreements." Hence, Mr. Beggs no longer had any restricted
stock holdings at the end of Fiscal 1996.
(j) Such amount reflects the Company's determination of the fair value at the
date of grant of restricted stock issued, on January 6, 1997, pursuant to
the Company's 1996 Transitional Restricted Stock Plan to, among others,
certain Named Executive Officers as follows: Gary T. Fazio: 15,800 shares;
David J. McIlquham: 15,800 shares; Douglas Fellmy: 15,800 shares; and
Lawrence J. Rogers: 15,800 shares. As of November 30, 1997 the value of
each of the above noted Named Executive Officers holdings pursuant to this
plan was $225,983.
61
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (A)
- -------------------------------------------------------------------------- ---------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ ------------ ----------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Ronald L. Jones......... 75,000 8.0% $9.60 6/1/2007 $ 453,000 $ 1,147,500
Chief Executive Officer
and President
Gary T. Fazio........... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600
Vice President--Sales
Douglas Fellmy.......... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600
Vice President--Opera-
tions
David McIlquham......... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600
Vice President--Market-
ing
Lawrence J. Rogers...... 32,000 3.5% $9.60 6/1/2007 $ 193,280 $ 489,600
Vice President--Interna-
tional
</TABLE>
- --------
(a) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and Exchange
Commission and are not intended to be a forecast of the Company's stock
price. Actual gains, if any, on stock option exercises are dependent on
the future performance of the stock. There can be no assurance that the
amounts reflected in this table will be achieved. In accordance with rules
promulgated by the Securities and Exchange Commission, Potential
Realizable Value is based upon the exercise price of the options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FY-END (#) AT FY-END ($)
ON EXERCISE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) REALIZED (A) (B) (C)
---- ----------- -------- ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald L. Jones......... -- -- 146,836/515,506 $1,038,527/$3,468,270
Chief Executive Officer
and President
Gary T. Fazio........... -- -- --/ 32,000 --/ $150,486
Vice President--Sales
Douglas Fellmy.......... -- -- --/ 32,000 --/ $150,486
Vice President--
Operations
David McIlquham......... -- -- --/ 32,000 --/ $150,486
Vice President--Market-
ing
Lawrence J. Rogers...... -- -- --/ 32,000 --/ $150,486
Vice President--
International
</TABLE>
- --------
(a) Includes options exercisable within 60 days after November 30, 1997.
(b) Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price.
(c) Represents the total gain which would be realized if all in-the-money
options beneficially held at November 30, 1997 were exercised, determined
by multiplying the number of Shares underlying the options by the
difference between the per share option exercise price and the estimated
fair market value as of November 30, 1997.
62
<PAGE>
EMPLOYMENT AGREEMENTS
Ronald Jones has entered into an employment agreement with Parent providing
for his employment as Chief Executive Officer and President. The agreement has
an initial term of three years and a perpetual two-year term thereafter. The
agreement currently provides for an annual base salary of US$530,000, subject
to annual increase by Parent's Board of Directors, plus a performance bonus
and grants Mr. Jones the right to require Parent to repurchase certain
securities of Parent held by Mr. Jones. In addition, six employees of the
Company, including Gary T. Fazio, Douglas Fellmy, Lawrence J. Rogers and David
J. McIlquham, have entered into employment agreements that provide, among
other things, for an initial employment term of two years and a perpetual one-
year employment term thereafter, during which such employees will receive base
salary (respectively at least US$204,500, US$198,000, Canadian$249,500, and
US$200,000) and a performance bonus between zero and seventy percent of their
base salary and substantially the same benefits as they received as of the
date of such agreements. For the fiscal year ending November 30, 1998, the
temporary compensation committee of the Company's Board of Directors has
determined that the bonuses to be paid pursuant to those employment agreements
shall be based 75% on the Company's achievement of an Adjusted EBITDA target
and 25% on the Company's achievement of a Return on Net Tangible Assets
target. Each such target represents an improvement over the Company's prior
year performance. Several members of management are parties to agreements that
provide, for a period of one year following consummation of the Transactions,
that their annual base salary and benefits cannot be reduced.
DEFERRED COMPENSATION AGREEMENTS
On December 18, 1997, Mr. Jones entered into a deferred compensation
agreement with Parent pursuant to which Mr. Jones elected to defer $1,114,538
of compensation until either December 18, 2007 or, in certain instances, such
earlier date as provided in such deferred compensation agreement. In addition,
on December 18, 1997, six employees, including Gary T. Fazio, Douglas Fellmy
and Lawrence J. Rogers, entered into deferred compensation agreements with
Parent pursuant to which such employees elected to defer an aggregate $522,518
of compensation, in each case, until either December 18, 2007 or, in certain
instances, such earlier date as provided in such deferred compensation
agreements.
SEVERANCE BENEFIT PLANS
In addition, certain executives and other employees are eligible for
benefits under the Company's severance benefit plans and certain other
agreements, which provide for cash severance payments equal to their base
salary and, in some instances, bonuses (for periods ranging from two weeks to
two years) and for the continuation of certain benefits.
MANAGEMENT INCENTIVE PLAN
The Company provides performance-based compensation awards to executive
officers and key employees for achievement each year as part of a bonus plan.
Such compensation awards are a function of individual performance and
corporate results. The qualitative and quantitative criteria will be
determined from time to time by Parent's Board of Directors.
MANAGEMENT EQUITY PARTICIPATION IN THE TRANSACTIONS
In connection with the Transactions, in order to provide financial
incentives for certain of the Company's employees, the Management Investors
acquired common stock of Parent and/or fully vested options to acquire common
stock of Parent in exchange for either (i) cash or (ii) preferred stock and/or
options held by such Management Investors prior to the Merger. Upon a
Management Investor's termination of employment with the Company, the exercise
period of such options held by such Management Investor will be reduced to a
period ending no later than six months after such Management Investor's
termination. If such termination occurs prior to a qualified initial public
offering of Parent's common stock, then Parent shall have the right to
repurchase the common stock of Parent held by such Management Investor and, in
certain instances, such Management Investor shall have the right to require
Parent to repurchase the common stock of Parent held by such Management
Investor. See "Security Ownership."
63
<PAGE>
SEALY CORPORATION 1998 STOCK OPTION PLAN
In order to provide additional financial incentives for certain of the
Company's employees, subsequent to the consummation of the Transactions the
Management Investors and certain other employees of the Company were granted
and are expected to periodically be granted options to purchase additional
common stock of Parent pursuant to the Sealy Corporation 1998 Stock Option
Plan. Such options vest and become exercisable upon (i) certain threshold
dates or (ii) a change of control or sale of Parent. Upon an employee's
termination of employment with the Company, all of such employee's unvested
options will expire, the exercise period of all such employee's vested options
will be reduced to a period ending no later than six months after such
employee's termination, and if such termination occurs prior to a qualified
initial public offering of the Parent's common stock, then Parent shall have
the right to repurchase the common stock of Parent held by such employee.
64
<PAGE>
SECURITY OWNERSHIP
The Issuer is a wholly owned subsidiary of Parent. The issued and
outstanding capital stock of Parent consists of 19,518,953 shares of Class A
common stock, par value $0.01 per share ("Class A Common"), 7,791,327.6440
shares of Class B common stock, par value $0.01 per share ("Class B Common"),
2,168,772.5555 shares of Class L common stock, par value $0.01 per share
("Class L Common"), and 865,703.0716 shares of Class M common stock, par value
$0.01 per share ("Class M Common" and collectively with the Class A Common,
Class B Common and Class L Common, "Common Stock"). The shares of Class A
Common and Class L Common each entitle the holder thereof to one vote per
share on all matters to be voted upon by the stockholders of the Company,
including the election of directors, and are otherwise identical, except that
the shares of Class L Common are entitled to a preference over Class A Common
with respect to any distribution by the Company to holders of its capital
stock equal to the original cost of such share ($40.50) plus an amount which
accrues on a daily basis at a rate of 10% per annum, compounded annually. The
Class B Common is identical to the Class A Common and the Class M Common is
identical to the Class L Common except that the Class B Common and the Class M
Common are nonvoting. The Class B Common and the Class M Common are
convertible into Class A Common and Class L Common, respectively,
automatically upon consummation of an initial public offering by the Company.
The Board of Directors of the Company is authorized to issue preferred stock,
par value $0.01 per share, with such designations and other terms as may be
stated in the resolutions providing for the issue of any such preferred stock
adopted from time to time by the Board of Directors.
The following table sets forth certain information regarding the beneficial
ownership of (i) each class of common stock held by each person (other than
directors and executive officers of the Company) known to the Company to own
more than 5% of the outstanding voting common stock of Parent, (ii) the
Management Investors and (iii) each class of common stock held by each
director of the Company, each Named Executive Officer and all of the Company's
directors and executive officers as group. To the knowledge of the Company,
each of such stockholders has sole voting and investment power as to the
shares shown unless otherwise noted. Beneficial ownership of the securities
listed in the table has been determined in accordance with the applicable
rules and regulations promulgated under the Exchange Act.
65
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------------------
CLASS A COMMON CLASS B COMMON CLASS L COMMON CLASS M COMMON
--------------------- ----------------------- ------------------------- -----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS
---------- ---------- ------------ ---------- -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Bain Funds (1)(2)....... 9,450,000 48.4% 612,284.54 7.9% 1,050,000 48.4% 68,031.62 7.9%
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Harvard Private Capital
Holdings, Inc. ........ 4,000,000 20.5 -- -- 444,444.4444 20.5 -- --
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Sealy Investors 1, 973,989 5.0 5,086,617.06 65.3 108,221 5.0 565,179.6733 65.3
LLC (2)................
c/o Bain Capital, Inc.
Two Copley Avenue
Boston, MA 02116
Sealy Investors 2, LLC 973,989 5.0 2,056,314.03 26.4 108,221 5.0 228,479.3367 26.4
(2)....................
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Sealy Investors 3, LLC 973,989 5.0 36,112.01 * 108,221 5.0 4,012.4456 *
(2)....................
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Zell/Chilmark Fund, 2,862,000 14.7 -- -- 318,000 14.7 -- --
L.P. ..................
Two North Riverside
Plaza
Suite 1500
Chicago, IL 60606
DIRECTORS AND EXECUTIVE
OFFICERS:
Josh Bekenstein (1)(3).. 9,450,000 48.4 -- -- 1,050,000 48.4 -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Paul Edgerley (1)(3).... 9,450,000 48.4 -- -- 1,050,000 48.4 -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Michael Krupka (1)(3)... 9,450,000 48.4 -- -- 1,050,000 48.4 -- --
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
John M. Sallay (4)...... 4,000,000 20.5 -- -- 444,444.4444 20.5 -- --
c/o Harvard Management
Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Ronald Jones (5)........ 939,996 4.6 -- -- 104,444 4.6 -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Gary T. Fazio (6)....... 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Douglas Fellmy (6)...... 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
David McIlquham......... 41,994 * -- -- 4,666 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Lawrence J. Rogers (6).. 75,285 * -- -- 8,365 * -- --
c/o Sealy Corporation
1228 Euclid Avenue
Cleveland, OH 44115
Management Investors as 1,494,630 7.2 -- -- 166,070 7.2 -- --
a group (11 persons)
(7)....................
All directors and
executive officers as a
group
(15 persons)........... 14,944,630 71.8% -- -- 1,660,514.4444 71.8%
</TABLE>
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- --------
*Less than one percent
(1) Amounts shown reflect the aggregate number of shares of Class A Common and
Class L Common held by Bain Capital Fund V, L.P. ("Fund V"), Bain Capital
Fund V-B, L.P., BCIP Trust Associates, L.P. ("BCIP Trust") and BCIP
Associates ("BCIP") (collectively, the "Bain Funds"), for the Bain Funds
and Messrs. Bekenstein, Edgerley and Krupka.
(2) The members of Sealy Investors 1, LLC ("SI1") are Chase Equity Associates,
L.P. and Bain Capital Partners V, L.P. ("BCPV"). The members of Sealy
Investors 2, LLC ("SI2") are CIBC WG Argosy Merchant Fund 2, L.L.C. and
BCPV. The members of Sealy Investors 3, LLC ("SI3" and, collectively with
SI1 and SI2, the "LLCs") are BancBoston Capital Inc. and BCPV. BCPV is the
administrative member of each LLC and beneficially owns 1% of the equity of
each LLC. Accordingly, BCPV may be deemed to be beneficially own certain
shares owned by the LLCs, although BCPV disclaims such beneficial
ownership.
(3) Messrs. Bekenstein, Edgerley and Krupka are each Managing Directors of
Bain Capital Investors V, Inc., the sole general partner of BCPV, and are
limited partners of BCPV, the sole general partner of Fund V and Fund V-B.
Accordingly, Messrs. Bekenstein, Edgerley and Krupka may be deemed to
beneficially own shares owned by Fund V and Fund V-B. In addition, Messrs.
Bekenstein, Edgerley and Krupka are each general partners of BCIP and BCIP
Trust and, accordingly, may be deemed to beneficially own shares owned by
such funds. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(4) Mr. Sallay is a Managing Director of HPC, an affiliate of Harvard Private
Capital Holdings, Inc. ("Harvard"). Accordingly, Mr. Sallay may be deemed
to beneficially own shares owned by Harvard. Mr. Sallay disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest.
(5) Includes 891,630 shares of Class A Common and 99,070 shares of Class L
Common issuable upon exercise of outstanding and currently exercisable
options.
(6) Amounts shown reflect shares issuable upon exercise of outstanding and
currently exercisable options.
(7) The Management Investors consist of Messrs. Jones, Fazio, Fellmy,
McIlquham and Rogers and Bruce Barman, John Bartik, Jeffrey Claypool, James
Goughenour, Richard Sowerby and Kenneth Walker. Includes 1,309,644 shares
of Class A Common and 145,516 shares of Class L Common issuable upon
exercise of currently exercisable options.
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CERTAIN TRANSACTIONS
STOCKHOLDERS AGREEMENT
Upon the consummation of the Merger, Parent, and certain of its
stockholders, including the Bain Funds, Harvard, the LLCs and Zell
(collectively, the "Stockholders") entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement: (i) requires that each
of the parties thereto vote all of its voting securities of Parent and take
all other necessary or desirable actions to cause the size of the Board of
Directors of Parent to be established at seven members and to cause three
designees of the Bain Funds and one designee of Harvard to be elected to the
Board of Directors; (ii) grants Parent and the Bain Funds a right of first
offer on any proposed transfer of shares of capital stock of Parent held by
Zell, Harvard or the LLCs; (iii) grants Harvard a right of first offer on any
proposed transfer of shares of capital stock of Parent held by the Bain Funds;
(iv) grants tag-along rights (rights to participate on a pro rata basis in
sales of stock by other shareholders) on certain transfers of shares of
capital stock of Parent; (v) requires the Stockholders to consent to a sale of
Parent to an independent third party if such sale is approved by holders
constituting a majority of the then outstanding shares of voting common stock
of Parent; and (vi) except in certain instances, prohibits Zell from
transferring any shares of capital stock of Parent until the tenth anniversary
of the date of the consummation of the Merger. Certain of the foregoing
provisions of the Stockholders Agreement will terminate upon the consummation
of an initial Public Offering or an Approved Sale (as each is defined in the
Stockholders Agreement). Certain of the Stockholders, including Bain, received
one-time transaction fees aggregating $8.9 million upon consummation of the
Transactions.
MANAGEMENT SERVICES AGREEMENT
In connection with the Transactions, Parent and the Issuer entered into a
Management Services Agreement with Bain pursuant to which Bain has agreed to
provide: (i) general management services; (ii) identification, support,
negotiation and analysis of acquisitions and dispositions; (iii) support,
negotiation and analysis of financial alternatives; and (iv) other services
agreed upon by Parent and Bain. In exchange for such services, Bain will
receive: (i) an annual management fee of $2.0 million, plus reasonable out-of-
pocket expenses (payable quarterly); and (ii) a transaction fee in an amount
equal to 1.0% of the aggregate transaction value in connection with the
consummation of any additional acquisition or divestiture by the Company and
of each financing or refinancing. The Management Services Agreement has an
initial term of five years, subject to automatic one-year extensions unless
Parent or Bain provides written notice of termination.
PARENT REGISTRATION RIGHTS AGREEMENT
Upon the consummation of the Merger, Parent, and certain of its
stockholders, including the Bain Funds, Harvard, the LLCs and Zell entered
into a registration rights agreement (the "Parent Registration Rights
Agreement"). Under the Parent Registration Rights Agreement, the holders of a
majority of the Registrable Securities (as defined in the Parent Registration
Rights Agreement) owned by the Bain Funds have the right, subject to certain
conditions, to require Parent to register any or all of their shares of common
stock of Parent under the Securities Act at Parent's expense. In addition, all
holders of Registrable Securities are entitled to request the inclusion of any
shares of common stock of Parent subject to the Parent Registration Rights
Agreement in any registration statement at Parent's expense whenever Parent
proposes to register any of its common stock under the Securities Act. In
connection with all such registrations, Parent has agreed to indemnify all
holders of Registrable Securities against certain liabilities, including
liabilities under the Securities Act.
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DESCRIPTION OF SENIOR CREDIT AGREEMENTS
Upon consummation of the Transactions, the Issuer entered into the Senior
Credit Agreements with Goldman Sachs Credit Partners L.P., as arranger and
syndication agent, Morgan Guaranty Trust Company of New York, as
administrative agent, Bankers Trust Company, as documentation agent
(collectively, Goldman Sachs Credit Partners L.P., Morgan Guaranty Trust
Company of New York and Bankers Trust Company are, in such capacity, the
"Agents"), and other institutions party thereto (the "Banks"), which provides
loans of up to $550.0 million. Loans under the Senior Credit Agreements
consist of $120.0 million in aggregate principal amount of Tranche A Term
Loans, $125.0 million in aggregate principal amount of amortization extended
term loans ("AXELsSM")* Series B, $90.0 million in aggregate principal amount
of AXELs Series C and $115.0 million in aggregate principal amount of AXELs
Series D (the "Tranche A Term Loans", the "AXELs Series B", the "AXELs Series
C", and the "AXELs Series D" are referred to collectively as the "Term
Loans"), which were used by the Issuer to provide a portion of the funds
necessary to consummate the Transactions and the $100.0 million Revolving
Credit Facility, which will permit the Issuer to finance working capital,
letters of credit, acquisitions (up to a limit of $50.0 million) and other
general corporate needs. This information relating to the Senior Credit
Agreements is qualified in its entirety by reference to the complete text of
the documents entered into in connection therewith. The following is a
description of the general terms of the Senior Credit Agreements.
Indebtedness of the Issuer under the Senior Credit Agreements is guaranteed
by Parent, certain current and all future U.S. subsidiaries of the Issuer and
is secured by (i) a first priority security interest in all, subject to
certain customary exceptions, of the material tangible and intangible assets
of the Issuer and certain of its current and all of its future U.S.
subsidiaries, including all of the capital stock of certain of its current and
all of its future U.S. subsidiaries, and (ii) a first priority perfected
pledge of 65% of the capital stock of each first-tier foreign subsidiary.
Indebtedness under the Senior Credit Agreements bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility and the Term Loans
initially (subject to reduction based on attainment of certain leverage ratio
levels) bears interest at a rate based upon (i) the Base Rate (defined as the
highest of (x) the rate of interest announced publically by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in
respect of the Tranche A Term Loans and the loans under the Revolving Credit
Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B,
1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior
Credit Agreements) for one, two, three or six months (or, subject to general
availability, two weeks or twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect of AXELs Series D.
The Tranche A Term Loans will mature in December 2002. The AXELs Series B
will mature in December 2004. The AXELs Series C will mature in December 2005.
The AXELs Series D will mature in December 2006. The Tranche A Term Loans will
be subject to quarterly amortization payments commencing in March 1999, the
AXELs Series B, the AXELs Series C and the AXELs Series D will be subject to
quarterly amortization payments commencing in March 1998 with the AXELs Series
B amortizing in nominal amounts until the maturity of the Tranche A Term
Loans, the AXELs Series C amortizing in nominal amounts until the maturity of
the AXELs Series B and the AXELs Series D amortizing in nominal amounts until
the maturity of the AXELs Series C. The Revolving Credit Facility will mature
in December 2002. In addition, the Senior Credit Agreements provide for
mandatory repayments, subject to certain exceptions, of the Term Loans, and
reductions in the Revolving Credit
- --------
*"AXELs" is a registered servicemark of Goldman, Sachs & Co.
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Facility, based on the net proceeds of certain asset sales outside the
ordinary course of business of the Issuer and its subsidiaries, the net
proceeds of insurance, the net proceeds of certain debt and equity issuances,
and excess cash flow.
The Revolving Loans (other than amounts up to $50.0 million used to make
permitted acquisitions) may be repaid and reborrowed. The Issuer will be
required to pay to the Banks participating in the Revolving Credit Facility a
commitment fee initially (subject to reduction based on attainment of certain
leverage ratio levels) equal to 0.50% per annum, on the average unused portion
of the Revolving Credit Facility during each quarter. The Issuer also will be
required to pay to the Banks participating in the Revolving Credit Facility
letter of credit fees initially (subject to reduction based on attainment of
certain leverage ratio levels) equal to 2.25% per annum on the average daily
stated amount of each letter of credit outstanding and to the Bank issuing a
letter of credit a fronting fee of 1/8 of 1% on the average daily stated
amount of each outstanding letter of credit issued by such Bank, in each case
payable in arrears on a quarterly basis. The Agents and the Banks will receive
and continue to receive such other fees as have been separately agreed upon
with the Agents.
The Senior Revolving Credit Agreement requires the Company to meet certain
financial tests, including minimum levels of EBITDA (initially $92.5 million
and increasing over time to $120 million), minimum interest coverage ratio
(initially 1.5 to 1 and increasing over time to 1.9 to 1) and maximum leverage
ratio (initially 7.4 to 1 and decreasing over time to 5.1 to 1). The Senior
Credit Agreements also contain covenants which, among other things, limit
indebtedness and/or the incurrence of additional indebtedness, investments,
contingent obligations, dividends, transactions with affiliates, asset sales,
mergers and consolidations, prepayments of other indebtedness (including the
Notes), liens and encumbrances and other matters customarily restricted in
such agreements.
The Senior Credit Agreements contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, events relating to ERISA plans, judgment defaults, failure of any
guaranty or security document supporting the Senior Credit Agreements to be in
full force and effect and change of control of the Issuer and Parent.
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Senior Subordinated Exchange Notes will be issued pursuant to an
Indenture (the "Senior Subordinated Note Indenture") among the Company, the
Guarantors and The Bank of New York, as trustee (the "Senior Subordinated Note
Trustee"). The Senior Subordinated Discount Exchange Notes will be issued
pursuant to an Indenture (the "Senior Subordinated Discount Note Indenture"
and, together with the Senior Subordinated Note Indenture, the "Indentures")
among the Company, the Guarantors and The Bank of New York, as trustee (the
"Senior Subordinated Discount Note Trustee" and, together with the Senior
Subordinated Note Trustee, the "Trustees"). Each of the Senior Subordinated
Exchange Notes and the Senior Subordinated Discount Exchange Notes is referred
to herein as a "class" of Exchange Notes and each of the Senior Subordinated
Notes and the Senior Subordinated Discount Notes is referred to herein as a
"class" of Notes. The terms of the Notes include those stated in the
Indentures and those made part of the Indentures by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes are
subject to all such terms, and Holders of Notes are referred to the Indentures
and the Trust Indenture Act for a statement thereof. The following summary of
the material provisions of the Indentures and the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Indentures and the Registration Rights Agreement, including
the definitions therein of certain terms used below. Copies of the proposed
form of Indentures and Registration Rights Agreement are available as set
forth below under "--Additional Information". The definitions of certain terms
used in
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the following summary are set forth below under "--Certain Definitions". For
purposes of this summary, the term "Company" refers only to Sealy Mattress
Company and not to any of its Subsidiaries.
Initially, the Trustee will act as paying agent and registrar for the
Exchange Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Notes (which they replace) except that (i) the Exchange
Notes bear a Series B designation, (ii) the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii) the holders of Exchange Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Notes in certain circumstances relating to the timing of the Exchange Offer,
which rights will terminate when the Exchange Offer is consummated.
The Exchange Notes will be general unsecured obligations of the Company and
will be subordinated in right of payment to all current and future Senior
Debt. The Senior Subordinated Exchange Notes and the Senior Subordinated
Discount Exchange Notes will be pari passu with each other. As of March 1,
1998, the Issuer had Senior Debt of approximately $479.0 million and, through
its Subsidiaries, had additional liabilities (including trade payables and
lease obligations) aggregating approximately $169.5 million. The Indentures
will permit the incurrence of additional Senior Debt in the future.
The operations of the Company are primarily conducted through its
Subsidiaries and, therefore, the Company is primarily dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Exchange Notes. As a result, the Exchange Notes will be effectively
subordinated to all Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of the Company's Subsidiaries
except to the extent of the Note Guarantees. Only certain of the Company's
U.S. Subsidiaries will be Subsidiary Guarantors of the Notes. Any right of the
Company to receive assets of any of its Non-Guarantor Subsidiaries upon the
latter's liquidation or reorganization (and the consequent right of the
Holders of the Exchange Notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors
(including trade creditors), except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any Indebtedness of such Subsidiary senior to that held by the
Company. As of March 1, 1998, the Company's Non-Guarantor Subsidiaries had, in
the aggregate, approximately $43.6 million of liabilities (of which $29.6
million represent intercompany liabilities). See "Risk Factors--Subordination
of Notes; Guarantees".
As of the date of the Indentures, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indentures. See "--Certain Covenants--
Restricted Payments".
SUBORDINATION
The payment of the Company's Obligations with respect to each class of
Exchange Notes will be subordinated in right of payment, as set forth in the
Indentures, to the prior payment in full in cash or Cash Equivalents of all
Senior Debt, whether outstanding on the date of the Indentures or thereafter
incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full
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in cash or Cash Equivalents of all Obligations due in respect of such Senior
Debt (including interest after the commencement of any such proceeding at the
rate specified in the applicable Senior Debt) before the Holders of Exchange
Notes will be entitled to receive any payment with respect to the Exchange
Notes, and until all Obligations with respect to Senior Debt are paid in full
in cash or Cash Equivalents, any distribution to which the Holders of Exchange
Notes would be entitled shall be made to the holders of Senior Debt (except
that Holders of Exchange Notes may receive and retain Permitted Junior
Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Exchange
Notes (except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, interest or Liquidated Damages, if any,
on Designated Senior Debt occurs and is continuing beyond any applicable
period of grace or (ii) any other default occurs and is continuing with
respect to Designated Senior Debt that permits holders of the Designated
Senior Debt as to which such default relates to accelerate its maturity and
the applicable Trustee receives a notice of such default (a "Payment Blockage
Notice") from the Company or the holders of any Designated Senior Debt.
Payments on the Exchange Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and
(b) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, interest and Liquidated
Damages on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the applicable Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been waived for a period of not less than 180 days.
The Indentures further require that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Senior Credit Agreements and (ii) after payment in full of all Indebtedness
outstanding under the Senior Credit Agreements, any other Senior Debt
permitted under the Indentures, the principal amount of which is $25.0 million
or more, and that has been designated by the Company as "Designated Senior
Debt".
"Permitted Junior Securities" means Equity Interests in the Company or any
Guarantor or debt securities that are unsecured and are subordinated to all
Senior Debt (and any debt securities issued in exchange for Senior Debt) to
substantially the same extent as, or to a greater extent than, the Notes are
subordinated to Senior Debt pursuant to Article 10 of each of the Indentures
(without limiting the foregoing, such securities shall have no required
principal payments until after the final maturity of all Senior Debt).
"Senior Debt" means (i) all Indebtedness of the Company or any of the
Guarantors outstanding under Credit Facilities and all Hedging Obligations
with respect thereto, (ii) any other Indebtedness permitted to be incurred by
the Company under the terms of the Indentures, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Exchange Notes and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (w) any liability for
Federal, state, local or other taxes owed or owing by the Company, (x) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates,
(y) any trade payables or (z) any Indebtedness that is incurred in violation
of the Indentures.
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NOTE GUARANTEES
The Company's payment obligations under each class of Exchange Notes will be
fully and unconditionally guaranteed (the "Note Guarantees"), on a joint and
several basis, by the Subsidiary Guarantors and Parent (together with the
Subsidiary Guarantors, the "Guarantors"). Note Guarantees will not be provided
by the Non-Guarantor Subsidiaries. The Note Guarantee of each Guarantor will
be subordinated to the prior payment in full in cash or cash equivalents of
all Senior Debt of such Guarantor, which would include approximately $460.0
million of Senior Debt outstanding on a pro forma basis as of November 30,
1997, and the amounts for which the Guarantors will be liable under the
Guarantees issued from time to time with respect to Senior Debt. The
obligations of each Guarantor under its Note Guarantees will be limited so as
not to constitute a fraudulent conveyance under applicable law. See, however,
"Risk Factors--Risk of Fraudulent Transfer".
Subject to the provisions of the following paragraph, the Indentures provide
that no Subsidiary Guarantor may consolidate with or merge with or into
(whether or not such Subsidiary Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Subsidiary
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the applicable Trustee, under the Exchange Notes,
the applicable Indenture and the Registration Rights Agreement; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) the Company would be permitted by virtue of the
Company's pro forma Consolidated Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock". Except as set forth in this
paragraph, the Indentures do not prohibit the merger of two of the Company's
Restricted Subsidiaries or the merger of a Restricted Subsidiary into the
Company.
The Indentures provide that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of
any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a
sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the capital stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale or other
disposition of all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligations under its Note Guarantees; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the applicable Indenture. See
"Redemption or Repurchase at Option of Holders--Asset Sales". The limitations
and restrictions in the Indentures do not apply to, limit or restrict the
operations of Parent.
PRINCIPAL, MATURITY AND INTEREST
SENIOR SUBORDINATED EXCHANGE NOTES. The Senior Subordinated Exchange Notes
will be limited in aggregate principal amount to $300.0 million, of which
$125.0 million are expected to be issued in the Exchange Offer, and will
mature on December 15, 2007. Interest on the Senior Subordinated Exchange
Notes will accrue at the rate of 9 7/8% per annum and will be payable semi-
annually in arrears on June 15 and December 15 of each year, commencing on
June 15, 1998, to Holders of record on the immediately preceding June 1 and
December 1. Additional Senior Subordinated Exchange Notes may be issued from
time to time after the date of the Senior Subordinated Note Indenture, subject
to the provisions of the Senior Subordinated Note Indenture, including those
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock". Interest on the Senior
Subordinated Exchange Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve
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30-day months. Principal, premium, if any, interest and Liquidated Damages, if
any, on the Senior Subordinated Exchange Notes will be payable at the office
or agency of the Company maintained for such purpose within the City and State
of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Senior Subordinated Exchange Notes at their respective addresses set forth in
the register of Holders of Senior Subordinated Exchange Notes; provided that
all payments of principal, premium, interest and Liquidated Damages with
respect to Senior Subordinated Exchange Notes the Holders of which have given
wire transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the applicable Trustee
maintained for such purpose. The Senior Subordinated Exchange Notes will be
issued in denominations of $1,000 and integral multiples thereof.
SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES. The Senior Subordinated
Discount Exchange Notes will be limited in aggregate principal amount at
maturity to $275.0 million, of which $128.0 million are expected to be issued
in the Offering, and will mature on December 15, 2007. The Senior Subordinated
Discount Exchange Notes are being offered at a substantial discount from their
principal amount at maturity. Until December 15, 2002 (the "Full Accretion
Date"), no interest (other than Liquidated Damages, if applicable) will accrue
or be paid in cash on the Senior Subordinated Discount Exchange Notes, but the
Accreted Value will accrete (representing the amortization of original issue
discount) between the Issuance Date and the Full Accretion Date, on a semi-
annual bond equivalent basis using a 360-day year comprised of twelve 30-day
months such that the Accreted Value shall be equal to the full principal
amount at maturity of the Senior Subordinated Discount Exchange Notes on the
Full Accretion Date. Beginning on the Full Accretion Date, interest on the
Senior Subordinated Discount Exchange Notes will accrue at the rate of 10 7/8%
per annum and will be payable in cash semi-annually in arrears on June 15 and
December 15 of each year, commencing on June 15, 2003, to Holders of record on
the immediately preceding June 1 and December 1. Additional Senior
Subordinated Discount Exchange Notes may be issued from time to time after the
date of the Senior Subordinated Discount Note Indenture, subject to the
provisions of the Senior Subordinated Discount Note Indenture, including those
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock". Interest on the Senior
Subordinated Discount Exchange Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the Full
Accretion Date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, interest and
Liquidated Damages, if any, on the Senior Subordinated Discount Exchange Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to the Holders of the Senior Subordinated Discount Exchange Notes
at their respective addresses set forth in the register of Holders of Senior
Subordinated Discount Exchange Notes; provided that all payments of principal,
premium, interest and Liquidated Damages, if any, with respect to Senior
Subordinated Discount Exchange Notes the Holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the applicable Trustee
maintained for such purpose. The Senior Subordinated Discount Exchange Notes
will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
SENIOR SUBORDINATED EXCHANGE NOTES. Except as provided below, the Senior
Subordinated Exchange Notes will not be redeemable at the Company's option
prior to December 15, 2002. Thereafter, the Senior Subordinated Exchange Notes
will be subject to redemption at any time at the option of the Company, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at
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the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
---- -------------
<S> <C>
2002..................................... 104.937%
2003..................................... 103.292%
2004..................................... 101.646%
2005 and thereafter...................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Exchange Notes originally
issued under the Senior Subordinated Note Indenture at a redemption price of
109.875% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; provided that at least $80.0 million in
aggregate principal amount of Senior Subordinated Exchange Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Exchange Notes held by the Company and its Subsidiaries);
and provided further that such redemption shall occur within 120 days of the
date of the closing of any such Equity Offering.
At any time prior to December 15, 2002, the Senior Subordinated Exchange
Notes may also be redeemed, as a whole but not in part, at the option of the
Company upon the occurrence of a Change of Control, upon not less than 30 nor
more than 60 days prior notice (but in no event may any such redemption occur
more than 90 days after the occurrence of such Change of Control) mailed by
first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Senior Subordinated
Note Applicable Premium as of, and accrued and unpaid interest and Liquidated
Damages, if any, to, the date of redemption (the "Senior Subordinated Note
Redemption Date").
"Senior Subordinated Note Applicable Premium" means, with respect to any
Senior Subordinated Exchange Note on any Senior Subordinated Note Redemption
Date, the greater of (i) 1.0% of the principal amount of such Senior
Subordinated Note or (ii) the excess of (A) the present value at such Senior
Subordinated Note Redemption Date of (1) the redemption price of such Senior
Subordinated Exchange Note at December 15, 2002 (such redemption price being
set forth in the table above) plus (2) all required interest payments due on
such Senior Subordinated Exchange Note through December 15, 2002 (excluding
accrued but unpaid interest), computed using a discount rate equal to the
Treasury Rate at such Senior Subordinated Note Redemption Date plus 75 basis
points over (B) the principal amount of such Senior Subordinated Exchange
Note, if greater.
SENIOR SUBORDINATED DISCOUNT EXCHANGE NOTES. Except as provided below, the
Senior Subordinated Discount Exchange Notes will not be redeemable at the
Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Discount Exchange Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
---- -------------
<S> <C>
2002..................................... 105.437%
2003..................................... 103.625%
2004..................................... 101.812%
2005 and thereafter...................... 100.000%
</TABLE>
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Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Exchange Notes originally
issued under the Senior Subordinated Discount Note Indenture at a redemption
price of 110.875% of the Accreted Value, plus accrued and unpaid Liquidated
Damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; provided that at least $50.0 million in aggregate
Accreted Value of Senior Subordinated Discount Exchange Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Discount Exchange Notes held by the Company and its
Subsidiaries); and provided, further, that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
At any time prior to December 15, 2002, the Senior Subordinated Discount
Exchange Notes may also be redeemed, as a whole but not in part, at the option
of the Company upon the occurrence of a Change of Control, upon not less than
30 nor more than 60 days prior notice (but in no event may any such redemption
occur more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the Accreted Value thereof plus the Senior Subordinated
Discount Note Applicable Premium as of, and accrued and unpaid Liquidated
Damages, if any, to, the date of redemption (the "Senior Subordinated Discount
Note Redemption Date" and, together with the Senior Subordinated Note
Redemption Date, the "Redemption Dates").
"Senior Subordinated Discount Note Applicable Premium" means, with respect
to any Senior Subordinated Discount Exchange Note on any Senior Subordinated
Discount Note Redemption Date, the greater of (i) 1.0% of the Accreted Value
of such Senior Subordinated Discount Exchange Note or (ii) the excess of (A)
the present value at such Senior Subordinated Discount Note Redemption Date of
(1) the redemption price of such Senior Subordinated Discount Exchange Note at
December 15, 2002 (such redemption price being set forth in the table above)
plus (2) all Accreted Value on such Senior Subordinated Discount Exchange Note
through December 15, 2002, computed using a discount rate equal to the
Treasury Rate at such Senior Subordinated Discount Note Redemption Date plus
75 basis points over (B) the Accreted Value of such Senior Subordinated
Discount Exchange Note as of the Senior Subordinated Discount Note Redemption
Date, if greater.
SELECTION AND NOTICE. If less than all of the Notes of either series are to
be redeemed at any time, selection of Exchange Notes for redemption will be
made by the applicable Trustee from among the Exchange Notes of such series
that are then outstanding in compliance with the requirements of the principal
national securities exchange, if any, on which the Exchange Notes are listed,
or, if the Exchange Notes are not so listed, on a pro rata basis, by lot or by
such method as the applicable Trustee shall deem fair and appropriate;
provided that no Exchange Notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Exchange Notes
to be redeemed at its registered address. Notices of redemption may not be
conditional. If any Exchange Note is to be redeemed in part only, the notice
of redemption that relates to such Exchange Note shall state the portion of
the principal amount thereof to be redeemed. A new Exchange Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of
the Holder thereof upon cancellation of the original Exchange Note. Exchange
Notes called for redemption become due on the date fixed for redemption. On
and after the redemption date, interest ceases to accrue on Exchange Notes or
portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
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REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Exchange
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash (the "Change of Control Payment") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or, with respect
to the Senior Subordinated Discount Exchange Notes, if such Change of Control
Offer is prior to the Full Accretion Date, 101% of the Accreted Value thereof
on the date of repurchase, plus accrued and unpaid Liquidated Damages, if any,
thereon to the date of repurchase). Within ten days following any Change of
Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Exchange Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date such
notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the applicable Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
the Exchange Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Exchange Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the applicable Trustee the Exchange Notes so accepted together
with an Officers' Certificate stating the aggregate principal amount of
Exchange Notes or portions thereof being purchased by the Company. The Paying
Agent will promptly mail to each Holder of Exchange Notes so tendered the
Change of Control Payment for such Exchange Notes, and the applicable Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Exchange Note equal in principal amount to any
unpurchased portion of the Exchange Notes surrendered, if any; provided that
each such new Exchange Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Indentures provide that, prior to the mailing of any notice required by
the applicable Indenture, but in any event within 30 days following any Change
of Control, the Company will (i) repay in full in cash and terminate all
commitments under Indebtedness under the Senior Credit Agreements and all
other Senior Debt the terms of which require repayment upon a Change of
Control or offer to repay in full in cash and terminate all commitments under
all Indebtedness under the Senior Credit Agreements and all other such Senior
Debt and to repay the Indebtedness owed to each lender under the Senior Credit
Agreements that has accepted such offer or (ii) obtain the requisite consents
under the Senior Credit Agreements and all such other Senior Debt to permit
the repurchase of the Notes as provided above. The Company shall first comply
with this covenant before it shall be required to repurchase Exchange Notes
pursuant to the provisions described in the applicable Indenture. The
Company's failure to comply with the immediately preceding sentence shall
constitute an Event of Default described in clause (iii) and not in clause
(ii) under "Events of Default" below.
The Senior Credit Agreements restrict the Company's ability to prepay debt,
including the Exchange Notes, and also provide that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions.
In the event a Change of Control occurs at a time when the Company is
prohibited from purchasing
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Exchange Notes, the Company could seek the consent of its lenders to the
purchase of Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing
Exchange Notes. In such case, the Company's failure to purchase tendered
Exchange Notes would constitute an Event of Default under the Indentures which
would, in turn, constitute a default under the Senior Credit Agreements. In
such circumstances, the subordination provisions in the Indentures would
likely restrict payments to the Holders of Exchange Notes.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the applicable Indenture are applicable. Except
as described above with respect to a Change of Control, the applicable
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Exchange Notes in the event
of a takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control (i) if a third party makes the Change of Control Offer in
the manner, at the times and otherwise in compliance with the requirements set
forth in the applicable Indenture applicable to a Change of Control Offer made
by the Company and purchases all Exchange Notes validly tendered and not
withdrawn under such Change of Control Offer or (ii) the Company exercises its
option to purchase all the Exchange Notes upon a Change of Control as
described above under the caption "Optional Redemption".
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person or group of related Persons, as defined in Section
13(d) of the Exchange Act (a "Group"), whether or not otherwise in compliance
with the provisions of the applicable Indenture, other than Bain Capital, Inc.
and its Related Parties; (ii) the approval by the holders of Capital Stock of
the Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
applicable Indenture); (iii) any Person or Group (other than Bain Capital,
Inc. and its Related Parties) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the
aggregate ordinary voting power represented by the issued and outstanding
Voting Stock of Parent or any successor to all or substantially all of its
assets; (iv) the first day on which a majority of the members of the Board of
Directors of the Company or Parent are not Continuing Directors; or (v) the
first day on which Parent ceases to hold 100% of the outstanding Equity
Interests of the Company (other than as a result of a Merger of the Company
and Parent permitted by the applicable Indenture).
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Exchange Notes to
require the Company to repurchase such Exchange Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries taken as a whole to another Person
or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indentures or (ii) was nominated for election or
elected to such Board of Directors by any of the Principals or with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
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<PAGE>
"Principals" means the Parent, Bain Capital, Inc. and any other stockholder
of Parent that owns at least 10% of the outstanding Equity Interests of Parent
as of the date of issuance of the Exchange Notes.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
ASSET SALES
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be cash or Cash Equivalents; provided that the amount of
(a) any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet) of the Company or any such Restricted Subsidiary
(other than liabilities that are by their terms subordinated to the Exchange
Notes) that are assumed by the transferee of any such assets, (b) any notes or
other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are immediately converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received) and (c)
any Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Sale having an aggregate fair market
value, taken together with all other Designated Noncash Consideration received
pursuant to this clause (c) that is at that time outstanding, not to exceed
10% of Total Assets
at the time of the receipt of such Designated Noncash Consideration (with the
fair market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent changes
in value), shall be deemed to be cash for the purposes of this provision, and
(iii) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to
such Asset Sale within 365 days of receipt thereof either (A) to repay any
Senior Debt and, in the case of any Senior Debt under any revolving credit
facility, effect a commitment reduction under such revolving credit facility,
(B) to reinvest in Productive Assets, or (C) a combination of prepayment,
repurchase and investment permitted by the foregoing clauses (iii)(A) and
(iii)(B). Pending the final application of any such Net Cash Proceeds, the
Company or such Restricted Subsidiary may temporarily reduce Indebtedness
under a revolving credit facility, if any, or otherwise invest such Net Cash
Proceeds in Cash Equivalents. On the 366th day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating
to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) or (iii)(C) of
the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), the
aggregate amount of Net Cash Proceeds that have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A),
(iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds
Offer Amount") shall be applied by the Company or such Restricted Subsidiary
to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net
Proceeds Offer Payment Date") not less than 30 nor more than 45 days following
the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata
basis that amount of Exchange Notes equal to the Net Proceeds Offer Amount at
a price equal to 100% of the principal amount of the Exchange Notes to be
purchased, plus accrued and unpaid interest and Liquidated Damages thereon, if
any, to the date of purchase (or, if such Net Proceeds Offer is to be
consummated prior to the Full Accretion Date, 100% of the Accreted Value of
Senior Subordinated Discount Exchange Notes, plus accrued and unpaid
liquidated damages thereon, if any, to the date of purchase); provided,
however, that if at any time any non-cash consideration (including any
Designated Noncash Consideration)
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received by the Company or any Restricted Subsidiary of the Company, as the
case may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than
$10.0 million, the application of the Net Cash Proceeds constituting such Net
Proceeds Offer Amount to a Net Proceeds Offer may be deferred until such time
as such Net Proceeds Offer Amount plus the aggregate amount
of all Net Proceeds Offer Amounts arising subsequent to the Net Proceeds Offer
Trigger Date relating to such initial Net Proceeds Offer Amount from all Asset
Sales by the Company and its Restricted Subsidiaries aggregates at least $10.0
million, at which time the Company or such Restricted Subsidiary shall apply
all Net Cash Proceeds constituting all Net Proceeds Offer Amounts that have
been so deferred to make a Net Proceeds Offer (the first date the aggregate of
all such deferred Net Proceeds Offer Amounts is equal to $10.0 million or more
shall be deemed to be a "Net Proceeds Offer Trigger Date").
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Productive Assets, cash, Cash
Equivalents and/or Marketable Securities and (ii) such Asset Sale is for fair
market value (as determined in good faith by the Company's Board of
Directors); provided that any consideration not constituting Productive Assets
received by the Company or any of its Restricted Subsidiaries in connection
with any Asset Sale permitted to be consummated under this paragraph shall be
subject to the provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the applicable Trustee, and shall comply with the
procedures set forth in the applicable Indenture. Upon receiving notice of the
Net Proceeds Offer, Holders may elect to tender their Exchange Notes in whole
or in part in integral multiples of $1,000 in exchange for cash. To the extent
Holders properly tender Exchange Notes in an amount exceeding the Net Proceeds
Offer Amount, Exchange Notes of tendering Holders will be purchased on a pro
rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law. To the extent that the aggregate amount of Exchange Notes tendered
pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer Amount,
the Company may use any remaining Net Proceeds Offer Amount for general
corporate purposes. Upon completion of any such Net Proceeds Offer, the Net
Proceeds Offer Amount shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
Asset Sale provisions of the applicable Indenture, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the Asset Sale provisions of the
applicable Indenture by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
Equity Interests (including, without limitation, any payment in
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connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's Equity Interests in their capacity
as such (other than dividends or distributions payable in Qualified Capital
Stock of the Company); (ii) purchase, redeem or otherwise acquire or retire
for value (including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company; or (iii) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iii) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable Four-Quarter Period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indentures (excluding Restricted Payments permitted by
clauses (3), (5), (6), (8) and (9) of the next succeeding paragraph), is less
than the sum, without duplication, of (i) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indentures to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds (including the fair market value of property other than cash that
would constitute Marketable Securities or a Permitted Business) received by
the Company since the date of the Indentures as a contribution to its common
equity capital (other than from a Subsidiary or that were financed with loans
from the Company or any Restricted Subsidiary) or from the issue or sale of
Qualified Capital Stock (including Capital Stock issued upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness) of the
Company (excluding any net proceeds from an Equity Offering or capital
contribution to the extent used to redeem Exchange Notes in accordance with
the optional redemption provisions of the Exchange Notes) or from the issue or
sale of Disqualified Stock or debt securities of the Company that have been
converted into Qualified Capital Stock (other than Qualified Capital Stock (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Company), plus (iii) 100% of the aggregate net proceeds (including the fair
market value of property other than cash that would constitute Marketable
Securities or a Permitted Business) of any (A) sale or other disposition of
Restricted Investments made by the Company and its Restricted Subsidiaries or
(B) dividend from, or the sale of the stock of, an Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit (1) the payment of any dividend or the
consummation of any irrevocable redemption within 60 days after the date of
declaration of such dividend or notice of such redemption if the dividend or
payment of the redemption price, as the case may be, would have been permitted
on the date of declaration or notice; (2) if no Event of Default shall have
occurred and be continuing or shall occur as a consequence thereof, the
acquisition of any shares of Capital Stock of the Company (the "Retired
Capital Stock"), either (i) solely in exchange for shares of Qualified Capital
Stock of the Company (the "Refunding Capital Stock"), or (ii) through the
application of the net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital
Stock of the Company, and, in the case of subclause (i) of this clause (2), if
immediately prior to the
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retirement of the Retired Capital Stock the declaration and payment of
dividends thereon was permitted under clause (3) of this paragraph, the
declaration and payment of dividends on the Refunding Capital Stock in an
aggregate amount per year no greater than the aggregate amount of dividends
per annum that was declarable and payable on such Retired Capital Stock
immediately prior to such retirement; provided that at the time of the
declaration of any such dividends on the Refunding Capital Stock, no Default
or Event of Default shall have occurred and be continuing or would occur as a
consequence thereof; (3) if no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof, the declaration and
payment of dividends to holders of any class or series of Designated Preferred
Stock (other than Disqualified Stock) issued after the date of the Indentures
(including, without limitation, the declaration and payment of dividends on
Refunding Capital Stock in excess of the dividends declarable and payable
thereon pursuant to clause (2) of this paragraph); provided that, at the time
of such issuance, the Company, after giving effect to such issuance on a pro
forma basis, would have had a Consolidated Fixed Charge Coverage Ratio of at
least 2.0 to 1.0 for the most recent Four-Quarter Period; (4) payments to
Parent for the purpose of permitting, and in an amount equal to the amount
required to permit, Parent to redeem or repurchase Parent's common equity or
options in respect thereof, in each case in connection with the repurchase
provisions of employee stock option or stock purchase agreements or other
agreements to compensate management employees; provided that all such
redemptions or repurchases pursuant to this clause (4) shall not exceed $12.5
million (which amount shall be increased by the amount of any net cash
proceeds received from the sale since the date of the Indentures of Equity
Interests (other than Disqualified Stock) to members of the Company's
management team that have not otherwise been applied to the payment of
Restricted Payments pursuant to the terms of the preceding paragraph (c) and
by the cash proceeds of any "key-man" life insurance policies which are used
to make such redemptions or repurchases) in the aggregate since the date of
the Indentures; provided, further, that the cancellation of Indebtedness owing
to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with such a repurchase of Capital Stock
of Parent will not be deemed to constitute a Restricted Payment under the
Indentures; (5) the making of distributions, loans or advances to Parent in an
amount not to exceed $1.5 million per annum in order to permit Parent to pay
the ordinary operating expenses of Parent (including, without limitation,
directors' fees, indemnification obligations, professional fees and expenses,
but excluding any payments on or repurchases of the Seller Note); (6) payments
to Parent in respect of taxes pursuant to the terms of the Tax Allocation
Agreement as in effect on the date of the Indenture and as amended from time
to time pursuant to amendments that do not increase the amounts payable by the
Company or any of its Restricted Subsidiaries thereunder; (7) if no Default or
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof and the Company would be permitted to incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) in compliance
with the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock", other Restricted Payments in an
aggregate amount not to exceed $12.5 million since the date of the Indentures;
(8) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof; and (9) distributions to Parent to fund the Transactions (as
described under "Use of Proceeds") and payments with respect to Parent Notes
whether made at or subsequent to the Closing.
In determining the aggregate amount of Restricted Payments made subsequent
to the date of the Indentures in accordance with clause (c) of the immediately
preceding paragraph, (a) amounts expended pursuant to clauses (1), (2), (4),
and (7) shall be included in such calculation; provided such expenditures
pursuant to clause (4) shall not be included to the extent of the cash
proceeds received by the Company from any "key man" life insurance policies
and (b) amounts expended pursuant to clauses (3), (5), (6), (8) or (9) shall
be excluded from such calculation.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all
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outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash) in the Subsidiary so designated will be deemed
to be Restricted Payments at the time of such designation and will reduce the
amount available for Restricted Payments under the first paragraph of this
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness and that the Company will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness or
issue shares of Disqualified Stock if (i) no Default or Event of Default shall
have occurred and be continuing at the time or as a consequence of the
incurrence of any such Indebtedness or the issuance of any such Disqualified
Stock and (ii) the Consolidated Fixed Charge Coverage Ratio for the Company's
most recently ended Four-Quarter Period would have been at least 2.0 to 1.0,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, at the beginning of such Four-Quarter
Period.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the Exchange Notes and the Note Guarantees thereof;
(ii) Indebtedness incurred pursuant to one or more Credit Facilities in
an aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Subsidiaries thereunder) not to
exceed $550.0 million less (A) the aggregate amount of Indebtedness of
Securitization Entities at the time outstanding less (B) the amount of all
optional or mandatory principal payments actually made by the Company or
any of its Restricted Subsidiaries since the date of the Indentures in
respect of term loans under Credit Facilities (excluding any such payments
to the extent refinanced at the time of payment under a Credit Facility)
and (C) further reduced by any repayments of revolving credit borrowings
under Credit Facilities that are accompanied by a corresponding commitment
reduction thereunder; provided that the amount of Indebtedness permitted to
be incurred pursuant to the Senior Credit Agreements in accordance with
this clause (ii) shall be in addition to any Indebtedness permitted to be
incurred pursuant to the Senior Credit Agreements in reliance on, and in
accordance with, clauses (x) and (xvi) below;
(iii) the incurrence of Indebtedness and/or the issuance of Permitted
Foreign Subsidiary Preferred Stock by Foreign Subsidiaries of the Company,
which together with the aggregate principal amount of Indebtedness incurred
pursuant to this clause (iii) and the aggregate liquidation value of all
Permitted Foreign Subsidiary Preferred Stock issued pursuant to this clause
(iii), does not exceed $15.0 million at any one time outstanding; provided
that such amount shall increase to $30.0 million upon the consummation of
an Initial Public Offering;
(iv) other Indebtedness of the Company and its Subsidiaries outstanding
on the date of the Indentures for so long as such Indebtedness remains
outstanding;
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(v) Interest Swap Obligations of the Company covering Indebtedness of the
Company; provided that any Indebtedness to which any such Interest Swap
Obligations correspond is otherwise permitted to be incurred under the
applicable Indenture; and provided, further, that such Interest Swap
Obligations are entered into, in the judgment of the Company, to protect
the Company from fluctuation in interest rates on its outstanding
Indebtedness;
(vi) Indebtedness of the Company under Currency Agreements;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (i) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all Obligations with respect to the
Notes and (ii)(A) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than the
Company or a Subsidiary thereof and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary thereof shall be deemed, in each case, to constitute
an incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(vii);
(viii) the incurrence of Acquired Indebtedness of Restricted Subsidiaries
of the Company to the extent the Company could have incurred such
Indebtedness in accordance with the first paragraph of this covenant on the
date such Indebtedness became Acquired Indebtedness;
(ix) Guarantees by the Company and the Guarantors of each other's
Indebtedness; provided that such Indebtedness is permitted to be incurred
under the applicable Indenture;
(x) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount outstanding not to
exceed 5% of Total Assets at the time of any incurrence thereof (including
any Refinancing Indebtedness with respect thereto) (which amount may, but
need not, be incurred in whole or in part under the Senior Credit
Agreements);
(xi) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims;
(xii) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price, earn out or other similar obligations, in each case,
incurred or assumed in connection with the disposition of any business,
assets or a Restricted Subsidiary of the Company, other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition; provided that the maximum assumable liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition;
(xiii) obligations in respect of performance and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business;
(xiv) any refinancing, modification, replacement, renewal, restatement,
refunding, deferral, extension, substitution, supplement, reissuance or
resale of existing or future Indebtedness (other than intercompany
Indebtedness), including any additional Indebtedness incurred to pay
interest or premiums required by the instruments governing such existing or
future Indebtedness as in
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effect at the time of issuance thereof ("Required Premiums") and fees in
connection therewith ("Refinancing Indebtedness"); provided that any such
event shall not (1) directly or indirectly result in an increase in the
aggregate principal amount of Permitted Indebtedness (except to the extent
such increase is a result of a simultaneous incurrence of additional
Indebtedness (A) to pay Required Premiums and related fees or (B) otherwise
permitted to be incurred under the applicable Indenture) of the Company and
its Restricted Subsidiaries and (2) create Indebtedness with a Weighted
Average Life to Maturity at the time such Indebtedness is incurred that is
less than the Weighted Average Life to Maturity at such time of the
Indebtedness being refinanced, modified, replaced, renewed, restated,
refunded, deferred, extended, substituted, supplemented, reissued or resold
(except that this subclause (2) will not apply in the event the
Indebtedness being refinanced, modified, replaced, renewed, restated,
refunded, deferred, extended, sub- stituted, supplemented, reissued or
resold was originally incurred in reliance upon clause (xvi) of this
paragraph);
(xv) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is Non-Recourse Debt with respect
to the Company and its other Restricted Subsidiaries (except for Standard
Securitization Undertakings);
(xvi) the incurrence of additional Indebtedness by the Company or any of
its Restricted Subsidiaries and/or the issuance of Permitted Domestic
Subsidiary Preferred Stock by the Company's U.S. Subsidiaries, which
together with the aggregate principal amount of other Indebtedness incurred
pursuant to this clause (xvi) and the aggregate liquidation value of all
other Permitted Domestic Subsidiary Preferred Stock issued pursuant to this
clause (xvi), does not exceed $30.0 million at any one time outstanding
(which amount, in the case of Indebtedness, may, but need not, be incurred
in whole or in part under the Senior Credit Agreements); provided that such
amount shall increase to $50.0 million upon the consummation of an Initial
Public Offering.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness described in clauses (i) through (xvi) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional
shares of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant; provided, in each such case, that the amount thereof is
included in Consolidated Fixed Charges of the Company as accrued.
NO SENIOR SUBORDINATED DEBT
The Indentures provide that (i) the Company will not incur, create, issue,
assume, Guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes, and (ii) no Subsidiary Guarantor
will incur, create, issue, assume, guarantee or otherwise become liable for
any Indebtedness that is subordinate or junior in right of payment to any
Senior Debt of any Subsidiary Guarantor and senior in any respect in right of
payment to the Note Guarantees.
LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of its property or assets, or any proceeds therefrom, unless (i) in
the case of Liens securing Indebtedness that is expressly subordinate or
junior in right of payment to the Exchange Notes, the Exchange Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the
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Exchange Notes are equally and ratably secured, except for (A) Liens existing
as of the date of the Indentures and any extensions, renewals or replacements
thereof, (B) Liens securing Senior Debt, (C) Liens securing the Exchange
Notes, (D) Liens securing intercompany Indebtedness of the Company or a
Restricted Subsidiary of the Company on assets of any Subsidiary of the
Company, (E) Liens securing Indebtedness that is incurred to refinance
Indebtedness that was secured by a Lien permitted under the applicable
Indenture that was incurred in accordance with the provisions of the
applicable Indenture; provided, however, that such Liens do not extend to or
cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced, and (F) Permitted
Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or consensual restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock, (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indentures; (3) non-assignment
provisions of any contract or any lease entered into in the ordinary course of
business; (4) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person or the properties or assets of
the Person so acquired; (5) agreements
existing on the date of the Indentures (including, without limitation, the
Senior Credit Agreements and the Parent Note Indenture); (6) restrictions on
the transfer of assets subject to any Lien permitted under the applicable
Indenture imposed by the holder of such Lien; (7) restrictions imposed by any
agreement to sell assets or Capital Stock permitted under the applicable
Indenture to any Person pending the closing of such sale; (8) any agreement or
instrument governing Capital Stock of any Person that is in effect on the date
such Person is acquired by the Company or a Restricted Subsidiary of the
Company; (9) any Purchase Money Note, or other Indebtedness or other
contractual requirements of a Securitization Entity in connection with a
Qualified Securitization Transaction; provided that such restrictions apply
only to such Securitization Entity; (10) any agreement or instrument governing
Indebtedness or Permitted Foreign Subsidiary Preferred Stock (whether or not
outstanding) of Foreign Subsidiaries of the Company that was permitted by the
applicable Indenture to be incurred; (11) other Indebtedness or Domestic
Subsidiary Preferred Stock permitted to be incurred subsequent to the date of
the Indentures pursuant to the provisions of the covenant described above
under the caption "--Incurrence of Additional Indebtedness and Issuance of
Preferred Stock"; provided that any such restrictions are ordinary and
customary with respect to the type of Indebtedness or preferred stock being
incurred or issued (under the relevant circumstances); (12) restrictions on
cash or other deposits or net worth imposed by customers under contracts
entered into in the ordinary course of business; and (13) any encumbrances or
restrictions imposed by any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings of the
contracts, instruments or obligations referred to in clauses (1) through (12)
above; provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are, in the
good faith judgment of the Company's Board of Directors, no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the dividend or other payment restrictions prior to such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indentures provide that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
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another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the
Exchange Notes and the Indentures pursuant to supplemental indentures in forms
reasonably satisfactory to the applicable Trustee; (iii) immediately after
such transaction no Default or Event of Default exists; and (iv) except in the
case of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company and except in the case of a merger entered into solely for the purpose
of reincorporating the Company in another jurisdiction, the Company or the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable Four-Quarter Period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock".
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or permit to occur any transaction or
series or related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property or the rendering of any service) with,
or for the benefit of, any of its Affiliates involving aggregate consideration
in excess of $2.5 million (an "Affiliate Transaction"), other than (x)
Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate
Transactions on terms that are not materially less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the
Company; provided, however, that for a transaction or series of related
transactions with an aggregate value of $7.5 million or more, at the Company's
option, either (i) a majority of the disinterested members of the Board of
Directors of the Company shall determine in good faith that such Affiliate
Transaction is on terms that are not materially less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or (ii) the Board of Directors of the Company or any such Restricted
Subsidiary party to such Affiliate Transaction shall have received an opinion
from a nationally recognized investment banking firm that such Affiliate
Transaction is on terms not materially less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company; and
provided, further, that for an Affiliate Transaction with an aggregate value
of $10.0 million or more the Board of Directors of the Company or any such
Restricted Subsidiary party to such Affiliate Transaction shall have received
an opinion from a nationally recognized investment banking firm that such
Affiliate Transaction is on terms not materially less favorable than those
that might reasonably have been obtained in a comparable transaction at such
time on an arm's-length basis from a Person that is not an Affiliate of the
Company.
The foregoing restrictions shall not apply to (i) reasonable fees and
compensation paid to and indemnity provided on behalf of, officers, directors,
employee or consultants of the Company or any Subsidiary as determined in good
faith by the Company's Board of Directors or senior management; (ii)
transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
applicable Indenture; (iii) transactions effected as part of a Qualified
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Securitization Transaction; (iv) any agreement as in effect as of the date of
the Indentures or any amendment or replacement thereto or any transaction
contemplated thereby (including pursuant to any amendment or replacement
thereto) so long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the date of the Indentures; (v) Restricted Payments
permitted by the applicable Indenture; (vi) the payment of customary annual
management, consulting and advisory fees and related expenses to the
Principals and their Affiliates made pursuant to any financial advisory,
financing, underwriting or placement agreement or in respect of other
investment banking activities, including, without limitation, in connection
with acquisitions or divestitures which are approved by the Board of Directors
of the Company or such Restricted Subsidiary in good faith; (viii) payments or
loans to employees or consultants that are approved by the Board of Directors
of the Company in good faith, (ix) the existence of, or the performance by the
Company or any of its Restricted Subsidiaries of its obligations under the
terms of, any stockholders agreement (including any registration rights
agreement or purchase agreement related thereto) to which it is a party as of
the date of the Indentures and any similar agreements which it may enter into
thereafter; provided, however, that the existence of, or the performance by
the Company or any of its Restricted Subsidiaries of obligations under, any
future amendment to any such existing agreement or under any similar agreement
entered into after the date of the Indentures shall only be permitted by this
clause (ix) to the extent that the terms of any such amendment or new
agreement are not disadvantageous to the Holders of the applicable series of
Notes in any material respect; (x) transactions permitted by, and complying
with, the provisions of the covenant described under "--Merger, Consolidation,
or Sale of Assets"; and (xi) transactions with customers, clients, suppliers,
joint venture partners or purchasers or sellers of goods or services, in each
case in the ordinary course of business (including, without limitation,
pursuant to joint venture agreements) and otherwise in compliance with the
terms of the applicable Indenture which are fair to the Company or its
Restricted Subsidiaries, in the reasonable determination of the Board of
Directors of the Company or the senior management thereof, or are on terms at
least as favorable as might reasonably have been obtained at such time from an
unaffiliated party.
ADDITIONAL NOTE GUARANTEES
The Indentures provide that if the Company or any of its Restricted
Subsidiaries shall acquire or create another U.S. Subsidiary after the date of
the Indentures, or if any Subsidiary becomes a U.S. Subsidiary after the date
of the Indentures, then such newly acquired or created Subsidiary, shall
execute a Note Guarantee and deliver an Opinion of Counsel, in accordance with
the terms of the applicable Indenture; provided, that all Subsidiaries that
have properly been designated as Unrestricted Subsidiaries in accordance with
the applicable Indenture shall not be subject to the requirements of this
covenant for so long as they continue to constitute Unrestricted Subsidiaries.
CONDUCT OF BUSINESS
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, engage in any businesses a majority of whose
revenues are not derived from the same or reasonably similar, ancillary or
related to, or a reasonable extension, development or expansion of, the
businesses in which the Company and its Restricted Subsidiaries are engaged on
the date of the Indentures.
REPORTS
The Indentures provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that
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describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries (showing in reasonable detail, either on the
face of the financial statements or in the footnotes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company) and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. For so long as Parent is a
Guarantor of the Notes, the Indentures will permit the Company to satisfy its
obligations in this covenant with respect to financial information relating to
the Company by furnishing financial information relating to Parent; provided
that the same is accompanied by consolidating information that explains in
reasonable detail the differences between the information relating to Parent,
on the one hand, and the information relating to the Company and its
Restricted Subsidiaries on a stand-alone basis, on the other hand. In
addition, following the consummation of the exchange offer contemplated by the
Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request. In addition,
the Company and the Subsidiary Guarantors have agreed that, for so long as any
Exchange Notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The following events are defined in the Indentures as "Events of Default":
(i) the failure to pay interest on any Exchange Notes when the same becomes
due and payable if the default continues for a period of 30 days, whether or
not such payment shall be prohibited by the subordination provisions of the
applicable Indenture; (ii) the failure to pay the principal on any Exchange
Notes when such principal becomes due and payable, at maturity, upon
redemption or otherwise (including the failure to make a payment to purchase
Exchange Notes tendered pursuant to a Change of Control Offer or a Net
Proceeds Offer), whether or not such payment shall be prohibited by the
subordination provisions of the applicable Indenture; (iii) a default in the
observance or performance of any other covenant or agreement contained in the
applicable Indenture if the default continues for a period of 30 days after
the Company receives written notice specifying the default (and demanding that
such default be remedied) from the applicable Trustee or the Holders of at
least 25% of the outstanding principal amount of the Exchange Notes of either
series; (iv) the failure to pay at final stated maturity (giving effect to any
extensions thereof) the principal amount of any Indebtedness of the Company or
any Restricted Subsidiary (other than a Securitization Entity), which failure
continues for at least 10 days, or the acceleration of the maturity of any
such Indebtedness, which acceleration remains uncured and unrescinded for at
least 10 days, if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at final maturity or which has been accelerated,
aggregates $20.0 million or more at any time; (v) one or more judgments in an
aggregate amount in excess of $20.0 million shall have been rendered against
the Company or any of its Significant Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such judgment
or judgments become final and non-appealable; (vi) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding
to be unenforceable or invalid or shall cease for any reason to be in full
force and effect or any Guarantor, or any Person acting on behalf of any
Guarantor shall deny or disaffirm its obligations under its Subsidiary
Guarantee; and (vii) certain events of bankruptcy affecting the Company or any
of its Significant Subsidiaries.
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Upon the happening of any Event of Default specified in the applicable
Indenture, the applicable Trustee or the Holders of at least 25% in principal
amount of outstanding Exchange Notes of either series may declare the
principal of and accrued interest on all the Exchange Notes of such series to
be due and payable by notice in writing to the Company and the applicable
Trustee specifying the respective Event of Default and that such notice is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts
outstanding under either of the Senior Credit Agreements, shall become
immediately due and payable upon the first to occur of an acceleration under
either of the Senior Credit Agreements or five Business Days after receipt by
the Company and the Representative under the applicable Senior Credit
Agreement of such Acceleration Notice but only if such Event of Default is
then continuing. If an Event of Default with respect to bankruptcy proceedings
of the Company occurs and is continuing, then such amount shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the applicable Trustee or any Holder of Exchange Notes.
The Indentures provide that, at any time after a declaration of acceleration
with respect to the Exchange Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of either series of Exchange
Notes may rescind and cancel such declaration and its consequences as to such
series (i) if the rescission would not conflict with any judgment or decree,
(ii) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration, (iii) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has been paid,
(iv) if the Company has paid the applicable Trustee its reasonable
compensation and reimbursed the applicable Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the applicable Trustee shall have received an Officers'
Certificate and an Opinion of Counsel that such Event of Default has been
cured or waived. The holders of a majority in principal amount of either
series of Exchange Notes may waive any existing Default or Event of Default
under the applicable Indenture, and its consequences, except a default in the
payment of the principal of or interest on any Exchange Notes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Exchange Notes or the applicable Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder
of Exchange Notes by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Exchange Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to either class of Exchange Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange
Notes of such series to receive payments in respect of the principal of,
premium, if any, and interest and Liquidated Damages on such series of
Exchange Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to such Exchange Notes concerning
issuing temporary Exchange Notes, registration of Exchange Notes, mutilated,
destroyed, lost or stolen Exchange Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the applicable Trustees, and
the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the applicable Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations of the
Company released with respect to certain
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covenants that are described in the applicable Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to such series of
Exchange Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to such series of Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the applicable Trustee, in trust, for
the benefit of the Holders of the applicable series of Exchange Notes, cash in
U.S. dollars, non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, interest and Liquidated Damages, if any, on all outstanding Exchange
Notes of the applicable series on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether such
series of Exchange Notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the applicable Trustee an Opinion of Counsel in the United States
reasonably acceptable to the applicable Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the applicable Indenture,
there has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Holders of the outstanding Exchange Notes of such series
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the applicable
Trustee an Opinion of Counsel in the United States reasonably acceptable to
such Trustee confirming that the Holders of the outstanding Exchange Notes of
such series will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (including the applicable Indenture and the Senior Credit
Agreements) (other than a default resulting from the borrowing of funds to be
applied to such deposit) to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company must have delivered to the applicable Trustee an Opinion of Counsel to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
the Company must deliver to the applicable Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of such series of Exchange Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the applicable Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent provided for relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Notes in accordance with the
applicable Indenture. The applicable Registrar and the applicable Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to
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pay any taxes and fees required by law or permitted by the applicable
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Exchange Note for a period of 15 days before a selection of
Exchange Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, either of the
Indentures and either class of Exchange Notes may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Exchange Notes of such series then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Exchange Notes of such class), and any existing
default or compliance with any provision of the applicable Indenture or the
Exchange Notes of such class may be waived with the consent of the Holders of
a majority in principal amount of the then outstanding Exchange Notes of such
class (including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Exchange Notes of such
series).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes of a particular series held by a non-consenting
Holder): (i) reduce the principal amount of Exchange Notes of such series
whose Holders must consent to an amendment, supplement or waiver, (ii) reduce
the principal of or change the fixed maturity of any Exchange Note of a
particular series or alter the provisions with respect to the redemption of
the Exchange Notes of such series (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Exchange Note of such series, (iv) waive a Default or Event of Default
in the payment of principal of or premium, if any, or interest on the Exchange
Notes of such series (except a rescission of acceleration of the Exchange
Notes of such series by the Holders of at least a majority in aggregate
principal amount of the Exchange Notes of such series and a waiver of the
payment default that resulted from such acceleration), (v) make any Exchange
Note of such series payable in money other than that stated in the Exchange
Notes of such series, (vi) make any change in the provisions of the applicable
Indenture relating to waivers of past Defaults or the rights of Holders of
Exchange Notes of such series to receive payments of principal of or premium,
if any, or interest on the Exchange Notes of such series, (vii) waive a
redemption payment with respect to any Exchange Note of such series (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to
the provisions of Article 10 of the applicable Indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Exchange Notes of such series then
outstanding if such amendment would adversely affect the rights of Holders of
Exchange Notes of such series. Any amendment to the provisions of Article 10
of the applicable Indenture or the related definitions will also require the
consent of the majority of the lenders under each of the Senior Credit
Agreements.
Notwithstanding the foregoing, without the consent of any Holder of Exchange
Notes of a particular class, the Company and the applicable Trustee may amend
or supplement the applicable Indenture or the Exchange Notes of such class to
cure any ambiguity, defect or inconsistency, to provide for uncertificated
Exchange Notes of such class in addition to or in place of certificated
Exchange Notes of such class, to provide for the assumption of the Company's
obligations to Holders of Exchange Notes of such class in the case of a merger
or consolidation or sale of all or substantially all of the Company's assets,
to make any change that would provide any additional rights or benefits to the
Holders of Exchange Notes of such class or that does not adversely affect the
legal rights under
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the applicable Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the
applicable Indenture under the Trust Indentures Act.
CONCERNING THE TRUSTEES
The Indentures contain certain limitations on the rights of the Trustees,
should either of the Trustees become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Trustees will be
permitted to engage in other transactions; however, if either of the Trustees
acquires any conflicting interest such Trustee must eliminate such conflict
within 90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the
applicable Trustee, subject to certain exceptions. The Indentures provide that
in case an Event of Default shall occur (which shall not be cured), the
applicable Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the applicable Trustee will be under no obligation to
exercise any of its rights or powers under the applicable Indenture at the
request of any Holder of Exchange Notes, unless such Holder shall have offered
to the applicable Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain copies of the Indentures and
Registration Rights Agreement, without charge, by writing to Sealy Mattress
Company, Halle Building, 10th Floor, 1228 Euclid Avenue, Cleveland, Ohio
44115, Attention: General Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to the Full
Accretion Date, the sum of (a) the initial offering price of each Senior
Subordinated Discount Exchange Note and (b) the portion of the excess of the
principal amount of each Senior Subordinated Discount Exchange Note over such
initial offering price which shall have been accreted thereon through such
date, such amount to be so accreted on a daily basis at 10 7/8% per annum of
the initial offering price of the Senior Subordinated Discount Exchange Notes,
compounded semi-annually on each June 15 and December 15 from the date of
issuance of the Senior Subordinated Discount Exchange Notes through the date
of determination; provided that, on and after the Full Accretion Date, the
Accreted Value of each Senior Subordinated Discount Exchange Note shall be
equal to the principal amount of such Senior Subordinated Discount Exchange
Note.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or that is assumed by the Company or any of its Restricted
Subsidiaries in connection with the acquisition of assets from such Person, in
each case excluding any Indebtedness incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition.
"Affiliate" means a Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
the Company. The term "control" means the
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possession directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person whether through the
ownership of voting securities, by contract or otherwise. Notwithstanding the
foregoing, no Person (other than the Company or any Subsidiary of the Company)
in whom a Securitization Entity makes an Investment in connection with a
Qualified Securitization Transaction shall be deemed to be an Affiliate of the
Company or any of its Subsidiaries solely by reason of such Investment.
"all or substantially all" shall have the meaning given such phrase in the
Revised Model Business Corporation Act.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person if, as a result of such
Investment, such Person shall become a Restricted Subsidiary of the Company,
or shall be merged with or into the Company or any Restricted Subsidiary of
the Company, or (b) the acquisition by the Company or any Restricted
Subsidiary of the Company of all or substantially all of the assets of any
other Person or any division or line of business of any other Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries to any Person other than the Company or a
Restricted Subsidiary of the Company of (a) any Capital Stock of any
Restricted Subsidiary of the Company or (b) any other property or assets of
the Company or any Restricted Subsidiary of the Company other than in the
ordinary course of business; provided, however, that Asset Sales shall not
include (i) a transaction or series of related transactions for which the
Company or its Restricted Subsidiaries receive aggregate consideration of less
than $1.0 million, (ii) the sale, lease, conveyance, disposition or other
transfer of all substantially all of the assets of the Company as permitted
under the provisions described above under the caption "--Certain Covenants--
Merger, Consolidation and Sale of Assets" or any disposition that constitutes
a Change of Control, (iii) the sale or discount, in each case without
recourse, of accounts receivable arising in the ordinary course of business,
but only in connection with the compromise or collection thereof, (iv) the
factoring of accounts receivable arising in the ordinary course of business
pursuant to arrangements customary in the industry, (v) the licensing of
intellectual property, (vi) disposals or replacements of obsolete,
uneconomical, negligible, worn out or surplus property in the ordinary course
of business, (vii) the sale, lease conveyance, disposition or other transfer
by the Company or any Restricted Subsidiary of assets or property to one or
more Restricted Subsidiaries in connection with Investments permitted by the
covenant described under the caption "--Restricted Payments", (viii) sales of
accounts receivable, equipment and related assets (including contract rights)
of the type specified in the definition of "Qualified Securitization
Transaction" to a Securitization Entity for the fair market value thereof,
including cash in an amount at least equal to 75% of the fair market value
thereof. For the purposes of clause (viii), Purchase Money Notes shall be
deemed to be cash.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
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"Cash Equivalents" means: (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either S&P or Moody's; (iii) commercial paper maturity no more
than one year from the date of creation thereof and at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances (or, with
respect to foreign banks, similar instruments) maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia,
Japan or any member of the European Economic Community or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $200.0 million; provided that instruments issued by
banks not having one for the two highest ratings obtainable from either S&P or
Moody's or by banks organized under the laws of Japan or any member of the
European Economic Community shall not constitute Cash Equivalents for purposes
of the subordination provisions of the applicable Indenture; (v) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clause (i) above entered into with any bank meeting
the qualifications specified in clause (iv) above; and (vi) investments in
money market funds which invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of such Person's (i) Consolidated Net Income and
(ii) to the extent Consolidated Net Income has been reduced thereby, (A) all
income taxes and foreign withholding taxes of such Person and its Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period, (B)
Consolidated Interest Expense, (C) Consolidated Noncash Charges, (D) all one-
time cash compensation payments made in connection with the Transactions, (E)
any payments related to addressing the Company's or any of its Restricted
Subsidiary's "Year 2000" information systems issue and EITF 97-13
"reengineering" efforts and (F) all bad debt and factoring losses incurred
specifically with respect to the bankruptcy of Montgomery Ward.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the most recent
four full fiscal quarters for which internal financial statements are
available (the "Four-Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such
Person for the Four-Quarter Period. In addition to and without limitation of
the foregoing, for purposes of this definition, Consolidated EBITDA and
Consolidated Fixed Charges shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence of any
Indebtedness or the issuance of any preferred stock of such Person or any of
its Restricted Subsidiaries (and the application of the proceeds thereof) and
any repayment of other Indebtedness or redemption of other preferred stock
occurring during the Four-Quarter Period or at any time subsequent to the last
day of the Four-Quarter Period and on or prior to the Transaction Date, as if
such incurrence, repayment, issuance or redemption, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the
Four-Quarter Period and (ii) any Asset Sale or Asset Acquisition (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any Pro
Forma Cost Savings) associated with any such Asset Acquisition) occurring
during the Four-Quarter Period or at any time subsequent to the last day of
the Four-Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition
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(including the incurrence of, or assumption or liability for any such
Indebtedness or Acquired Indebtedness) occurred on the first day of the Four-
Quarter Period. If such Person or any of its Restricted Subsidiaries directly
or indirectly Guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness
as if such Person or any Restricted Subsidiary of such Person had directly
incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating Consolidated Fixed Charges for purposes of determining the
denominator (but not the numerator) of this Consolidated Fixed Charge Coverage
Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction Date
may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to
have been in effect during the Four-Quarter Period; and (3) notwithstanding
clause (1) above, interest on Indebtedness determined on a fluctuating basis,
to the extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense
(before amortization or write-off of debt issuance costs) plus (ii) the amount
of all cash dividend payments on any series of preferred stock of such Person
plus (iii) the amount of all dividend payments on any series of Permitted
Foreign Subsidiary Preferred Stock or Permitted Domestic Subsidiary Preferred
Stock; provided that with respect to any series of preferred stock that was
not paid cash dividends during such period but that is eligible to be paid
cash dividends during any period prior to the maturity date of the Exchange
Notes, cash dividends shall be deemed to have been paid with respect to such
series of preferred stock during such period for purposes of clause (ii) of
this definition.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication, (i) the aggregate of all cash and
non-cash interest expense with respect to all outstanding Indebtedness of such
Person and its Restricted Subsidiaries, including the net costs associated
with Interest Swap Obligations, for such period determined on a consolidated
basis in conformity with GAAP, (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period on a consolidated basis,
determined in accordance with GAAP, provided that there shall be excluded
therefrom (a) gains and losses from Asset Sales (without regard to the $1.0
million limitation set forth in the definition thereof) or abandonments or
reserves relating thereto and the related tax effects according to GAAP, (b)
gains and losses due solely to fluctuations in currency values and the related
tax effects according to GAAP, (c) items classified as a cumulative effect
accounting change or as extraordinary, unusual or nonrecurring gains and
losses (including, without limitation, severance, relocation and other
restructuring costs), and the related tax effects according to GAAP, (d) the
net income (or loss) of any Person acquired in a pooling of interests
transaction accrued prior to the date it becomes a Restricted Subsidiary of
the Company or is merged or consolidated with the Company or any Restricted
Subsidiary of the Company, (e) the net income of any Restricted Subsidiary of
the Company to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of the Company of that income is
restricted by contract, operation, operation of law or otherwise, (f) the net
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loss of any Person, other than a Restricted Subsidiary of the Company, (g) the
net income of any Person, other than a Restricted Subsidiary of the Company,
except to the extent of cash dividends or distributions paid to the Company or
a Restricted Subsidiary of the Company by such Person, (h) only for purposes
of clause (c)(i) of the first paragraph of the covenant described under the
caption "--Restricted Payments", any amounts included pursuant to clause
(c)(iii) of the first paragraph of such covenant, and (i) one time non-cash
compensation charges, including any arising from existing stock options
resulting from any merger or recapitalization transaction. For purposes of
clause (c)(i) of the first paragraph of the covenant described under the
caption "--Restricted Payments", Consolidated Net Income shall be reduced by
any cash dividends paid with respect to any series of Designated Preferred
Stock.
"Consolidated Noncash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person for such period, determined on a consolidated basis in
accordance with GAAP excluding any such non-cash charge constituting an
extraordinary item or loss or any such non-cash charge which requires an
accrual of or a reserve for cash charges for any future period.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Senior Credit Agreements) or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) and/or letters of credit.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Noncash Consideration" means any non-cash consideration received
by the Company or one of its Restricted Subsidiaries in connection with an
Asset Sale that is so designated as Designated Noncash Consideration pursuant
to an Officers' Certificate executed by the principal executive officer and
the principal financial officer of the Company or such Restricted Subsidiary.
Such Officers' Certificate shall state the basis of such valuation, which
shall be a report of a nationally recognized investment banking firm with
respect to the receipt in one or a series of related transactions of
Designated Noncash Consideration with a fair market value in excess of $10.0
million.
"Designated Preferred Stock" means Preferred Stock that is so designated as
Designated Preferred Stock, pursuant to an Officers' Certificate executed by
the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in clause
(iii) of the first paragraph of the covenant described under the caption "--
Restricted Payments".
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Exchange Notes mature; provided, however, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
have the right to require the Company to repurchase such Capital Stock upon
the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such
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Capital Stock provide that the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Restricted
Payments".
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any offering of Qualified Capital Stock of Parent or
the Company; provided that, in the event of any Equity Offering by Parent,
Parent contributes to the common equity capital of the Company (other than as
Disqualified Stock) the portion of the net cash proceeds of such Equity
Offering necessary to pay the aggregate redemption price (plus accrued
interest to the redemption date) of the Notes to be redeemed pursuant to the
preceding paragraph.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Agreements) in
existence on the date of the Indentures, until such amounts are repaid.
"Foreign Subsidiaries" means the Company's current and future non-U.S.
Subsidiaries.
"Four-Quarter Period" has the meaning specified in the definition of
Consolidated Fixed Charge Coverage Ratio.
"Full Accretion Date" means December 15, 2002.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indentures.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements (including Interest Swap
Obligations) and (ii) other agreements or arrangements designed to protect
such Person against fluctuations in interest rates (including Currency
Agreements).
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person. The amount of any Indebtedness outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Indebtedness issued with
original issue discount, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness. For purposes of calculating the amount of Indebtedness of
a Securitization
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Entity outstanding as of any date, the face or notional amount of any interest
in receivables or equipment that is outstanding as of such date shall be
deemed to be Indebtedness but any such interests held by Affiliates of such
Securitization Entity shall be excluded for purposes of such calculation.
"Initial Public Offering" means the first underwritten public offering of
Qualified Capital Stock by either Parent or by the Company pursuant to a
registration statement filed with the Commission in accordance with the
Securities Act for aggregate net cash proceeds of a least $50.0 million;
provided that in the event the Initial Public Offering is consummated by
Parent, Parent contributes to the common equity capital of the Company at
least $50.0 million of the net cash proceeds of the Initial Public Offering.
"Interest Swap Obligations" means the obligations of any Person, pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Persons calculated
by applying a fixed or a floating rate of interest on the same notional
amount.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "--Restricted Payments".
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statutes) of any jurisdiction).
"Marketable Securities" means publicly traded debt or equity securities that
are listed for trading on a national securities exchange and that were issued
by a corporation whose debt securities are rated in one of the three highest
rating categories by either S&P or Moody's.
"Moody's" means Moody's Investors Service, Inc.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements) and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Non-Guarantor Subsidiaries" means (i) the Foreign Subsidiaries and (ii)
Advanced Sleep Products, a California corporation, Sealy Components--Pads,
Inc., a Delaware corporation, Sealy Mattress Company of San Diego, a
California corporation, Sealy Connecticut, Inc., a Connecticut corporation,
and Sealy Mattress Company of S.W. Virginia, a Virginia corporation.
"Obligations" means any principal, interest (including, without limitation,
interest that, but for the filing of a petition in bankruptcy with respect to
an obligor, would accrue on such obligations), penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Parent" means Sealy Corporation, a Delaware corporation.
"Parent Note Indenture" means the indenture governing the Existing Exchange
Notes between The Bank of New York (as successor trustee to Mellon Bank,
F.S.B. (as successor trustee to KeyBank National Association)) and Parent.
"Parent Notes" means the existing 10 1/4% Senior Subordinated Exchange Notes
due 2003 of Parent.
"Permitted Business" means any business (including stock or assets) that
derives a majority of its revenues from the manufacture, distribution and sale
of mattresses, foundation and other bedding products and activities that are
reasonably similar, ancillary or related to, or a reasonable extension,
development or expansion of, the businesses in which the Company and its
Restricted Subsidiaries are engaged on the date of the Indentures.
"Permitted Domestic Subsidiary Preferred Stock" means any series of
Preferred Stock of a domestic restricted Subsidiary of the Company that
constitutes Qualified Capital Stock and has a fixed dividend rate, the
liquidation value of all series of which, when combined with the aggregate
amount of Indebtedness of the Company and its Restricted Subsidiaries incurred
pursuant to clause (xvi) of
the definition of Permitted Indebtedness, does not exceed $30.0 million;
provided that such amount shall increase to $50.0 million upon consummation of
an Initial Public Offering.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Restricted Subsidiary of the
Company that is a Guarantor or a Foreign Subsidiary (whether existing on the
date of the Indentures or created thereafter) or in any other Person
(including by means of any transfer of cash or other property) if as a result
of such Investment such Person shall become a Restricted Subsidiary of the
Company that is a Guarantor or a Foreign Subsidiary and Investments in the
Company by any Restricted Subsidiary of the Company, (ii) cash and Cash
Equivalents, (iii) Investments existing on the date of the Indentures, (iv)
loans and advances to employees and officers of the Company and its Restricted
Subsidiaries in the ordinary course of Business, (v) accounts receivable
created or acquired in the ordinary course of Business, (vi) Currency
Agreements and Interest Swap Obligations entered into in the ordinary course
of the Company's
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businesses and otherwise in compliance with the applicable Indenture, (vii)
Investments in Unrestricted Subsidiaries in an amount at any one time
outstanding not to exceed $20.0 million; (viii) Investments in securities of
trade creditors or customers received pursuant to any plan of reorganization
or similar arrangement upon the bankruptcy or insolvency of such trade
creditors or customers, (ix) guarantees by the Company of Indebtedness
otherwise permitted to be incurred by Restricted Subsidiaries of the Company
that are either Guarantors or Foreign Subsidiaries under the applicable
Indenture, (x) additional Investments having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (x)
that are at that time outstanding, not to exceed 5% of Total Assets at the
time of such Investment (with the fair market value of each Investment being
measured at the time made and without giving effect to subsequent changes in
value), (xi) any Investment by the Company or a Subsidiary of the Company in a
Securitization Entity or any Investment by a Securitization Entity in any
other Person in connection with a Qualified Securitization Transaction;
provided that any Investment in a Securitization Entity is in the form of a
Purchase Money Note or an equity interest, (xii) any transaction to the extent
it constitutes an Investment that is permitted by, and made in accordance
with, clause (b) of the "Limitations on Transactions with Affiliates" covenant
(other than transactions described in clause (v) of such clause (b)), (xiii)
Investments the payment for which consists exclusively of Qualified Capital
Stock of the Company and (xiv) Investments received by the Company or its
Restricted Subsidiaries as consideration for asset sales, including Asset
Sales; provided that in the case of an Asset Sale, such Asset Sale is effected
in compliance with the covenant described under the caption "--Redemption or
Repurchase at Option of Holders--Asset Sales".
"Permitted Foreign Subsidiary Preferred Stock" means any series of Preferred
Stock of a foreign Restricted Subsidiary of the Company that constitutes
Qualified Capital Stock and has a fixed dividend rate, the liquidation value
of all series of which, when combined with the aggregate amount of
Indebtedness of foreign Restricted Subsidiaries of the Company incurred
pursuant to clause (iii) of the definition of Permitted Indebtedness, does not
exceed $15.0 million; provided that such amount shall increase to $30.0
million upon consummation of an Initial Public Offering.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation;
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(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; provided, however, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and (B) the Lien securing such Indebtedness shall be created with 90 days
of such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment, or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
applicable Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Indebtedness of foreign Restricted Subsidiaries of
the Company incurred in reliance on clause (iii) of the second paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock";
(xiv) Liens securing Acquired Indebtedness incurred in reliance on clause
(viii) of the second paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock";
(xv) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary with respect to obligations that do not in the
aggregate exceed $10.0 million at any one time outstanding;
(xvi) Liens on assets transferred to a Securitization Entity or on assets
of a Securitization Entity, in either case incurred in connection with a
Qualified Securitization Transaction;
(xvii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xviii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xix) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customer duties in connection with the
importation of goods;
(xx) Liens on assets of Unrestricted Subsidiaries that secure Non-
Recourse Debt of Unrestricted Subsidiaries; and
(xxi) Liens existing on the date of the Indentures, together with any
Liens securing Indebtedness incurred in reliance on clause (xiv) of the
definition of Permitted Indebtedness in order to refinance the Indebtedness
secured by Liens existing on the date of the Indentures; provided that the
Liens securing the refinancing Indebtedness shall not extend to property
other than that pledged under the Liens securing the Indebtedness being
refinanced.
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"Pro Forma Cost Savings" means, with respect to any period, the reduction in
costs that occurred during the Four-Quarter Period or after the end of the
Four-Quarter Period and on or prior to the Transaction Date that were (i)
directly attributable to an Asset Acquisition and calculated on a basis that
is consistent with Regulation S-X under the Securities Act as in effect and
applied as of January 1, 1997 or (ii) implemented by the business that was the
subject of any such Asset Acquisition within six months of the date of the
Asset Acquisition and that are supportable and quantifiable by the underlying
accounting records of such business, as if, in the case of each of clause (i)
and (ii), all such reductions in costs had been effected as of the beginning
of such period.
"Productive Assets" means assets (including Capital Stock) that are used or
usable by the Company and its Restricted Subsidiaries in Permitted Businesses.
"Purchase Money Note" means a promissory note of a Securitization Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Restricted Subsidiary of the Company in connection with a Qualified
Securitization Transaction, which note shall be repaid from cash available to
the Securitization Entity, other than amounts required to be established as
reserves pursuant to agreements, amounts paid to investors in respect of
interest, principal and other amounts owing to such investors and amounts paid
in connection with the purchase of newly generated receivables or newly
acquired equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which the Company or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer to (a) a Securitization
Entity (in the case of a transfer by the Company or any of its Restricted
Subsidiaries) and (b) any other Person (in case of a transfer by a
Securitization Entity), or may grant a security interest in, any accounts
receivable or equipment (whether now existing or arising or acquired in the
future) of the Company or any of its Restricted Subsidiaries, and any assets
related thereto including, without limitation, all collateral securing such
accounts receivable and equipment, all contracts and contract rights and all
Guarantees or other obligations in respect such accounts receivable and
equipment, proceeds of such accounts receivable and equipment and other assets
(including contract rights) which are customarily transferred or in respect of
which security interests are customarily granted in connection with asset
securitization transactions involving accounts receivable and equipment.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company (or
another Person in which the Company or any Subsidiary of the Company makes an
Investment and to which the Company or any Subsidiary of the Company transfers
accounts receivable or equipment and related assets) that engages in no
activities other than in connection with the financing of accounts receivable
or equipment and that is designated by the Board of Directors of the Company
(as provided below) as a Securitization Entity (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise) of which (i)
is guaranteed by the Company or any Restricted Subsidiary of the Company
(excluding guarantees of Obligations (other than the principal of, and
interest on, Indebtedness)) pursuant to Standard Securitization Undertakings,
(ii) is recourse to or obligates the Company or any Restricted Subsidiary of
the Company in any way other than pursuant to Standard Securitization
Undertakings or (iii) subjects any property or asset of the Company or any
Restricted Subsidiary of the
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Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to Standard Securitization
Undertakings, (B) with which neither the Company nor any Restricted Subsidiary
of the Company has any material contract, agreement, arrangement or
understanding other than on terms no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons that are not Affiliates of the Company, other than fees payable in the
ordinary course of business in connection with servicing receivables of such
entity, and (c) to which neither the Company nor any Restricted Subsidiary of
the Company has any obligation to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating results.
Any such designation by the Board of Directors of the Company shall be
evidenced to each of the Trustees by filing with the Trustees a certified copy
of the resolution of the Board of Directors of the Company giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"Senior Credit Agreements" mean, collectively, (i) that certain Credit
Agreement, dated as of December 18, 1997, and (ii) that certain AXELs Credit
Agreement, dated as of December 18, 1997, in each case by and among the
Company, Goldman Sachs Credit Partners L.P., as arranging agent and
syndication agent, Morgan Guaranty and Trust Company of New York, as
administrative agent, Bankers Trust Company, as documentation agent, and the
financial institutions party thereto, initially providing for up to $550.0
million of revolving and term credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended (including any amendment and
restatement thereof), modified, renewed, refunded, replaced, refinanced or
restructured (including, without limitation, any amendment increasing the
amount of available borrowing thereunder) from time to time and whether with
the same or any other agent, lender or group of lenders.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company that are reasonably customary in an accounts receivable or equipment
transactions.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof), but shall not include any Unrestricted Subsidiary.
"Subsidiary Guarantors" means each of (i) all Restricted Subsidiaries (but
excluding the Non-Guarantor Subsidiaries) and (ii) any other subsidiary that
executes a Note Guarantee in accordance with the provisions of the applicable
Indenture, and their respective successors and assigns.
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"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's most recent
consolidated balance sheet.
"Treasury Rate" means, as of any Redemption Date, the yield to maturity as
of such Redemption Date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to such Redemption Date (or, if such Statistical Release
is no longer published, any publicly available source of similar market data))
most nearly equal to the period from such Redemption Date to December 15,
2002; provided, however, that if the period from such Redemption Date to
December 15, 2002 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of
one year shall be used.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the applicable Trustee by filing with
the applicable Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants--Restricted
Payments". If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the applicable
Indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock", the Company shall be in default of such
covenant). The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock", calculated on
a pro forma basis as if such designation had occurred at the beginning of the
four-quarter reference period, (ii) such Subsidiary shall execute a Note
Guarantee and deliver an Opinion of Counsel, in accordance with the terms of
the applicable Indenture and (iii) no Default or Event of Default would be in
existence following such designation.
"U.S. Subsidiary" means any Subsidiary of the Company that is incorporated
in a State in the United States or the District of Columbia or that Guarantees
or otherwise becomes an obligor with respect to any Indebtedness of the
Company or another Guarantor.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of such
payment, by (ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were originally sold by the Company on December 11, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. As a condition to the Purchase Agreement, the Company
entered into the Registration Rights Agreement with the Initial Purchaser
pursuant to which the Company has agreed to: (i) file an Exchange Offer
Registration Statement with the Commission on or prior to 90 days after the
Closing Date, (ii) use its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 150
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, commence the Exchange Offer
and use its best efforts to issue on or prior to 30 business days after the
date on which the Exchange Offer Registration Statement was declared effective
by the Commission, New Notes in exchange for all Notes tendered prior thereto
in the Exchange Offer and (iv) if obligated to file the Shelf Registration
Statement, use its best efforts to file the Shelf Registration Statement with
the Commission on or prior to 45 days after such filing obligation arises and
to cause the Shelf Registration to be declared effective by the Commission on
or prior to 90 days after such obligation arises. For each Note surrendered to
the Company pursuant to the Exchange Offer, the holder of such Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Note. Interest on each Exchange Note will accrue from the date of
its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Notes who is
an "affiliate" of the Company, a broker-dealer who owns Notes acquired
directly from the Company or an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretation of the staff of the
Commission, (ii) will not be able to tender its Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Notes, unless such sale or transfer is made pursuant to an exemption from
such requirements.
If (i) the Company is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because the Exchange
Offer is not permitted by applicable law or Commission policy or (ii) any
Holder of Transfer Restricted Securities notifies the Company prior to the
20th day following consummation of the Exchange Offer that (A) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (B) that it may not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Note until (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for a New
Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in
the Exchange Offer of a Note for a New Note, the date on which such New Note
is sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under
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the Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Act.
If (a) the Company fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), or (c) the Company fails to consummate the
Exchange Offer within 30 business days of the Effectiveness Target Date with
respect to the Exchange Offer Registration Statement, or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Notes, with respect to the first 90-
day period immediately following the occurrence of the first Registration
Default in an amount equal to $.05 per week per $1,000 principal amount of
Notes held by such Holder. The amount of the Liquidated Damages will increase
by an additional $.05 per week per $1,000 principal amount of Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages for all Registration
Defaults of $.50 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company on each Damages Payment Date to
the Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of
the Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Company is required to
allow Participating Broker-Dealers and other persons, if any, subject to
similar prospectus delivery requirements to use the prospectus contained in
the Exchange Offer Registration Statement in connection with the resale of
such Exchange Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Notes pursuant to the Exchange Offer. However, Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes bear a Series B designation
and a different CUSIP Number from the Notes, (ii) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing
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for an increase in the interest rate on the Notes in certain circumstances
relating to the timing of the Exchange Offer, all of which rights will
terminate when the Exchange Offer is terminated. The Exchange Notes will
evidence the same debt as the Notes and will be entitled to the benefits of
the Indenture.
As of the date of this Prospectus, $125,000,000 aggregate principal amount
of Senior Subordinated Notes and $128,000,000 aggregate principal amount of
Senior Subordinated Discount Notes were outstanding. The Company has fixed the
close of business on , 1998 as the record date for the Exchange Offer
for purposes of determining the persons to whom this Prospectus and the Letter
of Transmittal will be mailed initially.
Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Notes when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange
Offer. See "--Fees and Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Notwithstanding the foregoing,
the Company will not extend the Expiration Date beyond , 1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "--Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Senior Subordinated Exchange Notes will bear interest from their date of
issuance. Holders of Senior Subordinated Notes that are accepted for exchange
will receive, in cash, accrued interest
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thereon to, but not including, the date of issuance of the Exchange Notes.
Such interest will be paid with the first interest payment on the Senior
Subordinated Exchange Notes on June 15, 1998. Interest on the Notes accepted
for exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Senior Subordinated Exchange Notes is payable semi-annually on
each June 15 and December 15, commencing on June 15, 1998.
The Senior Subordinated Discount Exchange Notes are being issued at a
substantial discount from their principal amount so as to yield gross proceeds
of approximately $75.4 million. No interest will accrue or be payable on the
Senior Subordinated Discount Exchange Notes prior to December 15, 2002.
Thereafter, interest on the Senior Subordinated Discount Exchange Notes will
accrue and will be payable in cash semi-annually in arrears on June 15 and
December 15 of each year, commencing June 15, 2003.
PROCEDURES FOR TENDERING
Only a holder of Notes may tender such Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Notes and any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. To be tendered effectively, the Notes, Letter of
Transmittal and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the
Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the Company
the representations set forth above in the third paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF
THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
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Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Notes listed therein, such Notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Notes at the book-entry transfer facility, The Depository Trust Company (the
"Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange
Offer, and subject to the establishment thereof, any financial institution
that is a participant in the Book-Entry Transfer Facility's system may make
book-entry delivery of Notes by causing such Book-Entry Transfer Facility to
transfer such Notes into the Exchange Agent's account with respect to the
Notes in accordance with the Book-Entry Transfer Facility's procedures for
such transfer. Although delivery of the Notes may be effected through book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility, an appropriate Letter of Transmittal properly completed and duly
executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
The Depositary and DTC have confirmed that the Exchange Offer is eligible
for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange
Offer by causing DTC to transfer Notes to the Depositary in accordance with
DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to
the Depositary. The term "Agent's Message" means a message transmitted by DTC,
received by the Depositary and forming part of the confirmation of a book-
entry transfer, which states that DTC has received an express acknowledgment
from the participant in DTC tendering Notes which are the subject of such
book-entry confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that Sealy may enforce
such agreement against such participant. In the case of an Agent's Message
relating to guaranteed delivery, the term means a message transmitted by DTC
and received by the Depositary, which states that DTC has received an express
acknowledgment from the participant in DTC tendering Notes that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
Notwithstanding the foregoing, in order to validly tender in the Exchange
Offer with respect to Securities transferred pursuant to ATOP, a DTC
participant using ATOP must also properly complete and duly execute the
applicable Letter of Transmittal and deliver it to the Depositary. Pursuant to
authority granted by DTC, any DTC participant which has Notes credited to its
DTC account at any time (and thereby held of record by DTC's nominee) may
directly provide a tender as though it were the registered holder by so
completing, executing and delivering the applicable Letter of Transmittal to
the Depositary. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO
THE DEPOSITARY.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will
be determined by the Company in its sole discretion, which determination will
be final and binding. The Company reserves the absolute right to reject any
and all Notes not properly tendered or any Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right in its sole discretion to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Notes must be cured within such time as the Company shall
determine. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent upon five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Notes to be withdrawn (the
"Depositor"), (ii) identify the Notes to be withdrawn (including the
certificate number(s) and principal amount of such
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Notes, or, in the case of Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Notes register the transfer
of such Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Notes so withdrawn are validly retendered. Any
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Notes may be retendered by following one of
the procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the sole judgment
of the Company, might materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Notes and return
all tendered Notes to the tendering holders, (ii) extend the Exchange Offer
and retain all Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of holders to withdraw such Notes (see "--
Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Notes which
have not been withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
The Bank of New York
101 Barclay Street
21st Floor
New York, New York 10286
Delivery to an address other than as set forth above will not constitute a
valid delivery.
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FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes that are not exchanged for Exchange Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Notes may be resold
only (i) to the Company (upon redemption thereof or otherwise), (ii) so long
as the Notes are eligible for resale pursuant to Rule 144A, to a person inside
the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act
in a transaction meeting the requirements of Rule 144A, in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iii) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904
under the Securities Act, or (iv) pursuant to an effective registration
statement under the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives Exchange Notes in exchange for Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating Broker-
Dealer that receives Exchange Notes for its own account
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in exchange for Notes, where such Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or other person participates in the Exchange Offer for the
purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those no-
action letters. As indicated above, each Participating Broker-Dealer that
receives an Exchange Note for its own account in exchange for Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution".
115
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of special counsel described
below) is based upon current provisions of the Internal Revenue Code of 1986,
as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. The Company
recommends that each holder consult such holder's own tax advisor as to the
particular tax consequences of exchanging such holder's Notes for Exchange
Notes, including the applicability and effect of any state, local or foreign
tax laws.
Kirkland & Ellis, special counsel to the Company, has advised the Company
that in its opinion, the exchange of the Notes for Exchange Notes pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Notes in the
hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging Notes for Exchange Notes pursuant to the
Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Notes where such Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until [ ], 1998, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchaser or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
116
<PAGE>
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Exchange Notes
offered hereby will be passed upon for the Company by Kirkland & Ellis, New
York, New York.
EXPERTS
The financial statements of Sealy Corporation as of November 30, 1997 and
December 1, 1996 and for each of the years in the three-year period ended
November 30, 1997, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
117
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SEALY CORPORATION
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of independent auditors.......................................... F-2
Consolidated balance sheets as of November 30, 1997 and December 1,
1996................................................................... F-3
Consolidated statements of operations for the years ended November 30,
1997, December 1, 1996 and November 30, 1995........................... F-6
Consolidated statements of stockholders' equity for the years ended
November 30, 1997, December 1, 1996 and November 30, 1995.............. F-7
Consolidated statements of cash flows for the years ended November 30,
1997, December 1, 1996 and November 30, 1995........................... F-8
Notes to consolidated financial statements.............................. F-9
Condensed Consolidated Financial Statements:
Condensed consolidated statements of income for the quarters ended March
1, 1998 and March 2, 1997.............................................. F-37
Condensed consolidated balance sheets as of March 1, 1998 and November
30, 1997............................................................... F-38
Condensed consolidated statements of cash flows for the quarters ended
March 1, 1998 and March 2, 1997........................................ F-39
Notes to condensed consolidated financial statements.................... F-40
</TABLE>
F-1
<PAGE>
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 as of November 30, 1997 and December 1, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended November 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sealy
Corporation and subsidiaries as of November 30, 1997 and December 1, 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended November 30, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Cleveland, Ohio
January 7, 1998
F-2
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 1,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 6,057 $ 16,619
Accounts receivable, less allowance for doubtful
accounts (1997--$7,696; 1996--$6,814).............. 93,918 77,179
Inventories......................................... 46,007 33,992
Net assets held for sale............................ -- 35,492
Prepaid expenses.................................... 7,935 2,587
Prepaid taxes....................................... 14,594 1,522
Deferred income taxes............................... -- 6,337
-------- --------
168,511 173,728
Property, plant and equipment--at cost:
Land................................................ 9,760 12,109
Buildings and improvements.......................... 53,890 53,741
Machinery and equipment............................. 86,248 82,664
Construction in progress............................ 19,705 7,549
-------- --------
169,603 156,063
Less accumulated depreciation....................... 43,995 34,697
-------- --------
125,608 121,366
Other assets:
Goodwill--net of accumulated amortization (1997--
$57,261; 1996--$45,532)............................ 406,778 428,460
Patents and other intangibles--net of accumulated
amortization (1997--$6,540; 1996--$5,187).......... 4,491 5,844
Debt issuance costs, net, and other assets.......... 15,679 10,530
-------- --------
426,948 444,834
-------- --------
$721,067 $739,928
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SEALY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 1,
1997 1996
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-term obligations.............. $ -- $ 18,620
Accounts payable.................................... 49,676 35,797
Accrued expenses:
Customer incentives and advertising............... 30,704 20,704
Compensation...................................... 17,771 14,047
Other............................................. 20,200 23,691
Deferred income taxes............................. 1,936 --
-------- --------
120,287 112,859
-------- --------
Long-term obligations................................. 330,000 269,507
Other noncurrent liabilities.......................... 35,713 34,822
Deferred income taxes................................. 30,001 29,746
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 (1997--29,932; 1996--
29,409)............................................ 299 294
Class B common stock, $.01 par value; Authorized,
500 shares, Issued (1997--11; 1996--11)............ -- --
Additional paid-in capital.......................... 257,320 256,489
Retained (deficit) earnings......................... (50,614) 37,418
Foreign currency translation adjustment............. (1,939) (1,207)
-------- --------
205,066 292,994
-------- --------
Commitment and contingencies.......................... -- --
-------- --------
$721,067 $739,928
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
F-5
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
NOVEMBER 30, DECEMBER 1, NOVEMBER 30,
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Net sales................................ $804,834 $697,638 $653,942
-------- -------- --------
Cost and expenses:
Cost of goods sold..................... 455,905 397,259 362,416
Selling, general and administrative
(including provisions for bad debts of
$4,528, $918 and $812, respectively).. 262,023 216,674 216,670
Loss on net assets held for sale....... -- 11,762 --
Stock based compensation............... 1,635 4,779 (13,260)
Amortization of intangibles............ 13,264 13,594 14,056
Interest expense, net.................. 31,396 28,797 31,018
-------- -------- --------
Income before income taxes,
extraordinary item, and cumulative
effect of change in accounting
principle........................... 40,611 24,773 43,042
Income taxes............................. 22,509 25,279 23,572
-------- -------- --------
Income/(loss) before extraordinary item
and cumulative effect of change in
accounting principle.................. 18,102 (506) 19,470
Extraordinary item--loss from early
extinguishment of debt (net of income
tax benefit of $1,353) (Note 16)........ 2,030 -- --
Cumulative effect of change in accounting
principle (net of income tax benefit of
$2,885) (Note 15)....................... 4,329 -- --
-------- -------- --------
Net income/(loss).................... $ 11,743 $ (506) $ 19,470
======== ======== ========
Earnings/(loss) per common share:
Before extraordinary item and
cumulative effect of change in
accounting principle.................. $ 0.59 $ (0.02) $ 0.65
Extraordinary item..................... (0.07) -- --
Cumulative effect of change in
accounting principle.................. (0.14) -- --
-------- -------- --------
Net earnings/(loss) per common
share............................... $ 0.38 $ (0.02) $ 0.65
======== ======== ========
Weighted average number of common shares
and equivalents outstanding during
period.................................. 30,880 29,428 30,143
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B FOREIGN
-------------- ------------- ADDITIONAL RETAINED CURRENCY
COMMON STOCK COMMON STOCK PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
------ ------ ------ ------ ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
November 30, 1994....... 29,434 $294 -- $-- $269,229 $ 53,917 $(1,207) $322,233
Net income............. -- -- -- -- -- 19,470 -- 19,470
Performance share
plan.................. -- -- -- -- (13,260) -- -- (13,260)
Management stock
award................. 10 1 -- -- -- -- -- 1
Valuation adjustment on
common stock and
warrants subject to
repurchase............ -- -- -- -- 2,300 -- -- 2,300
Stock options
exercised............. 7 -- -- -- 67 -- -- 67
Warrants exercised..... -- -- 9 -- -- -- -- --
Foreign currency
translation........... -- -- -- -- -- -- 70 70
------ ---- --- ---- -------- -------- ------- --------
November 30, 1995....... 29,451 295 9 -- 258,336 73,387 (1,137) 330,881
Net loss............... -- -- -- -- -- (506) -- (506)
Performance share
plan.................. -- -- -- -- 4,510 -- -- 4,510
Management stock
award................. 68 -- -- -- 269 -- -- 269
Valuation adjustment on
common stock and
warrants subject to
repurchase............ -- -- -- -- (308) -- -- (308)
Warrants exercised..... -- -- 2 -- -- -- -- --
Repurchase of
management stock...... (110) (1) -- -- -- -- -- (1)
Dividend............... -- -- -- -- -- (35,463) -- (35,463)
Withdrawals from
performance share
plan.................. -- -- -- -- (3,498) -- -- (3,498)
Shares tendered under
performance share
plan.................. -- -- -- -- (2,820) -- -- (2,820)
Foreign currency
translation........... -- -- -- -- -- -- (70) (70)
------ ---- --- ---- -------- -------- ------- --------
December 1, 1996........ 29,409 294 11 -- 256,489 37,418 (1,207) 292,994
Net Income............. -- -- -- -- -- 11,743 -- 11,743
Management stock
award................. 285 3 -- -- 1,299 -- -- 1,302
Performance share
plan.................. 233 2 -- -- (134) -- -- (132)
Exercised stock
options............... 5 -- -- -- 29 -- -- 29
Valuation adjustment on
common stock and
warrants subject to
repurchase............ -- -- -- -- (363) -- -- (363)
Dividend............... -- -- -- -- -- (99,775) -- (99,775)
Foreign currency
translation........... -- -- -- -- -- -- (732) (732)
------ ---- --- ---- -------- -------- ------- --------
November 30, 1997....... 29,932 $299 11 $-- $257,320 $(50,614) $(1,939) $205,066
====== ==== === ==== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SEALY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
NOVEMBER 30, DECEMBER 1, NOVEMBER 30,
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)...................... $ 11,743 $ (506) $ 19,470
Adjustments to reconcile net
income/(loss) to net cash provided by
operating activities:
Depreciation........................... 10,851 13,037 10,144
Cumulative effect of change in
accounting principle.................. 7,214 -- --
Extraordinary item--early
extinguishment of debt................ 3,383 -- --
Loss on net assets held for sale....... -- 11,762 --
Loss on disposal of assets............. 1,061 178 813
Stock based compensation............... 1,165 4,779 (13,260)
Deferred income taxes.................. 8,528 5,781 11,974
Amortization of:
Intangibles.......................... 13,264 13,594 14,056
Debt issuance cost................... 1,841 2,683 3,136
Other, net............................. (4,449) 922 (1,502)
Changes in operating assets and
liabilities:
Accounts receivable.................... (16,739) (4,119) (3,975)
Inventories............................ (12,015) (5,543) 7,267
Prepaid expenses....................... (5,348) (821) 952
Prepaid taxes.......................... (3,119) (1,522) --
Accounts payable/accrued expenses/other
noncurrent liabilities................ 24,669 4,192 14,252
-------- -------- --------
Net cash provided by operating
activities........................ 42,049 44,417 63,327
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................. (29,140) (12,045) (11,804)
Proceeds from sale of subsidiary....... 35,000 -- --
Proceeds from sale of property, plant
and equipment......................... 5,561 1,089 7,468
-------- -------- --------
Net cash provided by (used in)
investing activities.............. 11,421 (10,956) (4,336)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term obligations..... (63,127) (23,727) (62,952)
Net borrowing from Revolving Credit
Facility.............................. 105,000 25,000 --
Dividend............................... (99,775) (35,463) --
Debt issuance costs.................... (6,130) -- --
-------- -------- --------
Net cash used in financing activi-
ties.............................. (64,032) (34,190) (62,952)
-------- -------- --------
Change in cash and cash equivalents...... (10,562) (729) (3,961)
Cash and cash equivalents:
Beginning of period.................... 16,619 17,348 21,309
-------- -------- --------
End of period.......................... $ 6,057 $ 16,619 $ 17,348
======== ======== ========
Supplemental disclosures:
Taxes paid, net........................ $ 12,432 $ 14,334 $ 9,405
Interest paid, net..................... $ 29,523 $ 26,487 $ 28,670
Other non-cash activity:
Goodwill reduction resulting from pre-
acquisition net operating loss
utilization........................... $ 9,953 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the consolidated
financial statements are summarized below.
(A) BUSINESS
Sealy Corporation (the "Company" or the "Parent"), is engaged in the home
furnishings business and manufactures, distributes and sells conventional
bedding products including mattresses and foundations. Substantially all of
the Company's trade accounts receivable are from retail businesses. The
Company recognizes revenue upon shipment of goods to customers.
The Company purchases substantially all of its Stearns & Foster foundation
parts and approximately 50% of its Sealy foundation parts from one vendor,
which has patents on various interlocking wire configurations. While the
Company attempts to reduce the risks of dependence on a single external
source, there can be no assurance that there would not be an interruption of
production if this vendor or any other vendor were to discontinue supplying
the Company for any reason.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(C) INTERNATIONAL OPERATIONS
The Company translates the assets and liabilities of its non-U.S.
subsidiaries at the exchange rates in effect at year-end and the results of
operations at the average rate throughout the year. The translation
adjustments are recorded directly as a separate component of shareholders'
equity, while transaction gains (losses) are included in net income.
(D) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity at the time of purchase of
three months or less to be cash equivalents. Cash equivalents are stated at
cost which approximates market value.
(E) 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.
(F) 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 cash
flows. 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.
F-9
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other intangibles include patents and trademarks which are amortized on the
straight-line method over periods ranging from 5 to 20 years.
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective-interest method over the lives of the
related debt.
(G) EARNINGS PER COMMON SHARE
Net earnings per common share is based upon weighted average number of
shares of the Company's common stock and common stock equivalents outstanding
for the periods presented. Common stock equivalents included in the
computation, using the treasury stock method, represent shares issuable upon
the assumed exercise of warrants, stock options and performance shares that
would have a dilutive effect in periods in which there were earnings.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
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 and
operating loss and tax credit carryforwards. 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. 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.
(I) ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising expenses
for the years ended November 30, 1997, December 1, 1996, and November 30, 1995
amounted to $97,314, $74,649 and $92,726, respectively.
(J) COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines and penalties, and
other sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can be reasonably
estimated. Recoveries from third parties which are probable of realization are
separately recorded, and are not offset against the related environmental
liability, in accordance with Financial Accounting Standards Board
Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(L) RECLASSIFICATION
Certain reclassifications of previously reported financial information were
made to conform to the 1997 presentation.
F-10
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(M) FISCAL YEAR
Effective December 1, 1995, the Company changed its fiscal year end from
November 30 to a 52- or 53-week year ending on the Sunday closest to November
30. Accordingly, the 1997 fiscal year ended on November 30, the 1996 fiscal
year ended on December 1 and the 1995 fiscal year ended on November 30. All
general references to years relate to fiscal years unless otherwise noted.
(2) INVENTORIES
Inventories are valued at cost not in excess of market, using the first-in,
first-out (FIFO) method. The major components of inventory as of November 30,
1997 and December 1, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $26,251 $18,300
Work in process............................................ 12,594 11,624
Finished goods............................................. 7,162 4,068
------- -------
$46,007 $33,992
======= =======
</TABLE>
(3) LONG-TERM OBLIGATIONS
Long-term debt as of November 30, 1997 and December 1, 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$275,000,000 Second Restated Secured Credit Agreement-
Revolving Credit Facility............................ $130,000 $ --
1994 Restated Credit Agreement:
Revolving Credit Facility........................... -- 25,000
Term Loan Facility.................................. -- 63,052
10 1/4% Senior Subordinated Notes..................... 200,000 200,000
Other................................................. -- 75
-------- --------
330,000 288,127
Less current portion.................................. -- 18,620
-------- --------
$330,000 $269,507
======== ========
</TABLE>
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 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"). The Revolving
Credit Facility provided sublimits for a $30 million discretionary letter of
credit facility ("Letters of Credit") and a discretionary swing loan facility
of up to $5 million.
F-11
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 on the
Company's total senior debt to adjusted EBITDA ratio. For the first six months
of the 1997 Credit Agreement, the margin on the Eurodollar rate borrowing was
1.25%. In September, 1997, the margin decreased to 1.0% and remained as such
through November 30, 1997. The initial commitment fee, which is also subject
to a pricing grid, was 0.375% during the first six months of the 1997 Credit
Agreement. In September 1997, the commitment fee decreased to 0.3% and
remained as such through November 30, 1997.
During the twelve months ended November 30, 1997, the maximum amount
outstanding under the Revolving Credit Facility, excluding Letters of Credit,
was $160 million. At November 30, 1997, the Company had approximately $135
million available under the Revolving Credit Facility, with Letters of Credit
issued totaling approximately $10 million. The Company's net weighted average
borrowing cost was 9.0% for fiscal 1997 and 1996.
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 the 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.
The 10 1/4% (formerly 9 1/2%) Senior Subordinated Notes (the "Parent Notes")
sold pursuant to a public offering on May 7, 1993 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 Parent Notes were
issued (the "Parent Note Indenture"). The Parent Notes are subordinated to all
existing and future Senior Debt of the Company as defined in the Parent Note
Indenture.
F-12
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to a Solicitation of Consents dated as of January 24, 1997, as
subsequently amended (the "Consent Solicitation"), the Company solicited
consents from the record holders (the "Registered Holders") of its Parent
Notes to certain amendments, consents and waivers under the Indenture (the
"Indenture"), dated as of May 7, 1993, between the Company and Mellon Bank,
F.S.B., as successor trustee (the "Trustee"), under which the Notes were
issued. Following receipt of the requisite consents of the Registered Holders,
on February 21, 1997, the Company and the Trustee executed a Supplemental
Indenture incorporating the amendments to the Indenture. The Supplemental
Indenture provided for (i) an increase in the interest rate on the Notes to 10
1/4%, (ii) provision to allow for the payment of a special dividend of up to
One Hundred Million Dollars ($100,000,000) (the "Dividend") to qualifying
equity security holders of the Company, (iii) an increase in the redemption
premiums paid to Registered Holders in the event the Notes are repurchased by
the Company, and (iv) the corresponding waiver of Section 4.05 of the
Indenture, such that the Dividend will not constitute a "Restricted Payment"
(as defined in the Indenture). The Company paid an aggregate of Four Million
Dollars ($4,000,000) on a pro rata basis to those Registered Holders that had
timely consented.
In December, 1997, the Company completed a Recapitalization which included
the tendering of Parent Notes and repayment of Parent indebtedness under the
1997 Credit Agreement. See Note 16, Subsequent Events.
(4) LEASE COMMITMENTS
The Company leases certain operating facilities, offices and equipment. The
following is a schedule of future minimum annual lease commitments and
sublease rentals at November 30, 1997.
<TABLE>
<CAPTION>
COMMITMENTS UNDER
------------------
SUBLEASE
OPERATING RENTAL
FISCAL YEAR LEASES INCOME
----------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
1998.................................................... $ 8,028 $102
1999.................................................... 6,357 --
2000.................................................... 5,663 --
2001.................................................... 4,349 --
2002.................................................... 3,830
Later years............................................. 10,264 --
------- ----
$38,491 $102
======= ====
</TABLE>
Rental expense charged to operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals................... $ 9,153 $ 9,096 $9,084
Contingent rentals (based upon
delivery equipment mileage)...... 1,361 1,067 809
------- ------- ------
$10,514 $10,163 $9,893
======= ======= ======
</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.
F-13
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) STOCK OPTION AND RESTRICTED STOCK PLANS
The Company adopted the 1989 Stock Option Plan ("1989 Plan") in 1989, the
1992 Stock Option Plan ("1992 Plan") in 1992 and the 1997 Stock Option Plan
("1997 Plan") in 1996 and reserved 100,000 shares, 600,000 shares and
2,400,000 shares, respectively, of Class A Common Stock of the Company (the
"Shares") for future issuance. Options under the 1989 Plan, the 1992 Plan and
the 1997 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 1995, the Company issued options under the 1989 Plan
totaling 3,300 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 options outstanding (net of forfeitures) and the related exercise price
for all 1989 Plan options as of November 30, 1997 adjusted for the dividends
paid on May 17, 1997 and February 28, 1997 were 4,862 Shares and $34.02. No
1989 Plan options have been exercised since the date of grant.
Outstanding options (net of subsequent forfeitures) and the related exercise
prices adjusted for the dividends paid in May 17, 1996 and February 28, 1997
under the 1992 Plan are as follows: 63,158 granted in June, 1992 with an
exercise price of $5.12 per Share; 67,584 granted in June, 1993 with an
exercise price of $6.16 per Share; 77,175 granted in June, 1994 with an
exercise price of $9.17 per Share; 105,105 granted in June, 1995 with an
exercise price of $10.85 per Share and 130,830 granted in June, 1996 with an
exercise price of $7.23 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 totaling 11,958 shares were exercised during the three years ended
November 30, 1997. At November 30, 1997, options for 351,833 Shares issued
under the 1992 Plan are exercisable.
During Fiscal 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "1993 Plan"), which was subsequently amended on April 6, 1994
and June 27, 1995. 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%, 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. The 1993 Plan was amended on June 27, 1995
to provide for the grant of an additional option to purchase 5,000 Shares to
each eligible director and thereafter providing for the automatic annual grant
of an option to each eligible director to purchase an additional 5,000 Shares
at fair market value on the date of grant. Pursuant to the 1993 Plan, the
Company granted options to acquire up to 5,000 Shares to each eligible
director in fiscal 1995, 1996 and 1997 with a fixed exercise price of $15.95,
$10.63 and $9.60 per Share, respectively. The options outstanding (net of
forfeitures) and their related strike prices at November 30, 1997 adjusted for
the dividends paid on May 17, 1996 and February 28, 1997 are 60,780 Shares at
$6.21, 30,384 Shares at $10.52, 26,872 Shares at $7.01, and 20,000 Shares at
$9.60 for the 1993, 1995, 1996 and 1997 grants, respectively. As of November
30, 1997 no options under the 1993 Plan have been exercised.
F-14
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1996, pursuant to an employment agreement with the Company's CEO, the
Company granted him an aggregate of 67,635 shares of restricted stock with a
fair value of $637,800 at date of grant. The restricted stock was to vest at a
rate of approximately 25% at each anniversary date of the grant. The Company
also awarded a grant of ten-year stock options to acquire up to an aggregate
of 587,342 Shares at an exercise price of $7.23 per Share (representing fair
market value at the time of grant) adjusted for the dividends paid on May 17,
1997 and February 28, 1997. The stock options were to vest at a rate of 25% at
each anniversary date of the grant. On May 31, 1997 the Human Resources
Committee, under the 1997 Plan, granted the CEO a ten-year stock option to
acquire up to 75,000 Shares at an exercise price of $9.60 per Share
(representing fair market value of the time of grant).
In May 1997, the Company granted ten-year stock options to acquire 921,400
shares at an exercise price of $9.60 per share (representing fair market value
at the time of grant). The options vest 50% on the third anniversary date of
the grant and 50% on the fourth anniversary date of the grant. Outstanding
options (net of forfeitures) at November 30, 1997 were 910,200.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company continues to account for its stock option and stock incentive plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and makes no charges against capital with respect
to options granted. SFAS No. 123 does however require the disclosure of pro
forma information regarding Net income and Earnings per share determined as if
the Company had accounted for its stock options under the fair value method.
For purposes of this pro forma disclosure the estimated fair value of the
options is amortized to expense over the options' vesting period.
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C> <C>
Net income (loss)............................. As reported $11,743 $ (506)
Pro forma $10,814 $ (892)
Net Earnings (loss) per share................. As reported $ 0.38 $(0.02)
Pro forma $ 0.35 $(0.03)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to Fiscal 1996 and all related Plans were terminated
effective December 18, 1997, the above pro forma effect may not be
representative of that to be expected in future years.
F-15
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value for all options granted in Fiscal 1997 and 1996 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: the expected life for all options
is seven years; the expected dividend yield for all stock is zero percent and
the expected volatility of all stock is zero percent. Adjustments were made to
the then outstanding options and related stock prices as a result of the
dividends paid on May 17, 1996 and February 28, 1997. Such adjustments were
treated as modifications of outstanding awards in accordance with SFAS No.
123. The risk free interest rates utilized for the grants made during Fiscal
1997 and 1996 and for the May 1996 and February 1997 modifications of all then
outstanding grants are as follows:
<TABLE>
<CAPTION>
RISK FREE INTEREST RATE
-----------------------------------
ORIGINAL MODIFICATION MODIFICATION
OPTION GRANT DATE GRANT MAY 1996 FEBRUARY 1997
----------------- -------- ------------ -------------
<S> <C> <C> <C>
1989 Plan:
December 1989........................ -- -- 5.15%
1992 Plan:
June 1992............................ -- -- 6.06%
June 1993............................ -- -- 6.22%
June 1994............................ -- -- 6.31%
June 1995............................ -- -- 6.38%
June 1996............................ 6.77% -- 6.46%
1993 Plan:
March 1993........................... -- 6.26% 6.46%
June 1995............................ -- 6.51% 6.46%
June 1996............................ 6.77% -- 6.46%
May 1997............................. 6.64% -- --
CEO Award:
March 1996........................... 5.82% -- 6.46%
1997 Plan:
June 1997............................ 6.64% -- --
</TABLE>
A summary of the status and changes of shares subject to options and the
related average price per share is as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT AVERAGE OPTION
TO OPTIONS PRICE PER SHARE
-------------- ---------------
<S> <C> <C>
Outstanding November 30, 1995............... 346,450 $12.41
--------- ------
Granted................................... 531,500 $10.58
Adjustment................................ 7,622 --
Canceled.................................. (37,500) 11.66
--------- ------
Outstanding December 1, 1996................ 848,072 11.19
--------- ------
Granted................................... 941,400 9.40
Adjustment................................ 341,478 --
Exercised................................. (4,958) 5.82
Canceled.................................. (41,700) 10.81
--------- ------
Outstanding November 30, 1997............... 2,084,292 $ 8.52
========= ======
</TABLE>
F-16
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options exercisable and shares available for future grant at Fiscal Year
End:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Options exercisable.............................. 641,895 312,447 225,450
Weighted-average option price per share of
options exercisable............................. $7.91 $11.29 $11.39
Weighted-average fair value of options granted
during the year................................. $9.60 $10.63 $15.95
Shares available to grant........................ 1,741,086 339,550 413,550
</TABLE>
The ranges of exercise prices and the remaining contractual life of options
as of November 30, 1997 were:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES $5.12 TO $10.85 $34.02
------------------------ --------------- --------
<S> <C> <C>
Options outstanding:
Outstanding as of November 30, 1997............ 2,079,430 4,862
Weighted-average remaining contractual life.... 8.4 Yrs. 2.0 Yrs.
Weighted-average exercise price................ $8.44 $34.02
Options exercisable:
Outstanding as of November 30, 1997............ 637,033 4,862
Weighted-average remaining contractual life.... 7.0 Yrs. 2.0 Yrs.
Weighted-average exercise price................ $7.66 $34.02
</TABLE>
In 1996, the Company adopted the 1996 Transitional Restricted Stock Plan
(the "1996 Transitional Plan") effective December 1, 1996 which terminates on
January 3, 2000, and no grants shall thereafter be awarded under the Plan. All
grants awarded under the Plan prior to such date shall remain in effect until
they have been exercised or terminated in accordance with the terms and
provisions of the Plan. On January 6, 1997, 281,400 Shares, which vest on
January 3, 2000, were granted to 32 senior executives of the Company
(including 15,800 shares each to Mr. Fazio, Mr. Fellmy, Mr. McIlquham and Mr.
Rogers) under the Plan with a fair value of $3,632,874 at date of grant. The
Plan provides for partial vesting at a rate of 50% if a grantee incurs a
"termination" (as defined in the Plan) from January 3, 1999 to January 2,
2000. During Fiscal 1997, 35,800 Shares were forfeited and 39,700 additional
Shares were issued to three senior executives of the Company (none of whom
were Named Executive Officers) resulting in Shares outstanding at November 30,
1997 of 285,300.
As a result of the Recapitalization (see Note 16) effective on December 18,
1997, the Human Resources Committee of the Company's Board of Directors
removed all restrictions on the then outstanding restricted stock issued under
the 1996 Transitional Plan and those shares were paid out as a result of the
Recapitalization at the Recapitalization share price of $14.3027. As of
December 18, 1997, the Human Resources Committee accelerated vesting of the
Company issued and then outstanding stock options under the 1989 Plan, 1992
Plan, 1993 Plan and 1997 Plan (collectively the "Terminated Stock Option
Plans"); terminated the Terminated Stock Option Plans; and paid each holder of
options under the Terminated Stock Option Plans reasonable compensation for
such terminations which compensation was equal to the spread between the
Merger share price of $14.3027 and the respective per share exercise price for
the terminated stock options. Prior to December 18, 1997 certain members of
senior management were offered and elected to cancel their options under the
Terminated Stock Option Plans and their restricted stock under the 1996
Transitional Plan. Those senior executives received nonqualified stock options
which were subsequently cancelled and exchanged on December 18, 1997 for ten-
year stock options to acquire 145,516 shares of the Company's post-
Recapitalization Class L Common Stock at an exercise price of $10.125 per
share
F-17
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and ten-year stock options to acquire 1,309,644 shares of the Company's post-
Recapitalization Class A Common Stock at an exercise price of $0.125 per
share. See Note 16 for description of new Class A and Class L Common shares.
These options were fully vested at the time of grant and the exercise price
was set at 25% of fair market value at the time of grant.
(6) INCOME TAXES
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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................... $10,679 $15,494 $ 6,384
State and local................. 2,616 1,196 1,404
Canada, Commonwealth of Puerto
Rico and Mexico................ 4,016 2,808 3,810
------- ------- -------
17,311 19,498 11,598
Deferred.......................... 5,198 5,781 11,974
------- ------- -------
Income tax expense................ $22,509 $25,279 $23,572
======= ======= =======
</TABLE>
Income before income taxes from Canadian operations amounted to $8,643,
$7,042 and $7,247, for the years ended November 30, 1997, December 1, 1996 and
November 30, 1995.
The differences between the effective tax rate and the statutory U.S.
Federal income tax rate are explained as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 30, 1997 DEC. 1, 1996 NOV. 30, 1995
------------- ------------ -------------
<S> <C> <C> <C>
Income tax expense (benefit)
computed at statutory U.S.
Federal income tax rate.......... 35.0% 35.0% 35.0%
State and local income taxes, net
of Federal tax benefit........... 6.2 6.1 4.5
Permanent differences resulting
from purchase accounting......... 9.4 16.1 9.6
Foreign tax rate differential and
effects of foreign earnings
repatriation..................... 3.5 6.5 5.4
Sale of subsidiary................ 1.8 37.3 --
Other items, net.................. (0.5) 1.0 0.3
---- ----- ----
55.4% 102.0% 54.8%
==== ===== ====
</TABLE>
At November 30, 1997 and December 1, 1996, the total deferred tax assets and
deferred tax liabilities were $15,571 and $19,265, $47,508 and $42,674,
respectively. The significant components of the deferred tax assets were
accrued salaries and benefits of $7,669 and $7,447, respectively and net
operating loss carryforwards of $3,577 in Fiscal 1996, and the deferred tax
liabilities relating to property, plant and equipment were $21,445 and $23,601
and intangible assets of $12,262 and $13,204, respectively.
F-18
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
During 1997, goodwill was reduced by $9,953 for the utilization of
previously unrecognized pre-acquisition net operating loss carryforwards.
(7) RETIREMENT PLANS
Substantially all employees are covered by profit sharing plans, where
specific amounts are set aside in trust for retirement benefits. The total
profit sharing expense was $5.9 million, $5.0 million, and $5.4 million for
the years ended November 30, 1997, December 1, 1996, and November 30, 1995,
respectively.
(8) WARRANTS
SERIES A AND SERIES B WARRANTS
Series A and Series B Warrants (collectively, "Restructure Warrants") were
issued under a Warrant Agreement (the "Agreement") dated as of November 6,
1991 between the Company and its subsidiary, Sealy, Inc., as warrant agent.
The Restructure Warrants, when exercised, entitled the Holder thereof to
receive one Share in exchange for the exercise price per Share for Series A
warrants and Series B warrants, subject to adjustment under certain
circumstances. As of November 30, 1997, the Series A and Series B Warrants
were exercisable into 4,337,959 and 1,686,446 Shares, respectively.
Under the Agreement, adjustments are to be made to the exercise ratio and
exercise price of the Restructure Warrants in the event the Company issues
shares of its capital stock at less than Current Market Value (including under
employee benefit plans). The Company has issued shares under its Performance
Share Plan, 1996 Transitional Plan and certain employee issuances, triggering
the anti-dilution adjustments, and these adjustments have been made pursuant
to the Warrant Agreement. The Series A and Series B Warrants conversion ratio
and exercise price at November 30, 1997 were 1.0207 and $15.6751 per share and
1.0207 and $22.0431 per share, respectively and at December 1, 1996 were
1.0115 and $15.8182 per share and 1.0115 and $22.2444 per share, respectively,
The Restructure Warrants were 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 by the Company pursuant to its 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. On October 27, 1997, the
Company's Board of Directors, in connection with the Recapitalization (see
Note 16), authorized such a redemption effective February 3, 1998 (the
"Redemption Date") of all outstanding Restructure Warrants. In accordance with
criteria set forth in the Warrant Agreement and as defined in the Warrant
Agreement, two independent financial firms performed a valuation effective
December 2, 1997 and established a redemption price. The redemption price was
$0.9411 for each Series A Warrant and $0.3777 for each Series B Warrant.
Holders were given the option to exercise their Restructure Warrants prior to
the redemption date, surrender their certificates representing their
Restructure Warrants and receive the redemption price within five business
days of the surrender, or receive the redemption price within five business
days of the Redemption Date.
F-19
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MERGER WARRANTS
Merger Warrants were issued under a Warrant Agreement ("Warrant Agreement")
dated as of August 1, 1989 between the Company and KeyCorp Shareholder
Services, Inc., as successor warrant agent. Each Merger Warrant, when
exercised, will entitle the holder thereof to receive one fiftieth of one
share of Class B Common Stock ("Warrant Shares") of the Company (50 to 1
ratio) in exchange for the exercise price of $.01 per share, subject to
adjustment under certain circumstances. The Company has issued shares under
its Performance Share Plan, 1996 Transitional Restricted Stock Plan and
certain employee issuances, triggering the anti-dilution adjustment provision,
and these adjustments have been made pursuant to the Warrant Agreement
resulting in a revised conversion ratio of 48.64 to 1 on December 1, 1996 and
47.98 to 1 on November 30, 1997.
The Merger Warrants became exercisable subsequent to August 9, 1995. As a
result of exercised Merger Warrants, 607 and 2,085 shares of Class B Common
Stock were issued in Fiscal 1997 and 1996, respectively.
The Company is required to offer to repurchase the Merger Warrants and
Warrant Shares upon the removal of any limitations to repurchase or upon the
occurrence of certain other events. Merger Warrants and Warrant Shares are,
therefore, not considered to be a part of the Company's stockholders' equity
but, are included in other noncurrent liabilities in the accompanying
consolidated balance sheets. Authorized Merger Warrants at November 30, 1997
and December 1, 1996 are exercisable into an aggregate of 203,751 and 207,747
shares of Class B Common Stock, respectively.
As a result of the Recapitalization (see Note 16) effective on December 18,
1997, Merger Warrant holders upon exercise of their Merger Warrants at a
conversion rate of 47.98 to 1 are entitled only to receive a cash payment of
$14.2927 which is the spread between the Recapitalization share price of
$14.3027 and the Merger Warrant exercise price of $0.01. As a result of the
Recapitalization, Warrants not exercised prior to such Recapitalization can no
longer be converted to Class B shares and upon subsequent exercise will
receive the same amount in cash without interest. As of December 17, 1997, the
Company forwarded to a third party paying agent the amount necessary to fund
the future cash requirements with respect to remaining then outstanding Merger
Warrants and Class B Common Stock.
(9) COMMON STOCK
Prior to the Merger, holders of Class A Common Stock were entitled to one
vote per share on all matters submitted to a vote of stockholders while the
holders of Class B Common Stock were 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 were identical. Shares of Class B Common Stock,
under certain circumstances, were convertible into shares of Class A Common
Stock. In connection with the Recapitalization (see Note 16), new Class A, B,
L and M Common Shares were issued.
(10) PERFORMANCE SHARE PLAN
Effective April 1, 1992, the Company adopted a Performance Share Plan
("Plan") for certain employees of the Company. Under the Plan, the Board of
Directors may approve the issuance of up to 3.0 million performance share
units each representing the right to receive up to one Share if the Company
meets specified cumulative operating cash flow targets over the five-year
period ending December 1, 1996. During fiscal 1996, two participants withdrew
from the Plan resulting in an adjustment to additional paid-in capital. As of
December 1, 1996, the conclusion of the Plan, 451,740 Shares were awarded
under the Plan of which 207,549 Shares were tendered to the Company by Plan
participants to cover their estimated tax liability, resulting in the issuance
of 244,191 Shares in January 1997.
F-20
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 1, 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. Performance
Share Plan expense for the year ended December 1, 1996 amounted to $4.5
million. The Company recorded a $13.3 million credit to non-cash compensation
expense under the Plan for the year ended November 30, 1995.
(11) SUMMARY OF INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME/ EARNINGS PER
NET SALES GROSS PROFIT (LOSS) COMMON SHARE
------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997:
First quarter......... $ 168,904 $ 72,890 $ 1,158 $ 0.04
Second quarter........ 180,625 80,951 3,282 0.11
Third quarter......... 229,919 101,864 7,917 0.26
Fourth quarter........ 225,386 93,224 (614) (0.02)
1996:
First quarter......... $ 159,475 $ 69,583 $ 2,854 $ 0.09
Second quarter........ 165,177 68,935 2,909 0.10
Third quarter......... 192,546 84,434 7,083 0.24
Fourth quarter........ 180,440 77,427 (13,352) (0.45)
</TABLE>
During the first and fourth quarters of Fiscal 1997, the Company recorded an
after-tax loss of $2.0 million ($0.07 per share), from early extinguishment of
debt in connection with the Refinancing, and
$4.3 million ($0.14 per share), from write-offs in connection with EITF 97-13
(see Note 15), respectively. During the fourth quarter of Fiscal 1996, the
Company recorded an after-tax loss on pending sale of subsidiary of $17.6
million and a noncash charge of $3.2 million in connection with the Company's
Performance Share Plan.
(12) 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 previously 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
F-21
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the site. In 1997, the Company with DEP approval completed essentially all
soil remediation and conducted 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. In March,
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
which was recorded as an increase to other non-current liabilities.
In January 1997, the Company filed a claim in the U.S. District Court of New
Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case
seeking a judgement of non-liability was filed by some (but not all) of these
insurance companies in the U.S. District Court for the Northern District of
Ohio. The Company is awaiting a ruling by the District Courts involved.
The Company has also 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.
On May 22, 1997, the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust
final judgments ("the Judgments") entered on December 30, 1964 and December
26, 1967. These Judgements, among other things, prohibited the Company from
suggesting resale prices to its dealers. During the pendency of the Company's
motion to terminate the Judgments, and based upon allegations received by the
Department of Justice ("the Department") concerning a possible resale price
maintenance agreement with a Stearns & Foster dealer, the Department, on
September 8, 1997, issued to the Company a Civil Investigative Demand seeking
documents relating to, among other things, communications between the Company
and dealers concerning the retail price of mattresses. In response to the
Civil Investigative Demand, the Company produced certain documents and the
deposition of a Company executive was taken. Immediately following such
document production and deposition, the Department consented to the
termination of the Judgments and an order terminating the Judgments was
entered by the Court on September 19, 1997. After the Court terminated the
Judgments, the Department notified the Company on September 29, 1997 that it
was limiting the Civil Investigative Demand to certain narrow specifications.
In October 1997, the Company produced additional documents in response to the
Civil Investigative Demand. On November 24, 1997 the Company received a
request from the Department for clarification and additional information. The
Company has responded to that request.
(13) FINANCIAL INSTRUMENTS
Due to the short maturity of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, their carrying values approximate fair
value. The carrying amount of long-term debt under the Term Loan Facility and
Revolving Credit Facility approximate fair value because the
F-22
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest rate adjusts to market interest rates. The fair value of long-term
debt under the 10 1/4% Senior Subordinated Notes, based on a quoted market
price, was $215 million and $201 million at November 30, 1997 and December 1,
1996, respectively.
(14) DISPOSITION
On January 15, 1997, the Company completed the sale of Woodstuff
Manufacturing, Inc., a wholly owned subsidiary that manufactured and marketed
solid wood bedroom furniture under the "Samuel Lawrence" brand name. The
divestiture produced cash proceeds of $35.0 million and resulted in a book
loss of $17.6 million. The loss on sale of this subsidiary includes income tax
expense of $5.8 million arising from the tax gain on the transaction, as well
as transaction costs related to the sale. A summary of the net assets held for
sale at December 1, 1996 is as follows (amounts in thousands):
<TABLE>
<S> <C>
Accounts receivable.............................................. $ 9,228
Inventory........................................................ 6,907
Other current assets............................................. 480
Property, plant and equipment, net............................... 10,329
Other assets..................................................... 26,246
Accounts payable and accrued expenses............................ (4,939)
Other liabilities................................................ (1,998)
Excess of net assets over proceeds from sale..................... (10,761)
--------
Net assets held for sale......................................... $ 35,492
========
</TABLE>
(15) CUSTOMER RECEIVABLE
On July 7, 1997, Montgomery Ward, which is a major customer of the Company,
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. During
fiscal 1997, the Company recorded increases in bad debt reserves of $2,766
million and related factoring expenses of $1,261 million, in response to this
situation. The Company has since reinstated shipments to Montgomery Ward and
will continue to monitor and attempt to limit its exposure in this situation.
Management believes that this situation will not have a material adverse
effect on the Company's financial position or future operations.
(16) YEAR 2000 ISSUE (UNAUDITED)
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to
be Year 2000 compliant. The Company has conducted a comprehensive impact
analysis to determine what computing platforms and date-aware functions with
respect to its existing computer operating systems will be disrupted by the
Year 2000 Issue. In January, 1998, the Company completed a prioritization of
the impacted areas identified to date and commenced the detailed program code
changes through a contracted third party vendor which has experience in Year
2000 conversions for the Company's existing system including the same release
of such system. The Company is in the preliminary stages of assessment of its
vendors and customers status with respect to the Year 2000 Issue. The required
code changes, testing and implementation necessary to address the Year 2000
Issue is projected to be completed by May, 1999, and is expected to cost
approximately $4.0 million.
F-23
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) NEW ACCOUNTING PRONOUNCEMENTS
On November 20, 1997 the Emerging Issues Task Force (EITF) reached a final
consensus that business process reengineering costs incurred in connection
with an overall information technology transformation project should be
expensed as incurred (EITF 97-13). The transition provisions require companies
that had previously capitalized such business process reengineering costs to
identify these costs and quantify the unamortized amounts remaining on the
balance sheet as of the beginning of the quarter which includes November 20,
1997. These unamortized amounts are required to be written off as a cumulative
effect of a change in accounting principle in such quarter. The Company has
adopted EITF 97-13 resulting in a loss of $4.3 million, net of income tax
benefit of $2.9 million, representing the cumulative write-off of previously
capitalized costs as of August 31, 1997 primarily relating to the Company's
new Business Systems project. All business process reengineering costs
subsequent to August 31, 1997 have been expensed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earning per Share. SFAS
No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion No. 15"),
and requires the calculation and dual presentation of basic and diluted
earnings per share ("EPS"), replacing the measures of primary and fully-
diluted EPS as reported under Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
earlier application is not permitted. Accordingly, EPS presented on the
accompanying statements of income are calculated under the guidance of Opinion
15. Under SFAS No. 128, the basic and diluted EPS on net income for fiscal
1997 would have been $0.39 and $0.38, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information",
were issued. The Company plans to adopt these standards when required in
fiscal 1999.
(18) SUBSEQUENT EVENTS
On October 30, 1997, Parent entered into an agreement and plan of merger
(the "Merger Agreement") with Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund, L.P., a
Delaware limited partnership ("Zell"). Zell owned approximately 87% of the
issued and outstanding common stock of Parent (the "Existing Common Stock").
Pursuant to the Merger Agreement, upon the satisfaction of certain conditions,
Sandman was merged with and into Parent with Parent being the surviving
corporation effective on December 18, 1997 (the "Closing Date") and the
Company was recapitalized (the "Recapitalization") whereby certain equity
investors, including members of management, acquired an approximate 90.0%
economic equity stake (85.3% voting equity stake) in the Company. A portion of
the issued and outstanding shares of common stock of the Company was converted
into the right to receive aggregate cash equal to $419.3 million less (i)
certain seller fees and expenses and (ii) certain costs in connection with the
extinguishment of certain outstanding options and warrants of the Company and
the remaining portion was converted into voting preferred stock and then
reconverted into $25.0 million in aggregate principal amount of junior
subordinated notes of the Company and a retained voting common stock interest
in the Company of approximately 14.7%. Concurrent with the Recapitalization,
the Company refinanced existing indebtedness (the "Refinancing") by Sealy
Mattress Company (the "Issuer"), a wholly owned subsidiary of the Parent,
entering into and borrowing $460 million under the Senior Credit Agreements
and by issuing $125 million of Senior Subordinated Notes and $128 million of
Senior Subordinated Discount Notes.
F-24
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
After the Recapitalization, the issued and outstanding capital stock of the
Company will consist of Class A common stock, par value $0.01 per share
("Class A Common"), Class B common stock, par value $0.01 per share ("Class B
Common"), Class L common stock, par value $0.01 per share ("Class L Common"),
and Class M common stock, par value $0.01 per share ("Class M Common" and
collectively with the Class A Common, Class B Common and Class L Common,
"Common Stock"). The Class L Common and the Class M Common are senior in right
of payment to the Class A Common and Class B Common. Holders of Class B Common
and Class M Common have no voting rights except as required by law. The
holders of Class A Common and Class L Common are entitled to one vote per
share on all matters to be voted upon by the stockholders of the Company,
including the election of directors. The Board of Directors of the Company is
authorized to issue preferred stock, par value $0.01 per share, with such
designations and other terms as may be stated in the resolutions providing for
the issue of any such preferred stock adopted from time to time by the Board
of Directors.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc.
("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors
3, LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs; (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by the Bain Funds; (iv) granted tag-along rights on
certain transfers of shares of capital stock of Parent; (v) required the
Stockholders to consent to a sale of Parent to an independent third party if
such sale is approved by holders constituting a majority of the then
outstanding shares of voting common stock of Parent; and (vi) except in
certain instances, prohibits Zell from transferring any shares of capital
stock of Parent until the tenth anniversary of the date of the consummation of
the Recapitalization. Certain of the foregoing provisions of the Stockholders
Agreement terminate upon the consummation of an initial Public Offering or an
Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding capital stock of Sealy, Inc., an Ohio corporation, The Stearns &
Foster Bedding Company, a Delaware corporation, Advanced Sleep Products, a
California corporation, Sealy Components-Pads, Inc., a Delaware corporation,
and Sealy Mattress Company of San Diego, a California corporation, to the
capital of the Issuer. Immediately after the Capital Contribution, the Issuer
became the only direct subsidiary of Parent and owns 100% of the operations of
Parent. At the Closing, Sandman was merged with and into Parent with Parent
the surviving corporation.
On November 18, 1997 Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the Indenture under which the Parent Notes were issued
(the "Parent Note Indenture"). The purchase price to be paid in respect to
validly tendered Parent Notes and related consents were determined by a
formula set forth in the offer to purchase with respect to the Tender Offer.
The Offerings were conditioned upon the consummation of the Tender Offer for,
and the obtaining of consents with respect to, at least a majority in
aggregate principal amount of the Parent Notes outstanding. Parent's
obligation to accept for purchase and to pay for the Parent Notes validly
F-25
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
tendered pursuant to the Tender Offer was conditioned upon, among other
things, consummation of the other elements of the Recapitalization.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility and a discretionary swing loan facility of
up to $20.0 million. Upon consummation of the Transactions, the Issuer entered
into the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a
credit agreement providing for Tranche A Term Loans and revolving borrowings
(the "Senior Revolving Credit Agreement" and, together with the Senior AXELs
Credit Agreement, the "Senior Credit Agreements"). The Senior Credit
Agreements provided for loans of up to $550.0 million, consisting of a $450.0
million term loan facility (the "Term Loan Facility") and a $100.0 million
revolving credit facility (the "Revolving Credit Facility"). The Issuer
distributed the proceeds of the Term Loan Facility and its initial borrowings
under the Revolving Credit Facility to Parent to provide a portion of the
funds necessary to consummate the Transactions. Indebtedness of the Issuer
under the Senior Credit Agreements is secured and guaranteed by Parent and
certain of the Issuer's current and all of the Issuer's future U.S.
subsidiaries and will bear interest at a floating rate. See Note 17 for
further details regarding guarantees including consolidating condensed
financial statements for guarantors and non-guarantors. The Senior Credit
Agreements will require the Company to meet certain financial tests, including
minimum levels of adjusted EBITDA as determined in the agreements, minimum
interest coverage and maximum leverage ratio. The Senior Credit Agreements
also contains covenants which, among other things, limit capital expenditures,
indebtedness and/or the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, mergers and
consolidations, prepayments of other indebtedness (including the Notes), liens
and encumbrances and other matters customarily restricted in such agreements.
Indebtedness under the Senior Credit Agreements bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility and the Term Loans
initially (subject to reduction based on attainment of certain leverage ratio
levels) bears interest at a rate based upon (i) the Base Rate (defined as the
highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in
respect of the Tranche A Term Loans and the loans under the Revolving Credit
Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B,
1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior
Credit Agreements) for one, two, three or six months (or, subject to general
availability, two weeks or twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche A Term Loans are subject to quarterly
amortization payments commencing in March 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in March 1998 with the AXELs Series B amortizing in nominal amounts
until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing
in nominal amounts until the maturity of the AXELs Series B and the AXELs
Series D amortizing in nominal amounts until the maturity of the AXELs Series
C. The Revolving Credit Facility matures in December 2002. In addition, the
Senior Credit Agreements provide for mandatory repayments, subject to certain
exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the
ordinary course of business of the Issuer and its
F-26
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subsidiaries, the net proceeds of insurance, the net proceeds of certain debt
and equity issuances, and excess cash flow (as defined in the Senior Credit
Agreements).
The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "Senior Subordinated
Discount Note Indenture" and, together with the Senior Subordinated Note
Indenture, the "Indentures") among the Issuer, the Guarantors and The Bank of
New York, as trustee (the "Senior Subordinated Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees").
The Senior Subordinated Notes are limited in aggregate principal amount to
$300.0 million, of which $125.0 million was issued in the Offering, and
matures on December 15, 2007. Interest on the Senior Subordinated Notes accrue
at the rate of 9 7/8% per annum and is payable semi-annually in arrears on
June 15 and December 15 of each year, commencing on June 15, 1998, to Holders
of record on the immediately preceding June 1 and December 1. Additional
Senior Subordinated Notes may be issued from time to time after the date of
the Senior Subordinated Note Indenture, subject to the provisions of the
Senior Subordinated Note Indenture.
Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2002........................ 104.937%
2003........................ 103.292%
2004........................ 101.646%
2005 and thereafter......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in
the Offering, and mature on December 15, 2007. The Senior Subordinated
Discount Notes were offered at a substantial discount from their principal
amount at maturity. Until December 15, 2002 (the "Full Accretion Date"), no
interest (other than liquidated damages, if applicable) will accrue or be paid
in cash on the Senior Subordinated Discount Notes, but the Accreted Value will
accrete (representing the amortization of original issue discount)
F-27
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
between the issuance date and the Full Accretion Date, on a semi-annual bond
equivalent basis. Beginning on the Full Accretion Date, interest on the Senior
Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and
will be payable in cash semi-annually in arrears on June 15 and December 15 of
each year, commencing on June 15, 2003, to Holders of record on the
immediately preceding June 1 and December 1. Additional Senior Subordinated
Discount Notes may be issued from time to time after the date of the Senior
Subordinated Discount Note Indenture, subject to the provisions of the Senior
Subordinated Discount Note Indenture. Interest on the Senior Subordinated
Discount Notes will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from the Full Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR PRINCIPAL AMOUNT
---- ----------------
<S> <C>
2002........................ 105.437%
2003........................ 103.625%
2004........................ 101.812%
2005 and thereafter......... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under
the Senior Subordinated Discount Note Indenture at a redemption price of
110.875% of the Accreted Value, plus accrued and unpaid liquidated damages
thereon, if any, to the redemption date, with the net cash proceeds of any
Equity Offerings; (as defined in the Indentures) provided that at least $50.0
million in aggregate Accreted Value of Senior Subordinated Discount Notes
remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Discount Notes held by the Company and its
Subsidiaries); and provided, further, that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
The unaudited pro forma balance sheet data of the Company as of November 30,
1997 shown below gives effect to the Recapitalization and the Refinancing as
if they each had occurred on November 30, 1997 (in 000's):
<TABLE>
<S> <C>
ASSETS
Current assets.................................................. $ 177,717
Other assets.................................................... 574,231
---------
Total assets.................................................. $ 751,948
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities............................................. $ 118,250
Long-term debt obligations, including current portion........... 687,648
Other liabilities............................................... 67,982
---------
Total liabilities............................................. 873,880
Stockholders' deficit........................................... (121,932)
---------
Total liabilities and stockholders' deficit................... $ 751,948
=========
</TABLE>
F-28
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma statement of operations data for the year ended
November 30, 1997 shown below gives effect to (i) the Recapitalization; (ii)
the Refinancing; and (iii) the divestitures of the Company's Samuel Lawrence
subsidiary and South Brunswick plant in January, 1997 and March, 1997,
respectively, as if they each occurred on December 2, 1996 (in 000's) but does
not reflect certain non-recurring Recapitalization charges and an
extraordinary loss related to the Refinancing:
<TABLE>
<S> <C>
Revenue......................................................... $799,503
========
Net loss........................................................ $ (9,403)
========
Net loss per common share....................................... $ (0.30)
========
</TABLE>
(19) GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As discussed in Note 16, the Parent and each of the Guarantor Subsidiaries
has fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes. The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company.
Substantially all of the Issuer's operating income and cashflow is generated
by its subsidiaries. As a result, funds necessary to meet the Issuer's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the Notes. Although holders
of the Notes will be direct creditors of the Issuer's principal direct
subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-
Guarantor Subsidiaries") that are not included among the Guarantor
Subsidiaries, and such subsidiaries will not be obligated with respect to the
Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries
will effectively have priority with respect to the assets and earnings of such
companies over the claims of creditors of the Issuer, including the holders of
the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of November 30, 1997 and
December 1, 1996, consolidating condensed statements of operations and cash
flows for each of the years in the three year period ended November 30,
1997.
2. Sealy Corporation (the "Parent" and a "guarantor"), Sealy Mattress
Company (the "Issuer"), combined Guarantor Subsidiaries and combined Non-
Guarantor Subsidiaries with their investments in subsidiaries accounted for
using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors.
F-29
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
Accounts receivable,
net................... -- 3,434 79,150 11,334 -- 93,918
Inventories............ -- 1,912 39,240 5,190 (335) 46,007
Prepaid expenses and
other assets.......... (9,206) 294 29,819 1,622 -- 22,529
-------- ------- -------- ------- --------- --------
(9,206) 5,660 150,271 22,121 (335) 168,511
Property, plant and
equipment--at cost..... -- 4,664 152,045 12,894 -- 169,603
Less accumulated
depreciation........... -- 1,254 40,603 2,138 -- 43,995
-------- ------- -------- ------- --------- --------
-- 3,410 111,442 10,756 -- 125,608
Other assets:
Goodwill and other
intangibles, net...... -- 14,461 361,976 34,832 -- 411,269
Net investment in and
advances to (from)
subsidiaries and
affiliates............ 543,783 2,636 (357,823) (28,591) (160,005) --
Debt issuance costs,
net and other
assets................ 8,918 35 6,641 85 -- 15,679
-------- ------- -------- ------- --------- --------
552,701 17,132 10,794 6,326 (160,005) 426,948
-------- ------- -------- ------- --------- --------
Total assets......... $543,495 $26,202 $272,507 $39,203 ($160,340) $721,067
======== ======= ======== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long-
term obligations...... $ -- $ -- -- $ -- $ -- $ --
Accounts payable....... -- 2,086 40,743 6,847 -- 49,676
Accrued incentives and
advertising........... -- 1,473 26,782 2,449 -- 30,704
Accrued compensation... -- 246 16,244 1,281 -- 17,771
Other accrued
expenses.............. 2,287 222 18,172 1,573 (118) 22,136
-------- ------- -------- ------- --------- --------
2,287 4,027 101,941 12,150 (118) 120,287
Long-term obligations... 330,000 -- -- -- -- 330,000
Other noncurrent
liabilities............ 2,969 -- 32,744 -- -- 35,713
Deferred income taxes... 3,173 896 22,693 3,239 -- 30,001
Stockholders' equity.... 205,066 21,279 115,129 23,814 (160,222) 205,066
-------- ------- -------- ------- --------- --------
Total liabilities and
stockholders'
equity.............. $543,495 $26,202 $272,507 $39,203 ($160,340) $721,067
======== ======= ======== ======= ========= ========
</TABLE>
F-30
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 1, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $ -- $ 54 $ 3,118 $ 13,447 $ -- $ 16,619
Accounts receivable,
net................... -- 2,861 67,296 7,022 -- 77,179
Inventories............ -- 1,551 28,251 4,464 (274) 33,992
Net assets held for
sale.................. -- -- -- 35,492 -- 35,492
Prepaid expenses and
deferred taxes........ (5,603) 228 13,925 1,896 -- 10,446
-------- ------- --------- -------- --------- --------
(5,603) 4,694 112,590 62,321 (274) 173,728
Property, plant and
equipment--at cost..... -- 4,214 135,581 16,268 -- 156,063
Less accumulated
depreciation........... -- 976 31,593 2,128 -- 34,697
-------- ------- --------- -------- --------- --------
-- 3,238 103,988 14,140 -- 121,366
Other assets:
Goodwill and other in-
tangibles, net........ -- 14,873 383,692 35,739 -- 434,304
Net investment in and
advances to (from)
subsidiaries and af-
filiates.............. 586,883 24,776 (337,985) (35,875) (237,799) --
Debt issuance costs,
net and other assets.. 7,981 -- 2,495 54 -- 10,530
-------- ------- --------- -------- --------- --------
594,864 39,649 48,202 (82) (237,799) 444,834
-------- ------- --------- -------- --------- --------
Total assets........... $589,261 $47,581 $ 264,780 $ 76,379 $(238,073) $739,928
======== ======= ========= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion--long- $ 18,620 $ -- $ -- $ -- $ -- $ 18,620
term obligations......
Accounts payable....... -- 1,556 30,161 4,080 -- 35,797
Accrued incentives and -- 1,101 17,668 1,935 -- 20,704
advertising...........
Accrued compensation... -- 227 12,687 1,133 -- 14,047
Other accrued ex-
penses................ 6,251 157 17,837 (458) (96) 23,691
-------- ------- --------- -------- --------- --------
24,871 3,041 78,353 6,690 (96) 112,859
Long-term obligations... 269,398 -- 74 35 -- 269,507
Other noncurrent
liabilities............ 2,606 -- 32,210 6 -- 34,822
Deferred income taxes... (608) 901 24,925 4,528 -- 29,746
Stockholders' equity.... 292,994 43,639 129,218 65,120 (237,977) 292,994
-------- ------- --------- -------- --------- --------
Total liabilities and
stockholders' equity.. $589,261 $47,581 $ 264,780 $ 76,379 $(238,073) $739,928
======== ======= ========= ======== ========= ========
</TABLE>
F-31
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $37,973 $708,914 $75,042 $(17,095) $804,834
Costs and expenses:
Cost of goods sold..... -- 23,256 400,785 48,878 (17,014) 455,905
Selling, general and
administrative........ 1,336 11,464 233,512 17,346 -- 263,658
Amortization of
intangibles........... -- 411 11,764 1,089 -- 13,264
Interest expense, net.. 32,114 -- (75) (643) -- 31,396
Loss (Income) from
equity investees...... 8,969 8,258 -- -- (17,227) --
Loss (Income) from non-
guarantor equity
investees............. -- 20 (4,104) -- 4,084 --
Capital charge and
intercompany interest
allocation............ (69,376) 3,689 64,821 866 -- --
-------- ------- -------- ------- -------- --------
Income/(loss) before
income taxes,
extraordinary item and
cumulative effect of a
change in accounting
principle.............. 26,957 (9,125) 2,211 7,506 13,062 40,611
Income taxes............ 13,103 (156) 6,140 3,422 -- 22,509
-------- ------- -------- ------- -------- --------
Income/(loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. 13,854 (8,969) (3,929) 4,084 13,062 18,102
Extraordinary item..... 2,030 -- -- -- -- 2,030
Cumulative effect of a
change in accounting
principle............. -- -- 4,329 -- -- 4,329
-------- ------- -------- ------- -------- --------
Net income/(loss)....... $ 11,824 $(8,969) $ (8,258) $ 4,084 $ 13,062 $ 11,743
======== ======= ======== ======= ======== ========
</TABLE>
F-32
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 1, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ -- $560,540 $120,223 $(16,421) $697,638
Costs and expenses: 33,296
Cost of goods sold..... -- 19,867 305,100 88,592 (16,300) 397,259
Selling, general and
administrative........ 150 9,082 190,628 21,593 -- 221,453
Loss on net assets held
for sale.............. -- 11,762 -- -- -- 11,762
Amortization of
intangibles........... -- 411 11,450 1,733 -- 13,594
Interest expense, net.. 30,364 -- 91 (1,658) -- 28,797
Loss (Income) from
equity investees...... (2,608) 1,796 -- -- 812 --
Income from non-
guarantor equity
investees............. -- (15,829) (2,920) -- 18,749 --
Capital charge and
intercompany interest
allocation............ (35,043) 3,209 41,595 (9,761) -- --
-------- ------- -------- -------- -------- --------
Income/(loss) before
income taxes........... 7,137 2,998 14,596 19,724 (19,682) 24,773
Income taxes............ 7,522 390 16,392 975 -- 25,279
-------- ------- -------- -------- -------- --------
Net income/(loss)....... $ (385) $ 2,608 $ (1,796) $ 18,749 $(19,682) $ (506)
======== ======= ======== ======== ======== ========
</TABLE>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $30,460 $537,672 $96,296 $(10,486) $653,942
Costs and expenses:
Cost of goods sold..... -- 16,548 286,088 70,209 (10,429) 362,416
Selling, general and
administrative........ (13,080) 8,382 192,205 15,903 -- 203,410
Amortization of
intangibles........... -- 411 12,143 1,502 -- 14,056
Interest expense, net.. 33,113 -- (819) (1,276) -- 31,018
Income from equity
investees............. (11,870) (9,001) -- -- 20,871 --
Income from non-
guarantor equity
investees............. -- (1,346) (4,160) -- 5,506 --
Capital charge and
intercompany interest
allocation............ (32,794) 2,773 29,678 343 -- --
-------- ------- -------- ------- -------- --------
Income/(loss) before
income taxes........... 24,631 12,693 22,537 9,615 (26,434) 43,042
Income taxes............ 5,104 823 13,536 4,109 -- 23,572
-------- ------- -------- ------- -------- --------
Net income/(loss)....... $ 19,527 $11,870 $ 9,001 $ 5,506 $(26,434) $ 19,470
======== ======= ======== ======= ======== ========
</TABLE>
F-33
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 29,901 $(40,205) $ 7,532 $ 44,782 $ 39 $ 42,049
-------- -------- -------- -------- -------- --------
Cash flows from
investing activities:
Proceeds from sale of
subsidiary............ -- 35,000 -- -- -- 35,000
Purchase of property,
plant and equipment... -- (450) (27,109) (1,581) -- (29,140)
Proceeds from sale of
property, plant and
equipment............. -- 5,150 410 1 -- 5,561
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 34,131 13,862 23,942 (7,284) (64,651) --
-------- -------- -------- -------- -------- --------
Net proceeds provided
by (used in) investing
activities............ 34,131 53,562 (2,757) (8,864) (64,651) 11,421
Cash flows from
financing activities:
Dividend............... (99,775) -- -- -- -- (99,775)
Repayment of long-term
obligations, net...... (63,127) -- -- -- -- (63,127)
Net borrowing--
revolving credit
facility.............. 105,000 -- -- -- -- 105,000
Debt issuance costs.... (6,130) -- -- -- -- (6,130)
Net equity activity
with Parent........... -- (13,391) (5,831) (45,390) 64,612 --
-------- -------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ (64,032) (13,391) (5,831) (45,390) 64,612 (64,032)
-------- -------- -------- -------- -------- --------
Change in cash and cash
equivalents............ -- (34) (1,056) (9,472) -- (10,562)
Cash and cash
equivalents:
Beginning of period..... -- 54 3,118 13,447 -- 16,619
-------- -------- -------- -------- -------- --------
End of period........... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
======== ======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 1, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 15,398 $16,923 $ 32,242 $19,105 $(39,251) $ 44,417
-------- ------- -------- ------- -------- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (134) (11,581) (870) 540 (12,045)
Proceeds from sale of
property, plant and
equipment............. -- -- 1,579 50 (540) 1,089
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 17,267 (8,175) (26,695) 1,888 15,715 --
-------- ------- -------- ------- -------- --------
Net proceeds provided
by (used in)
investing
activities.......... 17,267 (8,309) (36,697) 1,068 15,715 (10,956)
Cash flows from
financing activities:
Dividend............... (35,463) -- -- -- -- (35,463)
Repayment of long-term
obligations, net...... (22,202) -- (1,608) 83 -- (23,727)
Net borrowing--
revolving credit
facility.............. 25,000 -- -- -- -- 25,000
Debt issuance costs.... -- -- -- -- -- --
Net equity activity
with Parent........... -- (8,569) (4,830) (10,137) 23,536 --
-------- ------- -------- ------- -------- --------
Net cash provided by
(used in) financing
activities.......... (32,665) (8,569) (6,438) (10,054) 23,536 (34,190)
-------- ------- -------- ------- -------- --------
Change in cash and cash
equivalents............ -- 45 (10,893) 10,119 -- (729)
Cash and cash
equivalents:
Beginning of period..... -- 9 14,011 3,328 -- 17,348
-------- ------- -------- ------- -------- --------
End of period........ $ -- $ 54 $ 3,118 $13,447 $ -- $ 16,619
======== ======= ======== ======= ======== ========
</TABLE>
F-35
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 26,749 $ 22,771 $ 42,832 $ 23,472 $(52,497) $ 63,327
-------- -------- -------- -------- -------- --------
Cash flows from
investing activities:
Purchase of property,
plant and equipment... -- (79) (8,204) (3,521) -- (11,804)
Proceeds from sale of
property, plant and
equipment............. -- -- 7,417 51 -- 7,468
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 32,251 (5,468) (11,113) (25,456) 9,786 --
-------- -------- -------- -------- -------- --------
Net proceeds provided
by (used in) investing
activities............ 32,251 (5,547) (11,900) (28,926) 9,786 (4,336)
Cash flows from
financing activities:
Dividend............... -- -- -- -- -- --
Repayment of long-term
obligations, net...... (59,000) -- (3,918) (34) -- (62,952)
Net borrowing--
revolving credit
facility.............. -- -- -- -- -- --
Debt issuance costs.... -- -- -- -- -- --
Net equity activity
with Parent........... -- (17,162) (16,484) (8,404) 42,050 --
-------- -------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ (59,000) (17,162) (20,402) (8,438) 42,050 (62,952)
-------- -------- -------- -------- -------- --------
Change in cash and cash
equivalents............ -- 62 10,530 (13,892) (661) (3,961)
Cash and cash
equivalents:
Beginning of period.... -- (53) 3,481 17,220 661 21,309
-------- -------- -------- -------- -------- --------
End of period.......... $ -- $ 9 $ 14,011 $ 3,328 $ -- $ 17,348
======== ======== ======== ======== ======== ========
</TABLE>
F-36
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 1, MARCH 2,
1998 1997
------------- -------------
<S> <C> <C>
Net sales.......................................... $209,259 $168,904
Costs and expenses:
Cost of goods sold............................... 121,484 96,697
Selling, general and administrative.............. 87,597 55,574
Amortization of intangibles...................... 3,162 3,480
Interest expense, net............................ 15,528 6,801
-------- --------
227,771 162,552
-------- --------
(Loss) income before income tax and extraordinary
item.............................................. (18,512) 6,352
Income tax (benefit) expense....................... (747) 3,164
-------- --------
(Loss) income before extraordinary item.......... (17,765) 3,188
Extraordinary item--loss from early extinguishment
of debt (net of
income tax benefit of $9,636 and $1,353, respec-
tively)........................................... 14,455 2,030
-------- --------
Net (loss) income................................ $(32,220) $ 1,158
======== ========
(Loss)/earnings per common share--basic:
(Loss) income before extraordinary item............ $ (0.59) $ 0.11
Extraordinary item................................. (0.47) (0.07)
-------- --------
Net (loss) income................................ $ (1.06) $ 0.04
======== ========
(Loss)/earnings per common share--diluted:
(Loss)income before extraordinary item............. $ (0.59) $ 0.11
Extraordinary item................................. (0.47) (0.07)
-------- --------
Net (loss) income................................ $ (1.06) $ 0.04
======== ========
Weighted average number of common shares outstand-
ing:
Basic............................................ 30,345 29,726
Diluted.......................................... 30,345 30,035
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-37
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 1, NOVEMBER 30,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 6,170 $ 6,057
Accounts receivable, less allowance for doubtful
accounts (1998-$8,175; 1997-$7,696)................ 105,341 93,918
Inventories......................................... 50,718 46,007
Prepaid expenses and deferred taxes................. 13,783 22,529
---------- --------
176,012 168,511
Property, plant and equipment--at cost................ 174,547 169,603
Less: accumulated depreciation........................ (46,493) (43,995)
---------- --------
128,054 125,608
Other assets:
Goodwill and other intangibles--net of accumulated
amortization (1998-$66,963; 1997-$63,801).......... 408,107 411,269
Debt issuance costs, net, and other assets.......... 38,530 15,679
---------- --------
446,637 426,948
---------- --------
$ 750,703 $721,067
========== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term obligations............ $ 3,701 $ --
Accounts payable.................................... 44,566 49,676
Accrued interest.................................... 10,629 2,038
Accrued incentives and advertising.................. 33,301 30,704
Accrued compensation................................ 6,946 17,771
Other accrued expenses.............................. 24,470 20,098
---------- --------
123,613 120,287
Long-term obligations................................. 705,272 330,000
Other noncurrent liabilities.......................... 36,261 35,713
Deferred income taxes................................. 13,376 30,001
Stockholders' (deficit) equity:
Common stock........................................ 303 299
Additional paid-in capital.......................... 134,414 257,320
Retained deficit.................................... (260,303) (50,614)
Foreign currency translation adjustment............. (2,233) (1,939)
---------- --------
(127,819) 205,066
Commitments and contingencies......................... -- --
---------- --------
$750,703 $721,067
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-38
<PAGE>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
QUARTER ENDED
ENDED MARCH
MARCH 1, 2,
1998 1997
--------- -------
<S> <C> <C>
Net cash (used in) provided by operating activities.......... $ (23,346) $ 27
--------- -------
Investing activities:
Proceeds from sale of subsidiary........................... -- 35,000
Purchase of property and equipment, net.................... (5,300) (3,955)
--------- -------
Net cash (used in) provided by investing activities...... (5,300) 31,045
--------- -------
Financing activities:
Treasury stock repurchase.................................. (413,078) --
Proceeds from long-term obligations, net................... 351,648 68,348
Equity contributions....................................... 121,317 --
Dividend................................................... -- (99,776)
Debt issuance costs........................................ (31,128) (6,130)
--------- -------
Net cash provided by (used in) financing activities...... 28,759 (37,558)
--------- -------
Change in cash and cash equivalents.......................... 113 (6,486)
Cash and cash equivalents:
Beginning of period........................................ 6,057 16,619
--------- -------
End of period.............................................. $ 6,170 $10,133
========= =======
Supplemental disclosures:
Cash paid for:
Taxes paid, net............................................ $ 1,567 $ 3,250
Cash interest paid......................................... $ 12,340 $ 1,361
Selected noncash items:
Depreciation............................................... $ 2,711 $ 3,141
Issuance of Junior Notes................................... $ 25,000 $ --
Rollover Equity............................................ $ 15,235 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-39
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 1, 1998
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, 1997.
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 1, 1998, 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.
Certain reclassifications of previously reported financial information were
made to conform to the 1998 presentation.
NOTE B--INVENTORIES
The major components of inventories were as follows:
<TABLE>
<CAPTION>
MARCH 1, NOVEMBER 30,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials....................................... $28,939 $26,251
Work in process..................................... 13,884 12,594
Finished goods...................................... 7,895 7,162
------- -------
$50,718 $46,007
======= =======
</TABLE>
NOTE C--RECAPITALIZATION
On October 30, 1997, Sealy Corporation ("Parent") entered into an agreement
and plan of merger (the "Merger Agreement") with Sandman Merger Corporation, a
transitory Delaware merger corporation ("Sandman"), and Zell/Chilmark Fund,
L.P., a Delaware limited partnership ("Zell"). Zell owned approximately 87% of
the issued and outstanding common stock of Parent (the "Existing Common
Stock"). Pursuant to the Merger Agreement, upon the satisfaction of certain
conditions, Sandman was merged with and into Parent with Parent being the
surviving corporation effective on December 18, 1997 (the "Closing Date") and
the Company was recapitalized (the "Recapitalization") whereby certain equity
investors, including members of management, acquired an approximate 90.0%
economic equity stake (85.3% voting equity stake) in the Company. A portion of
the issued and outstanding shares of common stock of the Company was converted
into the right to receive aggregate cash equal to $419.3 million less (i)
certain seller fees and expenses and (ii) certain costs in connection with the
extinguishment of certain outstanding options and warrants of the Company and
the remaining portion was converted into voting preferred stock and then
reconverted into $25.0 million in aggregate principal amount of a junior
subordinated note of the Company ("Junior Note") and a retained voting common
stock interest in the Company of approximately 14.7%. Concurrent with the
Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned
subsidiary of the Parent, issuing $125 million of Senior Subordinated Notes
and $128 million, with net proceeds to the Company of $75.4 million, of Senior
Subordinated Discount Notes (the "Notes") and by entering into and borrowing
$460 million under the Senior Credit Agreements.
F-40
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
After the Recapitalization, the issued and outstanding capital stock of the
Company consists of Class A common stock, par value $0.01 per share ("Class A
Common"), Class B common stock, par value $0.01 per share ("Class B Common"),
Class L common stock, par value $0.01 per share ("Class L Common"), and Class
M common stock, par value $0.01 per share ("Class M Common" and collectively
with the Class A Common, Class B Common and Class L Common, "Common Stock").
The Class L Common and the Class M Common are senior in right of payment to
the Class A Common and Class B Common. Holders of Class B Common and Class M
Common have no voting rights except as required by law. The holders of Class A
Common and Class L Common are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company, including the election of
directors. The Board of Directors of the Company is authorized to issue
preferred stock, par value $0.01 per share, with such designations and other
terms as may be stated in the resolutions providing for the issue of any such
preferred stock adopted from time to time by the Board of Directors.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc.
("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors
3, LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to
cause the size of the Board of Directors of Parent to be established at seven
members and to cause three designees of the Bain Funds and one designee of
Harvard to be elected to the Board of Directors; (ii) granted Parent and the
Bain Funds a right of first offer on any proposed transfer of shares of
capital stock of Parent held by Zell, Harvard or the LLCs, (iii) granted
Harvard a right of first offer on any proposed transfer of shares of capital
stock of Parent held by Bain Funds; (iv) granted tag-along rights on certain
transfers of shares of capital stock of Parent; (v) required the Stockholders
to consent to a sale of Parent to an independent third party if such sale is
approved by holders constituting a majority of the then outstanding shares of
voting common stock of Parent; and (vi) except in certain instances, prohibits
Zell from transferring any shares of capital stock of Parent until the tenth
anniversary of the date of the consummation of the Recapitalization. Certain
of the foregoing provisions of the Stockholders Agreement terminate upon the
consummation of an Initial Public Offering or an Approved Sale (as each is
defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding stock of Sealy, Inc., an Ohio corporation, the Stearns & Foster
Bedding Company, a Delaware corporation, Advanced Sleep Products, a California
corporation, Sealy Components-Pad, Inc., a Delaware corporation and Sealy
Mattress Company of San Diego, a California corporation, to the capital of the
Issuer. Immediately after the Capital Contribution, the Issuer became the only
direct subsidiary of Parent and owns 100% of the operations of Parent. At the
Closing, Sandman was merged with and into Parent with Parent the surviving
corporation.
The Recapitalization transaction resulted in an aggregate direct net charge
to APIC and retained deficit totaling $421.7 million primarily comprised of
the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge within selling, general and administrative
expense of $18.8 million comprised of accelerated vesting of stock options and
restricted stock and other incentive based compensation payments to employees
in connection with the transaction. The Company recorded a
F-41
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
$14.5 million charge, net of income tax benefit of $9.6 million, representing
the writeoff of the remaining unamortized debt issue costs related to long-
term obligations repaid in connection with the Recapitalization as well as
consent fees and premiums paid related to the Tender Offer of the Parent Notes
(each of which as defined in Note D below) in connection with the
Recapitalization.
NOTE D--LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
MARCH 1, NOVEMBER 30,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Senior Axels Credit Agreement........................ $330,000 $ --
Senior Revolving Credit Agreement:
Tranche A Term Loans............................... 120,000 --
Revolving Credit Facility.......................... 29,000 --
Senior Subordinated Notes............................ 125,000 --
Senior Subordinated Discount Notes................... 77,153 --
Junior Subordinated Note............................. 25,619 --
$275,000,000 Second Restated Secured Credit
Agreement--Revolving Credit Facility................ -- 130,000
10 1/4% Senior Subordinated Notes Due 2003........... 2,201 200,000
-------- --------
708,973 330,000
Less current portion................................. 3,701 --
-------- --------
$705,272 $330,000
======== ========
</TABLE>
On November 18, 1997 Parent commenced an offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of its 10 1/4% Senior Subordinated Notes due 2003 (the "Parent
Notes") and a related solicitation (the "Consent Solicitation") of consents to
modify certain terms of the Indenture under which the Parent Notes were issued
(the "Parent Note Indenture"). The purchase price to be paid in respect to
validly tendered Parent Notes and related consents were determined by a
formula set forth in the offer to purchase with respect to the Tender Offer.
The Offerings were conditioned upon the consummation of the Tender Offer for,
and the obtaining of consents with respect to, at least a majority in
aggregate principal amount of the Parent Notes outstanding. Parent's
obligation to accept for purchase and to pay for the Parent Notes validly
tendered pursuant to the Tender Offer was conditioned upon, among other
things, consummation of the other elements of the Recapitalization.
The Company's 1997 Credit Agreement was terminated in connection with the
Recapitalization. The 1997 Credit Agreement provided for a $275.0 million
reducing revolving credit facility and a discretionary swing loan facility of
up to $20.0 million. Upon consummation of the Transactions, the Issuer entered
into the AXELs credit agreement (the "Senior AXELs Credit Agreement") and a
credit agreement providing for Tranche A Term Loans and revolving borrowings
(the "Senior Revolving Credit Agreement" and, together with the Senior AXELs
Credit Agreement, the "Senior Credit Agreements"). The Senior Credit
Agreements provide for loans of up to $550.0 million, consisting of a $450.0
million term loan facility (the "Term Loan Facility") and a $100.0 million
revolving credit facility (the "Revolving Credit Facility"). The Issuer
distributed the proceeds of the Term Loan Facility and its initial borrowings
under the Revolving Credit Facility to Parent to provide a portion of the
funds necessary to consummate the Recapitalization. Indebtedness of the Issuer
under the Senior Credit
F-42
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
Agreements is secured and guaranteed by Parent and certain of the Issuer's
current and all of the Issuer's future U.S. subsidiaries and will bear
interest at a floating rate. See Note I for further details regarding
guarantees including consolidating condensed financial statements for
guarantors and non-guarantors. The Senior Credit Agreements will require the
Company to meet certain financial tests, including minimum levels of adjusted
EBITDA as determined in the agreements, minimum interest coverage and maximum
leverage ratio. The Senior Credit Agreements also contains covenants which,
among other things, limit capital expenditures, indebtedness and/or the
incurrence of additional indebtedness, investments, dividends, transactions
with affiliates, asset sales, mergers and consolidations, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other matters
customarily restricted in such agreements.
Indebtedness under the Senior Credit Agreements bears interest at a floating
rate. Indebtedness under the Revolving Credit Facility and the Term Loans
initially (subject to reduction based on attainment of certain leverage ratio
levels) bears interest at a rate based upon (i) the Base Rate (defined as the
highest of (x) the rate of interest announced publicly by Morgan Guaranty
Trust Company of New York from time to time, as its base rate and (y) the
Federal funds effective rate from time to time plus 0.50%) plus 1.25% in
respect of the Tranche A Term Loans and the loans under the Revolving Credit
Facility (the "Revolving Loans"), 1.50% in respect of the AXELs Series B,
1.75% in respect of the AXELs Series C and 2.00% in respect of the AXELs
Series D, or (ii) the Adjusted Eurodollar Rate (as defined in the Senior
Credit Agreements) for one, two, three or six months (or, subject to general
availability, two weeks or twelve months), in each case plus 2.25% in respect
of Tranche A Term Loans and Revolving Loans, 2.50% in respect of AXELs Series
B, 2.75% in respect of AXELs Series C and 3.00% in respect to AXELs Series D.
The Tranche A Term Loans mature in December 2002. The AXELs Series B mature
in December 2004. The AXELs Series C mature in December 2005. The AXELs Series
D mature in December 2006. The Tranche A Term Loans are subject to quarterly
amortization payments commencing in March 1999, the AXELs Series B, the AXELs
Series C and the AXELs Series D are subject to quarterly amortization payments
commencing in March 1998 with the AXELs Series B amortizing in nominal amounts
until the maturity of the Tranche A Term Loans, the AXELs Series C amortizing
in nominal amounts until the maturity of the AXELs Series B and the AXELs
Series D amortizing in nominal amounts until the maturity of the AXELs Series
C. The Revolving Credit Facility matures in December 2002. In addition, the
Senior Credit Agreements provide for mandatory repayments, subject to certain
exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the
ordinary course of business of the Issuer and its subsidiaries, the net
proceeds of insurance, the net proceeds of certain debt and equity issuances,
and excess cash flow (as defined in the Senior Credit Agreements).
The Junior Note has an initial principal balance outstanding of $25.0
million and mature on December 18, 2008. Interest on the Junior Note accrues
at 10% per annum if paid within ten days of the end of each calendar quarter
or at 12% if the Company elects to add accrued interest for such quarter to
the then outstanding principal balance. The Company has the option, at each
quarter end, to elect to pay the interest due for the quarter or add such
interest to the principal balance through the term of the Note.
The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the
F-43
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
"Senior Subordinated Discount Note Indenture" and together with the Senior
Subordinated Note Indenture, the "Indentures") among the Issuer, the
Guarantors, and The Bank of New York, as trustee (the "Senior Subordinated
Discount Note Trustee" and, together with the Senior Subordinated Note
Trustee, the "Trustees").
The Senior Subordinated Notes are limited in aggregate principal amount to
$300.0 million, of which $125.0 million was issued in the Offering, and
matures on December 15, 2007. Interest on the Senior Subordinated Notes accrue
at the rate of 9 7/8% per annum and is payable semi-annually in arrears on
June 15 and December 15 of each year, commencing on June 15, 1998, to Holders
of record on the immediately preceding June 1 and December 1. Additional
Senior Subordinated Notes may be issued from time to time after the date of
the Senior Subordinated Note Indenture, subject to the provisions of the
Senior Subordinated Note Indenture.
Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
---- -------------
<S> <C>
2002................................ 104.937%
2003................................ 103.292%
2004................................ 101.646%
2005 and thereafter................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued
under the Senior Subordinated Note Indenture at a redemption price of 109.875%
of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages thereon, if any, to the redemption date, with the net cash
proceeds of any Equity Offerings; (as defined in the Indentures) provided that
at least $80.0 million in aggregate principal amount of Senior Subordinated
Notes remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Notes held by the Company and its
Subsidiaries); and provided further that such redemption shall occur within
120 days of the date of closing of any such Equity Offering.
The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in
the Offering, and mature on December 15, 2007. The Senior Subordinated
Discount Notes were offered at a substantial discount from their principal
amount at maturity. Until December 15, 2002 (the "Full Accretion Date"), no
interest (other than liquidated damages, if applicable) will accrue or be paid
in cash on the Senior Subordinated Discount Notes, but the Accreted Value will
accrete (representing the amortization of original issue discount) between the
issuance date and the Full Accretion Date, on a semi-annual bond equivalent
basis. Beginning on the Full Accretion Date, interest on the Senior
Subordinated Discount Notes will accrue at the rate of 10 7/8% per annum and
will be payable in cash semi-annually in arrears on June 15 and
F-44
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
December 15 of each year, commencing on June 15, 2003, to Holders of record on
the immediately preceding June 1 and December 1. Additionally Senior
Subordinated Discount Notes may be issued from time to time after the date of
the Senior Subordinated Discount Note Indenture, subject to the provisions of
the Senior Subordinated Discount Note Indenture. Interest on the Senior
Subordinated Discount Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the Full
Accretion Date.
Except as provided below, the Senior Subordinated Discount Notes will not be
redeemable at the Company's option prior to December 15, 2002. Thereafter, the
Senior Subordinated Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest and
liquidated damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 15 of the years indicated
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
---- -------------
<S> <C>
2002................................ 105.437%
2003................................ 103.625%
2004................................ 101.812%
2005 and thereafter................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December 11,
1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under
the Senior Subordinated Discount Note Indenture at a redemption price of
110.875% of the Accreted Value, plus accrued and unpaid liquidated damages
thereon, if any, to the redemption date, with the net cash proceeds of any
Equity Offerings; (as defined in the Indentures) provided that at least $50.0
million in aggregate Accreted Value of Senior Subordinated Discount Notes
remain outstanding immediately after the occurrence of such redemption
(excluding Senior Subordinated Discount Notes held by the Company and its
Subsidiaries); and provided, further, that such redemption shall occur within
120 days of the date of the closing of any such Equity Offering.
NOTE E--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 previously 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.
Since issuance of the ACO, the DEP has approved the Company's soil
remediation plans and its initial groundwater remediation plan. Further
investigation in 1996 revealed certain additional areas of
F-45
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
soil contamination resulting from activities at the South Brunswick facility
prior to the Company's acquisition of the site. In 1997, the Company, with DEP
approval, completed essentially all soil remediation and conducted a pilot
test for a company-proposed revision to the groundwater remediation program.
The Company's revised groundwater remediation plan will be submitted to the
DEP for approval in 1998.
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. In March,
1997, the Company received $1.7 million from a former owner of the site and
one of the lenders to the former owner in the final settlement of this
litigation which was recorded as an increase to other non-current liabilities.
In January 1997, the Company filed a claim in the U.S. District Court of New
Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case
seeking a judgement of non-liability was filed by some (but not all) of these
insurance companies in the U.S. District Court for the Northern District of
Ohio. Both the New Jersey and Ohio District Courts have ruled that New Jersey
law applies and the Company has filed a motion seeking a favorable decision
holding the insurance companies liable for investigation and remediation costs
without the need for trial.
The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. Although the Company
is conducting the remediation voluntarily, it obtained Connecticut Department
of Environmental Protection approval of the remediation plan. The Company
believes the contamination is attributable to the manufacturing operations of
previous unaffiliated occupants of the facility. In 1994, the Company filed a
cost recovery action in U.S. District Court to require these entities to
complete the remediation and reimburse the Company for its cleanup costs. This
litigation is pending. 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.
On May 22, 1997, the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust
final judgments (the "Judgments") entered on December 30, 1964 and December
26, 1967. These Judgments, among other things, prohibited the Company from
suggesting resale prices to its dealers. During the pendency of the Company's
motion to terminate the Judgments, and based upon allegations received by the
Department of Justice ("the Department") concerning a possible resale price
maintenance agreement with a Stearns & Foster dealer, the Department, on
September 8, 1997, issued to the Company a Civil Investigative Demand seeking
documents relating to, among other things, communications between the Company
and dealers concerning the retail price of mattresses. In response to the
Civil Investigative Demand, the Company produced certain documents and the
deposition of a Company executive was taken. Immediately following such
document production and deposition, the Department consented to the
F-46
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
termination of the Judgments and an order terminating the Judgments was
entered by the Court on September 19, 1997. After the Court terminated the
Judgments, the Department notified the Company on September 29, 1997 that it
was limiting the Civil Investigative Demand to certain narrow specifications.
In October 1997, the Company produced additional documents in response to the
Civil Investigative Demand. On November 24, 1997 the Company received a
request from the Department for clarification and additional information. The
Company has responded to that request.
NOTE F--STOCK OPTION PLAN
On December 18, 1997, the Company's Board of Directors adopted the 1998
Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A
Common Stock of the Company for issuance. Options under the 1998 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. On March 18, 1998, the Company
granted ten-year stock options to acquire 2,072,250 shares of Class A Common
Stock at an exercise price of $0.50 per share (representing fair market value
at the time of grant) and 1,175,000 shares of Class A Common Stock at an
exercise price of $4.18 per share (representing a premium to fair market value
at the time of grant). The options vest 40% upon the second anniversary, and
20% on the third, fourth and fifth anniversary dates of the grant.
NOTE G--YEAR 2000 ISSUE
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to
be Year 2000 compliant. The Company has conducted a comprehensive impact
analysis to determine what computing platforms and date-aware functions with
respect to its existing computer operating systems will be disrupted by the
Year 2000 Issue. In January, 1998, the Company completed a prioritization of
the impacted areas identified to date and commenced the detailed program code
changes through a contracted third party vendor which has experience in Year
2000 conversions for the Company's existing system including the same release
of such system. The Company is in the preliminary stages of assessment of its
vendors and customers status with respect to the Year 2000 Issue. The required
code changes, testing and implementation necessary to address the Year 2000
Issue is projected to be completed by May, 1999, and is expected to cost
approximately $4.0 million.
NOTE H--SUBSEQUENT EVENTS
On March 10, 1998, the Company announced its plans to relocate its Corporate
headquarters and Research & Development Center from Cleveland, Ohio to
Archdale, North Carolina. The Company will also relocate its Lexington, North
Carolina manufacturing plant to Archdale, North Carolina. The Company has
entered into an agreement to purchase a property which currently includes an
office building and a manufacturing facility. The Company will construct an
additional office building on this property to house its Corporate
headquarters. The Company is currently reviewing financing alternatives with
respect to the property purchase and construction project which it expects to
finalize
F-47
<PAGE>
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
in the second quarter of fiscal 1998. The Company estimates total costs
associated with this relocation will result in a pretax charge of
approximately $8.5 million which will be recognized primarily in fiscal 1998
with the balance in fiscal 1999.
On March 30, 1998, the Company announced a call for redemption of all
outstanding Parent Notes. The redemption price of 106.33%, plus accrued
interest, or approximately $2.5 million, will be paid on May 1, 1998, after
which time interest will cease to accrue on the Notes.
NOTE I--GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As discussed in Note D, the Parent and each of the Guarantor Subsidiaries
have fully and unconditionally guaranteed, on a joint and several basis, the
obligation to pay principal and interest with respect to the Notes. The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company.
Substantially all of the Issuer's operating income and cashflow is generated
by its subsidiaries. As a result, funds necessary to meet the Issuer's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of the Issuer's
subsidiaries, could limit the Issuer's ability to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations,
including the payment of principal and interest on the Notes. Although holders
of the Notes will be direct creditors of the Issuer's principal direct
subsidiaries by virtue of the guarantees, the Issuer has subsidiaries ("Non-
Guarantor Subsidiaries") that are not included among the Guarantor
Subsidiaries, and such subsidiaries will not be obligated with respect to the
Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries
will effectively have priority with respect to the assets and earnings of such
companies over the claims of creditors of the Issuer, including the holders of
the Notes.
The following supplemental consolidating condensed financial statements
present:
1. Consolidating condensed balance sheets as of March 1, 1998 and
November 30, 1997, consolidating condensed statements of operations and
cash flows for the three-month periods ended March 1, 1998 and March 2,
1997.
2. Sealy Corporation (the "Parent" and a "Guarantor"), Sealy Mattress
Company (the "Issuer"), combined Guarantor Subsidiaries and combined Non-
Guarantor Subsidiaries with their investments in subsidiaries accounted for
using the equity method.
3. Elimination entries necessary to consolidate the Parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the
Guarantor Subsidiaries are material to investors.
F-48
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 1, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
SEALY COMBINED NON-
SEALY MATTRESS GUARANTOR GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 20 $ 31 $ 6,119 $ -- $ 6,170
Accounts receivable,
net................... -- 3,587 92,244 9,510 -- 105,341
Inventories............ -- 2,001 43,945 5,209 (437) 50,718
Prepaid expenses and
deferred taxes........ (9,237) 294 21,265 1,461 -- 13,783
--------- -------- -------- ------- -------- --------
(9,237) 5,902 157,485 22,299 (437) 176,012
Property, plant and
equipment--at cost..... -- 4,818 156,829 12,900 -- 174,547
Less: accumulated
depreciation........... -- (1,335) (42,953) (2,205) -- (46,493)
--------- -------- -------- ------- -------- --------
-- 3,483 113,876 10,695 -- 128,054
Other assets:
Goodwill and other
intangibles, net...... -- 14,362 359,063 34,682 -- 408,107
Net investment in and
advances to (from)
subsidiaries and
affiliates............ (92,054) 549,815 (368,025) (29,562) (60,174) --
Debt issuance costs,
net and other
assets................ -- 30,878 7,621 31 -- 38,530
--------- -------- -------- ------- -------- --------
(92,054) 595,055 (1,341) 5,151 (60,174) 446,637
--------- -------- -------- ------- -------- --------
Total assets......... $(101,291) $604,440 $270,020 $38,145 $(60,611) $750,703
========= ======== ======== ======= ======== ========
LIABILITIES AND
STOCKHOLDER'S
(DEFICIT) EQUITY
Current liabilities:
Current portion--long-
term obligations...... $ 2,201 $ 1,500 $ -- $ -- $ -- $ 3,701
Accounts payable....... -- 2,316 34,474 7,776 -- 44,566
Accrued interest....... 3 10,626 -- -- -- 10,629
Accrued incentives and
advertising........... -- 1,408 29,985 1,908 -- 33,301
Accrued compensation... -- 151 5,893 902 -- 6,946
Other accrued
expenses.............. 2,369 469 22,028 (307) (89) 24,470
--------- -------- -------- ------- -------- --------
4,573 16,470 92,380 10,279 (89) 123,613
Long-term obligations... 25,619 679,653 -- -- -- 705,272
Other noncurrent
liabilities............ 3,585 -- 32,676 -- -- 36,261
Deferred income taxes... (7,249) 371 16,467 3,787 -- 13,376
Stockholders' (deficit)
equity................. (127,819) (92,054) 128,497 24,079 (60,522) (127,819)
--------- -------- -------- ------- -------- --------
Total liabilities and
stockholders'
(deficit) equity.... $(101,291) $604,440 $270,020 $38,145 $(60,611) $750,703
========= ======== ======== ======= ======== ========
</TABLE>
F-49
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ -- $ 20 $ 2,062 $ 3,975 $ -- $ 6,057
Accounts receivable, net....... -- 3,434 79,150 11,334 -- 93,918
Inventories.................... -- 1,912 39,240 5,190 (335) 46,007
Prepaid expenses and deferred
taxes......................... (9,206) 294 29,819 1,622 -- 22,529
-------- ------- -------- ------- --------- --------
(9,206) 5,660 150,271 22,121 (335) 168,511
Property, plant and equipment--
at cost........................ -- 4,664 152,045 12,894 -- 169,603
Less: accumulated depreciation.. -- (1,254) (40,603) (2,138) -- (43,995)
-------- ------- -------- ------- --------- --------
-- 3,410 111,442 10,756 -- 125,608
Other assets:
Goodwill and other
intangibles, net.............. -- 14,461 361,976 34,832 -- 411,269
Net investment in and advances
to (from) subsidiaries and
affiliates.................... 543,783 2,636 (357,823) (28,591) (160,005) --
Debt issuance costs, net and
other assets.................. 8,918 35 6,641 85 -- 15,679
-------- ------- -------- ------- --------- --------
552,701 17,132 10,794 6,326 (160,005) 426,948
-------- ------- -------- ------- --------- --------
Total assets................. $543,495 $26,202 $272,507 $39,203 $(160,340) $721,067
======== ======= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Current portion--long-term
obligations................... $ -- $ -- $ -- $ -- $ -- $ --
Accounts payable............... -- 2,086 40,743 6,847 -- 49,676
Accrued interest............... 1,973 -- 65 -- -- 2,038
Accrued incentives and
advertising................... -- 1,473 26,782 2,449 -- 30,704
Accrued compensation........... -- 246 16,244 1,281 -- 17,771
Other accrued expenses......... 314 222 18,107 1,573 (118) 20,098
-------- ------- -------- ------- --------- --------
2,287 4,027 101,941 12,150 (118) 120,287
Long-term obligations........... 330,000 -- -- -- -- 330,000
Other noncurrent liabilities.... 2,969 -- 32,744 -- -- 35,713
Deferred income taxes........... 3,173 896 22,693 3,239 -- 30,001
Stockholders' equity............ 205,066 21,279 115,129 23,814 (160,222) 205,066
-------- ------- -------- ------- --------- --------
Total liabilities and
stockholders' equity........ $543,495 $26,202 $272,507 $39,203 $(160,340) $721,067
======== ======= ======== ======= ========= ========
</TABLE>
F-50
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 1, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 9,781 $185,535 $18,022 $ (4,079) $209,259
Costs and expenses:
Cost of goods sold..... -- 6,251 108,012 11,300 (4,079) 121,484
Selling, general and
administrative........ 17,426 2,880 61,331 5,960 -- 87,597
Amortization of intan-
gibles................ -- 99 2,914 149 -- 3,162
Interest expense, net.. 2,197 13,395 (41) (23) -- 15,528
Loss (income) from
equity investees...... (1,066) (13,519) -- -- 14,585 --
Loss (income) from
nonguarantor equity
investees............. -- -- (181) -- 181 --
Capital charge and
intercompany interest
allocation............ -- 134 (581) 447 -- --
-------- ------- -------- ------- -------- --------
Income/(loss) before in-
come taxes and extraor-
dinary item............ (18,557) 541 14,081 189 (14,766) (18,512)
Income taxes............ (792) (525) 562 8 -- (747)
-------- ------- -------- ------- -------- --------
Income/(loss) before ex-
traordinary item....... (17,765) 1,066 13,519 181 (14,766) (17,765)
Extraordinary item...... 14,455 -- -- -- -- 14,455
-------- ------- -------- ------- -------- --------
Net income/(loss)....... $(32,220) $ 1,066 $ 13,519 $ 181 $(14,766) $(32,220)
======== ======= ======== ======= ======== ========
</TABLE>
F-51
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 2, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ 7,550 $145,262 $19,099 $ (3,007) $168,904
Costs and expenses:
Cost of goods sold..... -- 4,825 81,157 13,722 (3,007) 96,697
Selling, general and
administrative........ 254 2,261 49,011 4,048 -- 55,574
Amortization of
intangibles........... -- 99 3,030 351 -- 3,480
Interest expense, net.. 7,299 -- (15) (483) -- 6,801
Loss (income) from
equity investees...... (6,981) (7,238) -- -- 14,219 --
Loss (income) from
nonguarantor equity
investees............. -- 398 (1,013) -- 615 --
Capital charge and
intercompany interest
allocation............ -- 85 (321) 236 -- --
------- ------- -------- ------- -------- --------
Income/(loss) before
income taxes and
extraordinary item..... (572) 7,120 13,413 1,225 (14,834) 6,352
Income taxes............ (3,760) 139 6,175 610 -- 3,164
------- ------- -------- ------- -------- --------
Income/(loss) before
extraordinary item..... 3,188 6,981 7,238 615 (14,834) 3,188
Extraordinary item...... 2,030 -- -- -- -- 2,030
------- ------- -------- ------- -------- --------
Net income/(loss)....... $ 1,158 $ 6,981 $ 7,238 $ 615 $(14,834) $ 1,158
======= ======= ======== ======= ======== ========
</TABLE>
F-52
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 1, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (17,348) $(25,706) $(7,031) $1,184 $25,555 $ (23,346)
--------- --------- ------- ------ ------- ---------
Cash flows from
investing activities:
Purchase of property
and equipment, net.... -- (174) (5,031) (95) -- (5,300)
Net activity in
investment in and
advances to (from)
subsidiaries and
affiliates............ 636,345 (621,760) 10,182 971 (25,738) --
--------- --------- ------- ------ ------- ---------
Net proceeds provided
by (used in) investing
activities............ 636,345 (621,934) 5,151 876 (25,738) (5,300)
Cash flows from
financing activities:
Treasury stock
repurchase costs ..... (413,078) -- -- -- -- (413,078)
Proceeds from
(repayment of) long-
term obligations,
net................... (327,799) 679,447 -- -- -- 351,648
Equity contributions... 121,317 -- -- -- -- 121,317
Debt issuance costs ... 563 (31,691) -- -- -- (31,128)
Net equity activity
with Parent........... -- (116) (151) 84 183 --
--------- --------- ------- ------ ------- ---------
Net cash (used in)
provided by financing
activities............ (618,997) 647,640 (151) 84 183 28,759
--------- --------- ------- ------ ------- ---------
Change in cash and cash
equivalents............ -- -- (2,031) 2,144 -- 113
Cash and cash
equivalents:
Beginning of period.... -- 20 2,062 3,975 -- 6,057
--------- --------- ------- ------ ------- ---------
End of period.......... $ -- $ 20 $ 31 $6,119 -- $ 6,170
========= ========= ======= ====== ======= =========
</TABLE>
F-53
<PAGE>
SEALY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 2, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEALY COMBINED COMBINED
SEALY MATTRESS GUARANTOR NON-GUARANTOR
CORPORATION COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
operating activities... $ 10,030 $ 6,760 $ 6,450 $ 1,887 $(25,100) $ 27
-------- -------- -------- ------- -------- --------
Cash flows from investing activities:
Proceeds from sale of
subsidiary............ -- 35,000 -- -- -- 35,000
Purchases of property
and equipment, net.... -- (175) (3,703) (77) -- (3,955)
Net activity in invest-
ment in and advances
to (from) subsidiaries
and affiliates........ 27,494 5,642 10,413 (6,105) (37,444) --
-------- -------- -------- ------- -------- --------
Net proceeds provided
by (used in) investing
activities............ 27,494 40,467 6,710 (6,182) (37,444) 31,045
Cash flows from financing activities:
Proceeds from
(repayment of) long-
term obligations, et.. 68,382 -- 1 (35) -- 68,348
Dividend............... (99,776) -- -- -- -- (99,776)
Debt issuance costs.... (6,130) -- -- -- -- (6,130)
Net equity activity
with Parent .......... -- (47,200) (10,141) (5,203) 62,544 --
-------- -------- -------- ------- -------- --------
Net cash used in fi-
nancing activities.... (37,524) (47,200) (10,140) (5,238) 62,544 (37,558)
-------- -------- -------- ------- -------- --------
Change in cash and cash
equivalents............ -- 27 3,020 (9,533) -- (6,486)
Beginning of period.... -- 54 3,118 13,447 -- 16,619
-------- -------- -------- ------- -------- --------
End of period.......... $ -- $ 81 $ 6,138 $ 3,914 $ -- $ 10,133
======== ======== ======== ======= ======== ========
</TABLE>
Cash and cash equivalents:
F-54
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 16
The Transactions......................................................... 24
Use of Proceeds.......................................................... 26
Capitalization........................................................... 27
Selected Historical Consolidated Financial and Other Data................ 28
Unaudited Pro Forma Condensed Consolidated Financial Data................ 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Business................................................................. 43
Management............................................................... 57
Security Ownership....................................................... 65
Certain Transactions..................................................... 68
Description of Senior Credit Agreements.................................. 69
Description of Exchange Notes............................................ 70
The Exchange Offer....................................................... 107
Certain Federal Income Tax Consequences.................................. 116
Plan of Distribution..................................................... 116
Legal Matters............................................................ 117
Experts.................................................................. 117
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEALY MATTRESS COMPANY
-----------
LOGO SEALY LOGO STEARNS & FOSTER
-----------
OFFER TO EXCHANGE ITS SERIES B 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007 FOR
ANY AND ALL OF ITS OUTSTANDING SERIES A SENIOR SUBORDINATED NOTES DUE 2007 AND
ITS SERIES B 10 7/8% SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007 FOR ANY AND
ALL OF ITS OUTSTANDING SERIES A SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Ohio. Section
1701.13 of the General Corporation Law of the State of Ohio, inter alia,
("Section 1701.13") provides that an Ohio corporation may indemnify any person
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of
the corporation, by reason of the fact he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise. The indemnity may include expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if he had no reasonable cause to believe that
his conduct was unlawful. An Ohio corporation may indemnify or agree to
indemnify any person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust, or other enterprise. The
indemnity may include expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification is permitted (i) without judicial approval if
the person is adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation or (ii) with respect to any action
or suit in which the only liability asserted against a director is pursuant to
unlawful loans, dividends, or distribution of assets (Section 1701.95). Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses, including attorney's fees, which such
officer or director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
the General Corporation Law of the State of Ohio, as it currently exists or
may hereafter be amended.
Section 1701.13 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and
incurred by him in any such capacity, arising out of his status as such,
whether or not the corporation would have the power to indemnify him under
Section 1701.13.
The Company maintains and has in effect insurance policies covering all of
the Company's directors and officers against certain liabilities for actions
taken in such capacities, including liabilities under the Securities Act of
1933.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<C> <S>
*2.1 Agreement and Plan of Merger, dated as of October 30, 1997, by and
among Sealy Corporation, Sandman Merger Corporation and Zell/Chilmark
Fund, L.P. (Incorporated by reference to Exhibit 2.1 filed with the
Parent's Current Report on Form 8-K dated December 18, 1997).
*2.2 First Amendment to the Agreement and Plan of Merger, dated as of
December 18, 1997, by and among Sealy Corporation, Sandman Merger
Corporation and Zell/Chilmark Fund, L.P. (Incorporated by reference
to Exhibit 2.2 filed with the Parent's Current Report on Form 8-K
dated December 18, 1997).
**3.1 Amended and Restated Certificate of Incorporation of Sealy Mattress
Company.
**3.2 Amended and Restated By-laws of Sealy Mattress Company.
*4.1 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 9 7/8% Senior
Subordinated Notes due 2007. (Incorporated by reference to Exhibit
4.1 filed with the Parent's Current Report on Form 8-K dated December
18, 1997).
*4.2 Indenture, dated as of December 18, 1997, by and among Sealy Mattress
Company, the Guarantors named therein and The Bank of New York, as
trustee, with respect to the Series A and Series B 10 7/8% Senior
Subordinated Notes due 2007. (Incorporated by reference to Exhibit
4.2 filed with the Parent's Current Report on Form 8-K dated December
18, 1997).
*4.3 Second Supplemental Indenture, dated as of December 5, 1997, by and
between Sealy Corporation and The Bank of New York, as trustee.
(Incorporated by reference to Exhibit 4.3 filed with the Parent's
Current Report on Form 8-K dated December 18, 1997).
**5.1 Opinion and consent of Kirkland & Ellis.
**8.1 Opinion of Kirkland & Ellis as to federal income tax consequences.
*10.1 Dealer Manager Agreement, dated as of November 18, 1997, among Sandman
Merger Corporation, Sealy Corporation and Goldman, Sachs & Co.
(Incorporated by reference to Exhibit 10.1 filed with the Parent's
Current Report on Form 8-K dated December 18, 1997).
*10.2 Purchase Agreement, dated as of December 11, 1997, by and among Sealy
Mattress Company, the Guarantors named therein, Goldman, Sachs & Co.,
J.P. Morgan Securities Inc. and BT Alex. Brown Incorporated.
(Incorporated by reference to Exhibit 10.2 filed with the Parent's
Current Report on Form 8-K dated December 18, 1997).
*10.3 Registration Rights Agreement, dated as of December 18, 1997, by and
among Sealy Mattress Company, the Guarantors named therein, Goldman,
Sachs & Co., J.P. Morgan Securities Inc. and BT Alex. Brown
Incorporated. (Incorporated by reference to Exhibit 10.3 filed with
the Parent's Current Report on Form 8-K dated December 18, 1997).
*10.4 Credit Agreement, dated as of December 18, 1997, among Sealy Mattress
Company, the Guarantors named therein, Goldman Sachs Credit Partners
L.P., as arranger and syndication agent, Morgan Guaranty Trust
Company of New York, as administrative agent, Bankers Trust Company,
as documentation agent, and the other institutions named therein.
(Incorporated by reference to Exhibit 10.4 filed with the Parent's
Current Report on Form 8-K dated December 18, 1997).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*10.5 AXEL Credit Agreement, dated as of December 18, 1997, among Sealy
Mattress Company, the Guarantors named therein, Goldman Sachs Credit
Partners L.P., as arranger and syndication agent, Morgan Guaranty
Trust Company of New York, as administrative agent, Bankers Trust
Company, as documentation agent, and the other institutions named
therein. (Incorporated by reference to Exhibit 10.5 filed with the
Parent's Current Report on Form 8-K dated December 18, 1997).
*10.6 Amended and Restated Employment Agreement, dated as of August 1, 1997,
by and between Sealy Corporation and Ronald L. Jones. (Incorporated by
reference to Exhibit 10.6 filed with the Parent's Current Report on
Form 8-K dated December 18, 1997).
*10.7 Employment Agreement, dated as of August 25, 1997, by and between Sealy
Corporation and Bruce G. Barman. (Incorporated by reference to Exhibit
10.7 filed with the Parent's Current Report on Form 8-K dated December
18, 1997).
*10.8 Employment Agreement, dated as of August 12, 1997, by and between Sealy
Corporation and Jeffrey C. Claypool. (Incorporated by reference to
Exhibit 10.8 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
*10.9 Employment Agreement, dated as of July 30, 1997, by and between Sealy
Corporation and Gary T. Fazio. (Incorporated by reference to Exhibit
10.9 filed with the Parent's Current Report on Form 8-K dated December
18, 1997).
*10.10 Employment Agreement, dated as of August 25, 1997, by and between Sealy
Corporation and Douglas E. Fellmy. (Incorporated by reference to
Exhibit 10.10 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
*10.11 Employment Agreement, dated as of August 28, 1997, by and between Sealy
Corporation and David J. McIlquham. (Incorporated by reference to
Exhibit 10.11 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
*10.12 Employment Agreement, dated as of August 1, 1997, by and between Sealy
Corporation and Lawrence J. Rogers. (Incorporated by reference to
Exhibit 10.12 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
*10.13 Change of Control Agreement, dated as of September 3, 1997, by and
between Sealy Corporation and John G. Bartik. (Incorporated by
reference to Exhibit 10.13 filed with the Parent's Current Report on
Form 8-K dated December 18, 1997).
*10.14 Change of Control Agreement, dated as of August 4, 1997, by and between
Sealy Corporation and James G. Goughenour. (Incorporated by reference
to Exhibit 10.14 filed with the Parent's Current Report on Form 8-K
dated December 18, 1997).
*10.15 Change of Control Agreement, dated as of August 27, 1997, by and
between Sealy Corporation and Richard F. Sowerby. (Incorporated by
reference to Exhibit 10.15 filed with the Parent's Current Report on
Form 8-K dated December 18, 1997).
*10.16 Change of Control Agreement, dated as of August 1, 1997, by and between
Sealy Corporation and Ronald H. Stolle. (Incorporated by reference to
Exhibit 10.16 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
*10.17 Change of Control Agreement, dated as of August 11, 1997, by and
between Sealy Corporation and Kenneth L. Walker. (Incorporated by
reference to Exhibit 10.17 filed with the Parent's Current Report on
Form 8-K dated December 18, 1997).
*10.18 Amendment to Amended and Restated Employment Agreement and Termination
of Stockholders Agreement, dated as of December 17, 1997, between
Ronald L. Jones and Sealy Corporation. (Incorporated by reference to
Exhibit 10.18 filed with the Parent's Current Report on Form 8-K dated
December 18, 1997).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*10.19 Amendment to Employment Agreements, dated as of December 17, 1997,
between the employee named therein and Sealy Corporation.
(Incorporated by reference to Exhibit 10.19 filed with the Parent's
Current Report on Form 8-K dated December 18, 1997).
*10.20 Form of Amendment to Change of Control Agreements, dated as of December
17, 1997. (Incorporated by reference to Exhibit 10.20 filed with the
Parent's Current Report on Form 8-K dated December 18, 1997).
*10.21 Sealy Profit Sharing Plan, Amended and Restated Date: December 1, 1989.
(Incorporated herein by reference to Exhibit 10.1 to the Form 10-K for
the fiscal year ended November 30, 1995 (File No. 1-8738)).
*10.22 Sealy Benefit Equalization Plan, dated December 1, 1994. (Incorporated
herein by reference to Exhibit 10.2 to the Form 10-K for the fiscal
year ended November 30, 1995 (File No. 1-8738)).
*10.23 Sealy Trust Agreement dated June 1, 1990. (Incorporated herein by
reference to Exhibit 10.3 to Parent's Annual Report on Form 10-K for
the fiscal year ended November 30, 1991 (File No. 1-8738)).
*10.24 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).
*10.25 Sealy Corporation Bonus Program. (Incorporated herein by reference to
Exhibit 10.5 to the Form 10-K for the fiscal year ended November 30,
1995 (File No. 1-8738)).
*10.26 Severance Agreement dated March 1, 1996 by and between Sealy
Corporation and Lyman M. Beggs. (Incorporated herein by reference to
Exhibit 10.6 to the Form 10-Q Quarterly Report of Parent dated March
3, 1996 (File No. 1-8738)).
*10.27 Sealy Corporation 1992 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.7 to Parent's Annual Report on Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.28 Sealy Corporation Performance Share Plan. (Incorporated herein by
reference to Exhibit 10.8 to Parent's Annual Report on Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.29 Employment Agreement dated as of October 31, 1992, by and between Sealy
Corporation and Lyman M. Beggs. (Incorporated herein by reference to
Exhibit 10.9 to Parent's Annual Report on Form 10-K for the fiscal
year ended November 30, 1992 (File No. 1-8738)).
*10.30 Letter Agreement, dated as of October 31, 1992 by and between Sealy
Corporation and Lyman M. Beggs. (Incorporated herein by reference to
Exhibit 10.10 to Parent's Annual Report on Form 10-K for the fiscal
year ended November 30, 1992 (File No. 1-8738)).
*10.31 Stockholder Agreement, dated as of October 31, 1992 by and between
Sealy Corporation and Lyman M. Beggs. (Incorporated herein by
reference to Exhibit 10.11 to Parent's Annual Report on Form 10-K for
the fiscal year ended November 30, 1992 (File No. 1-8738)).
*10.32 Letter Agreement, dated June 5, 1991 by and between Sealy Corporation
and Sam F. Smith, Jr. (Incorporated herein by reference to Exhibit
10.15 to Parent's Annual Report on Form 10-K for the fiscal year ended
November 30, 1992 (File No. 1-8738)).
*10.33 Sealy Corporation 1993 Non-Employee Director Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.17 to the Form S-1
Registration Statement of Parent (File No. 33-59134)). (As amended by
Amendment No. 1 dated April 6, 1994 and filed as Exhibit 10.13 to
Parent's Annual Report on Form 10-K for the fiscal year ended November
30, 1994.)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
*10.34 Amendment No. 2 to Sealy Corporation 1993 Non-Employee Director Stock
Option Plan, dated June 27, 1995. (Incorporated herein by reference to
Exhibit 10.14 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.35 Amendment No. 3 to Sealy Corporation 1993 Non-Employee Director Stock
Option Plan dated as of May 1, 1996. (Incorporated herein by reference
to Exhibit 10.15 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.36 Employment Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
Exhibit 10.15 to the Form 10-Q Quarterly Report of Parent dated March
3, 1996 (File No. 1-8738)).
*10.37 Amendment No. 1 to Sealy Bonus Plan. (Incorporated herein by reference
to Exhibit 10.17 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.38 Sealy Corporation Bonus Plan. (Incorporated herein by reference to
Exhibit 10.18 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.39 Amendment No. 1 to Sealy Corporation 1992 Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.19 to Parent's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.40 Amendment No. 1 to Sealy Corporation Performance Share Plan.
(Incorporated herein by reference to Exhibit 10.20 to Parent's Annual
Report on Form 10-K for the fiscal year ended December 1, 1996 (File
No. 1-8738)).
*10.41 Amendment No. 1 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to Exhibit 10.21 to Parent's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.42 Amendment No. 2 to Sealy Profit Sharing Plan. (Incorporated herein by
reference to Exhibit 10.22 to Parent's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.43 1996 Transitional Restricted Stock Plan. (Incorporated herein by
reference to Exhibit 10.23 to Parent's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.44 Sealy Corporation 1997 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.24 to Parent's Annual Report on Form 10-K for
the fiscal year ended December 1, 1996 (File No. 1-8738)).
*10.45 Stock Option Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
Exhibit 10.25 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.46 Stockholder Agreement dated March 4, 1996 by and among Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
Exhibit 10.26 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
*10.47 Restricted Stock Agreement dated March 4, 1996 by and between Sealy
Corporation and Ronald L. Jones. (Incorporated herein by reference to
Exhibit 10.27 to Parent's Annual Report on Form 10-K for the fiscal
year ended December 1, 1996 (File No. 1-8738)).
10.48 Stockholders Agreement dated as of December 18, 1997 by and among Sealy
Corporation and the Stockholders named therein.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.49 Registration Rights Agreement dated as of December 18, 1997 by and
among Sealy Corporation and the Stockholders named therein.
10.50 Management Services Agreement dated as of December 18, 1997 by and
between Sealy Corporation, Sealy Mattress and Bain Capital, Inc.
**12.1 Statement of Computation of Ratios.
*21.1 Subsidiaries of Sealy Mattress Company.
23.1 Consent of KPMG Peat Marwick LLP.
**23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
*24.1 Powers of Attorney (included on signature page hereto).
*25.1 Statement of Eligibility of Trustee on Form T-1.
*27.1 Financial Data Schedule (Incorporated herein by reference to Exhibit
27.1 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 1, 1996).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Tender Instructions.
</TABLE>
- --------
* Previously filed
** To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES.
Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of the chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
II-6
<PAGE>
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by
means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY OR ON BEHALF
OF THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel and May 4, 1998
KENNETH L. WALKER Secretary
Director
* May 4, 1998
- -------------------------------------
JOSH BEKENSTEIN
Director
* May 4, 1998
- -------------------------------------
PAUL EDGERLEY
Director
* May 4, 1998
- -------------------------------------
MICHAEL KRUPKA
II-9
<PAGE>
SIGNATURE CAPACITY DATE
Director
* May 4, 1998
- -------------------------------------
JOHN M. SALLAY
Director
* May 4, 1998
- -------------------------------------
JAMES W. JOHNSTON
Director
* May 4, 1998
- -------------------------------------
JONAS STEINMAN
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Corporation
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY OR ON BEHALF
OF THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel and May 4, 1998
KENNETH L. WALKER Secretary
II-11
<PAGE>
SIGNATURE CAPACITY DATE
Director
* May 4, 1998
- -------------------------------------
JOSH BEKENSTEIN
Director
* May 4, 1998
- -------------------------------------
PAUL EDGERLEY
Director
* May 4, 1998
- -------------------------------------
MICHAEL KRUPKA
Director
* May 4, 1998
- -------------------------------------
JOHN M. SALLAY
Director
* May 4, 1998
- -------------------------------------
JAMES W. JOHNSTON
Director
* May 4, 1998
- -------------------------------------
JONAS STEINMAN
II-12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Puerto
Rico
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-13
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Ohio-Sealy Mattress Manufacturing
Co., Inc. (Randolph)
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Ohio-Sealy Mattress Manufacturing
Co.--Ft. Worth
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4,1998.
Ohio-Sealy Mattress Manufacturing
Co.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Ohio-Sealy Mattress Manufacturing
Co.--Housto
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNA URE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Michigan,
Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Kansas
City, Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy of Maryland and Virginia, Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Illinois
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-21
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
A. Brandwein & Co.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-22
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Albany,
Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy of Minnesota, Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-24
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Company of Memphis
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-25
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
The Stearns & Foster Bedding Company
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
The Stearns & Foster Upholstery
Furniture Company
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-27
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy, Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-28
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
The Ohio Mattress Company Licensing
and Components Group
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF
OHIO, ON MAY 4, 1998.
Sealy Mattress Manufacturing
Company, Inc.
/s/ Ronald L. Jones
By: _________________________________
Name: Ronald L. Jones
Title: Chief Executive Officer and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
/s/ Ronald L. Jones Chief Executive
- ------------------------------------- Officer, President May 4, 1998
RONALD L. JONES and Director
(principal
executive officer)
/s/ Richard F. Sowerby
- ------------------------------------- Vice President of May 4, 1998
RICHARD F. SOWERBY Finance (principal
financial and
accounting officer)
/s/ Kenneth L. Walker Vice President,
- ------------------------------------- General Counsel, May 4, 1998
KENNETH L. WALKER Secretary
and Director
/s/ Ronald H. Stolle Director
- ------------------------------------- May 4, 1998
RONALD H. STOLLE
II-30
<PAGE>
EXHIBIT 10.48
STOCKHOLDERS AGREEMENT
----------------------
This STOCKHOLDERS AGREEMENT is dated as of December 18, 1997, by and among
Sealy Corporation, a Delaware corporation (the "Company"); Bain Capital Fund V,
-------
L.P. ("Bain Fund V"); Bain Capital Fund V-B, L.P. ("Bain Fund V-B"); BCIP
----------- -------------
Associates ("BCIP"); BCIP Trust Associates, L.P. ("BCIP Trust"); Harvard Private
---- ----------
Capital Holdings, Inc. ("Harvard");Sealy Investors 1, LLC ("SILLC 1"); Sealy
------- -------
Investors 2, LLC ("SILLC 2"); Sealy Investors 3, LLC ("SILLC 3"); Zell/Chilmark
------- -------
Fund, L.P. ("Zell"); and Randolph Street Partners II ("Randolph").
---- --------
On October 30, 1997, the Company, Sandman Merger Corporation, a transitory
Delaware merger corporation ("Sandman"), and Zell entered into an Agreement and
-------
Plan of Merger (the "Merger Agreement") pursuant to which, simultaneous with the
----------------
execution of this Agreement, Sandman merged with and into the Company (such
merger, the "Merger") with the Company as the surviving corporation.
------
Immediately prior to the execution of this Agreement, Bain Fund V, Bain
Fund V-B, BCIP, BCIP Trust, Harvard, SILLC 1, SILLC 2, SILLC 3 and Randolph
purchased a number of shares of Sandman's common stock ("Sandman Shares")
--------------
pursuant to a Subscription Agreement, dated as of the date hereof, by and among
such Persons (as defined below) and Sandman.
In connection with the Merger (i) certain shares of the Company's preferred
stock owned by Zell have been converted into a Junior Subordinated Promissory
Note and a number of shares of the Company's Common Stock and (ii) the Sandman
Shares have been converted into a number of shares of the Company's Common
Stock.
The Company and the Stockholders (as defined below) desire to enter into
this Agreement for the purposes, among others, of (i) establishing the
composition of the Board (as defined below), (ii) assuring continuity in the
management and ownership of the Company and (iii) limiting the manner and terms
by which the Stockholder Shares (as defined below) may be transferred.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings:
"Affiliate" means, when used with reference to a specified Person, any
---------
Person that directly or indirectly controls or is controlled by or is under
common control with the specified Person. As used in this definition, "control"
(including, with its correlative meanings, "controlled
<PAGE>
by" and "under common control with") shall mean possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise). With respect to any Person who is an
individual, "Affiliates" shall also include, without limitation, any member of
such individual's Family Group. Notwithstanding the foregoing, for purposes of
this Agreement, any Person who is an administrative member of a limited
liability company and who owns less than 10% of such limited liability company's
membership interests shall not be deemed to be an Affiliate of such limited
liability company.
"Bain Fund" means any of Bain Fund V, Bain Fund V-B, BCIP, BCIP Trust, or
---------
Randolph.
"Bain Investor" means any Bain Fund or any of their respective Permitted
-------------
Transferees.
"Bain Shares" means all Stockholder Shares issued or issuable to any Bain
-----------
Investor.
"Board" means the Company's board of directors.
-----
"Class A Common" means the Company's Class A Common Stock, par value $.01
--------------
per share.
"Class B Common" means the Company's Class B Common Stock, par value $.01
--------------
per share.
"Class L Common" means the Company's Class L Common Stock, par value $.01
--------------
per share.
"Class M Common" means the Company's Class M Common Stock, par value $.01
--------------
per share.
"Common Stock" means collectively Class A Common, Class B Common, Class L
------------
Common, Class M Common and any other common stock authorized by the Company.
"Family Group" means, with respect to any Person who is an individual, (i)
------------
such Person's spouse, former spouse and descendants (whether natural or
adopted), parents and their descendants and any spouse of the foregoing persons
(collectively, "relatives") or (ii) the trustee, fiduciary or personal
representative of such Person and any trust solely for the benefit of such
Person and/or such Person's relatives.
"Harvard Investor" means any of Harvard or any of its Permitted
----------------
Transferees.
"Harvard Shares" means all Stockholder Shares issued or issuable to any
--------------
Harvard Investor.
-2-
<PAGE>
"Investor" means any Bain Investor, any Harvard Investor or any SILLC
--------
Investor.
"Investors" means collectively the Bain Investors, the Harvard Investors
---------
and the SILLC Investors.
"Investor Shares" means all Stockholder Shares issued or issuable to any
---------------
Investor.
"Permitted Transferee" has the meaning set forth in Section 4(e)(ii)
--------------------
hereof.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a governmental entity or any
department, agency or political subdivision thereof or any other entity or
organization.
"Public Offering" means an underwritten public offering and sale of the
---------------
Common Stock pursuant to an effective registration statement under the
Securities Act; provided that a Public Offering shall not include an offering
made in connection with a business acquisition or combination or an employee
benefit plan.
"Public Sale" means any sale of Stockholder Shares to the public pursuant
-----------
to an offering registered under the Securities Act or to the public pursuant to
the provisions of Rule 144 (or any similar rule or rules then in effect) under
the Securities Act.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"SILLC Investor" means any of SILLC 1, SILLC 2, SILLC 3 or any of their
--------------
respective Permitted Transferees.
"SILLC Shares" means all Stockholder Shares issued or issuable to any SILLC
------------
Investor.
"Stockholder" means any of the Stockholders.
-----------
"Stockholder Shares" means (i) all shares of Common Stock held, directly or
------------------
indirectly, by the Stockholders, and (ii) all equity securities issued or
issuable directly or indirectly with respect to any Common Stock referred to in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular shares constituting Stockholder Shares,
such shares will cease to be Stockholder Shares when they have been Transferred
in a Public Sale.
"Stockholders" means collectively the Investors and the Zell Holders.
------------
-3-
<PAGE>
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, limited liability company, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors thereof is at the time owned or controlled, directly
or indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, limited liability
company, association or other business entity, a majority of the partnership or
other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more Subsidiaries of that
Person or a combination thereof. For purposes hereof, a Person or Persons shall
be deemed to have a majority ownership interest in a partnership, limited
liability company, association or other business entity if such Person or
Persons shall be allocated a majority of partnership, limited liability company,
association or other business entity gains or losses or shall be or control the
managing director, managing member, manager or a general partner of such
partnership, limited liability company, association or other business entity.
"Transfer" means any voluntary or involuntary, direct or indirect sale,
--------
transfer, conveyance, assignment, pledge, hypothecation, gift, delivery or other
disposition. Notwithstanding the foregoing, the conversion by any Stockholder
of any shares of any class of Common Stock into any other class of Common Stock
shall not be deemed a "Transfer" for purposes of this Agreement, provided that
such Stockholder continues to own such converted shares immediately after such
conversion.
"Unaffiliated Third Party" means any Person who, immediately prior to the
------------------------
contemplated transaction, (i) is not a Person who directly or indirectly owns in
excess of 5% of the outstanding shares of Common Stock on a fully-diluted basis
(a "5% Owner"), (ii) is not controlling, controlled by or under common control
--------
with any such 5% Owner and (iii) is not the spouse or descendent (by birth or
adoption) of any such 5% Owner or a trust for the benefit of such 5% Owner
and/or such other Persons.
"Zell Holder" means any of Zell or any of its Permitted Transferees.
-----------
"Zell Shares" means all Stockholder Shares issued or issuable to any Zell
-----------
Holder.
2. Board of Directors.
------------------
(a) To the extent permitted by law, each Stockholder shall vote all voting
securi ties of the Company over which such Stockholder has voting control, and
shall take all other necessary or desirable actions within such Stockholder's
control (whether in such Stockholder's capacity as a stockholder, director,
member of a board committee or officer of the Company or otherwise, and
including, without limitation, attendance at meetings in person or by proxy for
purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all necessary and desirable actions within
its control (including, without limitation, calling special board and
shareholder meetings), so that:
(i) the authorized number of directors of the Board shall be seven;
-4-
<PAGE>
(ii) holders of record of a majority of the Bain Shares entitled to
vote for directors of the Board will designate three (3) of the seven total
directors of the Board (each a "Bain Director") (the three Bain Directors
-------------
shall initially be Joshua Bekenstein, Paul Edgerley and Michael Krupka);
(iii) prior to the consummation of an initial Public Offering, so
long as Harvard and its Affiliates (and not any of their respective
assigns) own at least 5% of the outstanding shares of Common Stock, Harvard
and its Affiliates who own Stockholder Shares (and not any of their
respective assigns) will designate one of the seven total directors of the
Board (the "Harvard Director") (the Harvard Director shall initially be
----------------
John M. Sallay);
(iv) any director designated pursuant to clause (ii) or (iii) above
shall be removed from the Board or any committee thereof (with or without
cause) at the written request of the Stockholder or Stockholders which have
the right to designate such director hereunder, but only upon such written
request and under no other circumstances (in each case, determined on the
basis specified in clause (ii) or (iii) above, as the case may be);
(v) in the event that any director designated hereunder for any reason
ceases to serve as a member of the Board or any committee thereof during
such director's term of office, the resulting vacancy on the Board or
committee shall be filled by a director designated by the Stockholders
referred to in clause (ii) or (iii) above, as the case may be;
(vi) at the Board's election, the composition of the board of
directors (or any similar governing body) of any of the Company's
Subsidiaries shall be the same as the Board; and
(vii) no executive committee of the Board shall have the authority to
(1) declare dividends of the Company, (2) authorize the issuance of capital
stock of the Company (other than to directors, officers or employees of the
Company and its Subsidiaries pursuant to benefit plans), (3) authorize the
execution by the Company of any merger, consolidation or recapitalization
agreement or any agreement to sell all or substantially all of the assets
of the Company, (4) authorize the refinancing of any of the material
indebtedness for borrowed money of the Company and its Subsidiaries, (5)
authorize any material acquisition of another Person or substantially all
of the assets of another Person, (6) authorize the creation of any material
Subsidiary of the Company which is not directly or indirectly wholly-owned
by the Company, or (7) authorize capital expenditures individually or in
the aggregate during any applicable period $10 million in excess of the
capital expenditures provided for in the applicable budget or budgets of
the Company and its Subsidiaries approved by the Board. For purposes of
this clause (vii), the terms "material" and "materially" shall refer to an
amount or a valuation in excess of $50 million.
(b) The Company shall reimburse the directors of the Board for all
reasonable out-of-pocket expenses borne by such directors in connection with the
performance of their duties as directors of the Company. In addition, the
Company shall pay such additional compensation to
-5-
<PAGE>
the directors of the Company who are not employees of the Company or any of its
Subsidiaries or any Stockholder or any Affiliate of any Stockholder as the Board
so determines.
(c) If any party fails to designate in writing a representative to fill a
director position pursuant to the terms of this Section 2, the election of a
Person to such director position shall be accomplished in accordance with the
Company's Certificate of Incorporation and by-laws and applicable law. In the
event that, at any time, any provision of the Company's Certificate of
Incorporation or by-laws is inconsistent with the requirements of any provision
of this Section 2, the Stockholders shall take such action as may be necessary
to amend any such provision in the Company's Certificate of Incorporation or by-
laws, as the case may be, to conform with such requirements.
3. Conflicting Agreements. Each Stockholder represents that such
----------------------
Stockholder has not granted and is not a party to any proxy, voting trust or
other agreement which is inconsistent with or conflicts with the provisions of
this Agreement, and no holder of Stockholder Shares shall grant any proxy or
become party to any voting trust or other agreement which is inconsistent with
or conflicts with the provisions of this Agreement.
4. Restrictions on Transfer of Stockholder Shares.
----------------------------------------------
(a) General Restrictions.
--------------------
(i) Prior to the earlier of (x) the tenth anniversary of the date
hereof and (y) the first day after the period commencing on the date hereof
and ending on the day the Company's financial statements are filed with the
SEC for the first full fiscal quarter after the Company issues any
securities to the public pursuant to a filing with the SEC, subject to
Section 7 hereof, a Zell Holder may Transfer Stockholder Shares only (A) if
such Zell Holder is exercising a tag-along right granted to such Zell
Holder pursuant to Section 4(d), then to any Person, provided, that such
--------
Person shall have complied with the requirements of Section 4(e)(ii), or
(B) pursuant to the terms of Section 5.
(ii) On or after the earlier of (x) the tenth anniversary of the date
hereof and (y) the first day after the period commencing on the date hereof
and ending on the day the Company's financial statements are filed with the
SEC for the first full fiscal quarter after the Company issues any
securities to the public pursuant to a filing with the SEC, subject to
Section 7 hereof, a Zell Holder may Transfer Stockholder Shares only (A) in
Public Sales, (B) if such Zell Holder has complied with the terms and
requirements of Section 4(c) or if such Zell Holder is exercising a tag-
along right granted to such Zell Holder pursuant to Section 4(d), then to
any Person, provided, that such Person shall have complied with the
--------
requirements of Section 4(e)(ii), or (C) pursuant to the terms of Section
5.
(iii) Subject to Section 7 hereof, an Investor may Transfer
Stockholder Shares only (A) in Public Sales, (B) if such Investor has
complied with the terms and requirements of Sections 4(b), 4(c) and 4(d),
to the extent applicable, or if such Investor is exercising a tag-along
right granted to such Investor pursuant to Section 4(d), then to any
Person,
-6-
<PAGE>
provided, that such Person shall have complied with the requirements of
--------
Section 4(e)(ii), or (C) pursuant to the terms of Section 5.
(b) Right of First Offer granted to Harvard. Subject to Section
---------------------------------------
4(e)(i) (all terms defined in this Section 4(b) shall be for purposes of this
Section 4(b) only):
(i) If at any time any Bain Investor (a "Selling Holder") proposes to
--------------
Transfer any Stockholder Shares (other than pursuant to a Public Sale, or
pursuant to the terms of Section 5), then such Selling Holder will, not
fewer than fifteen (15) business days prior to making such Transfer, give
notice (the "Proposed Transfer Notice") to Harvard and its Affiliates who
------------------------
then own Stockholder Shares (and not any of their respective assigns) and
to the Company specifying the Stockholder Shares proposed to be Transferred
(the "Offered Shares").
--------------
(ii) At any time within ten (10) business days after delivery of the
Proposed Transfer Notice (the "Exercise Period") Harvard and its Affiliates
---------------
who then own Stockholder Shares (and not any of their respective assigns)
(the "Offering Holder") may notify the Selling Holder and the Company in
---------------
writing of their offer (the "Offer") to purchase all of the Offered Shares
-----
and the price (the "Offered Price") and the other terms and conditions upon
-------------
which such Offering Holder proposes to purchase such Offered Shares (such
offer must be solely for cash) (the "Offer Notice"). The Offer Notice will
------------
constitute an irrevocable offer by the Offering Holder to acquire the
Offered Shares from the Selling Holder at the Offered Price and on the
terms specified in the Offer Notice.
(iii) At any time during the 60 day period commencing upon the
expiration of the Exercise Period, the Selling Holder may
(A) if an Offer Notice has been delivered to the Selling Holder
during the applicable Exercise Period, then (x) deliver notice to the
Offering Holder accepting the applicable Offer (the "Acceptance
----------
Notice") or (y) provided the Selling Holder has also complied with any
applicable provisions of Section 4(d) and no transferee is an
Affiliate of the Selling Holder, Transfer all (unless reduced pursuant
to the exercise of rights granted to other Stockholders in Section
4(d)) of the Offered Shares, at a price which is greater than the
price specified in the Offer Notice and on other terms and conditions
which are not in the aggregate more favorable to the transferee
thereof than those specified in the Offer Notice, to any Person(s), or
(B) if an Offer Notice has not been delivered to the Selling
Holder during the applicable Exercise Period, then, provided the
Selling Holder has also complied with any applicable provisions of
Section 4(d) and no transferee is an Affiliate of the Selling Holder,
Transfer all (unless reduced pursuant to the exercise of rights
granted to other Stockholders in Section 4(d)) of the Offered Shares
to any Person(s).
(iv) Upon the proper delivery of an Acceptance Notice, the Offering
Holder and the Selling Holder shall be firmly bound to consummate the
purchase and sale of the Offered
-7-
<PAGE>
Shares in accordance with the terms hereof and the applicable Proposed
Transfer Notice, Offer Notice and Acceptance Notice. Subject to the
provisions hereof, within sixty (60) days after the Offering Holder's
receipt of the applicable Acceptance Notice, the Offering Holder shall
purchase and the Selling Holder shall sell all of the Offered Shares at a
mutually agreeable time and place (the "Offered Shares Closing").
----------------------
(v) At the Offered Shares Closing, the Selling Holder shall deliver to
the Offering Holder certificates representing the Offered Shares to be
purchased by the Offering Holder, duly endorsed with signature guaranteed,
and the Offering Holder shall deliver to the Selling Holder the Offered
Price by wire transfer of immediately available funds to an account
designated by such Selling Holder.
(vi) Any Offered Shares not transferred within the applicable time
periods specified above will again be subject to the provisions of this
Section 4(b) upon any subsequent proposed Transfer.
(vii) The provisions of this Section 4(b) shall terminate upon the
earlier of (x) the consummation of an initial Public Offering or (y) the
date upon which Harvard and its Affiliates (and not any of their respective
assigns) cease to own at least 5% of the outstanding shares of Common
Stock.
(c) Right of First Offer granted to the Company and the Bain
--------------------------------------------------------
Investors. Subject to Section 4(e)(i) (all terms defined in this Section 4(c)
shall be for purposes of this Section 4(c) only):
(i) If at any time any Harvard Investor, any SILLC Investor or any
Zell Holder (a "Selling Holder") proposes to Transfer any Stockholder
--------------
Shares (other than pursuant to a Public Sale, or pursuant to the terms of
Section 5), then such Selling Holder will, not fewer than twenty (20)
business days prior to making such Transfer, give notice (the "Proposed
--------
Transfer Notice") to the Bain Investors and to the Company specifying the
---------------
Stockholder Shares proposed to be Transferred (the "Offered Shares").
--------------
(ii) At any time within eight (8) business days after delivery of the
Proposed Transfer Notice (the "Company Exercise Period") the Company may
-----------------------
notify the Selling Holder and the Bain Investors in writing of its offer
(the "Company Offer") to purchase all of the Offered Shares and the price
-------------
(the "Company Offered Price") and the other terms and conditions upon which
---------------------
the Company proposes to purchase such Offered Shares (such offer must be
solely for cash) (the "Company Offer Notice"). The Company Offer Notice
--------------------
will constitute an irrevocable offer, subject to financing, by the Company
to acquire the Offered Shares from the Selling Holder at the Company
Offered Price and on the terms specified in the Company Offer Notice.
(iii) If the Company has not delivered a Company Offer Notice or if
holders of a majority of the Bain Shares then outstanding (collectively,
the "Bain Offering Holder") desire to offer a price in excess of the
--------------------
Company Offered Price for the Offered Shares, then,
-8-
<PAGE>
at any time during the eight (8) business day period commencing upon the
expiration of the Company Exercise Period (the "Bain Exercise Period"), the
--------------------
Bain Offering Holder may notify the Selling Holder and the Company in
writing of their offer (the "Bain Offer") to purchase all of the Offered
-----------
Shares and the price (the "Bain Offered Price") and the other terms and
-------------------
conditions upon which the Bain Offering Holder proposes to purchase such
Offered Shares (such offer must be solely for cash) (the "Bain Offer
----------
Notice"). The Bain Offer Notice will constitute an irrevocable offer by
-------
the Bain Offering Holder to acquire the Offered Shares from the Selling
Holder at the Bain Offered Price and on the terms specified in the Bain
Offer Notice.
(iv) At any time during the 60 day period commencing upon the
expiration of the Bain Exercise Period, the Selling Holder may
(A) if a Company Offer Notice has been delivered to the Selling
Holder during the applicable Company Exercise Period and a Bain Offer
Notice has not been delivered to the Selling Holder during the
applicable Bain Exercise Period, then (x) deliver notice to the
Company accepting the applicable Company Offer (an "Acceptance
----------
Notice") or (y) provided the Selling Holder has also complied with any
applicable provisions of Section 4(d) and no transferee is an
Affiliate of the Selling Holder, Transfer all (unless reduced pursuant
to the exercise of rights granted to other Stockholders in Section
4(d)) of the Offered Shares, at a price which is greater than the
price specified in the Company Offer Notice and on other terms and
conditions which are not in the aggregate more favorable to the
transferee thereof than those specified in the Company Offer Notice,
to any Person(s), or
(B) if a Bain Offer Notice has been delivered to the Selling
Holder during the applicable Bain Exercise Period, then (x) deliver
notice to the Bain Offering Holder accepting the applicable Bain Offer
(also, an "Acceptance Notice") or (y) provided the Selling Holder has
-----------------
also complied with any applicable provisions of Section 4(d) and no
transferee is an Affiliate of the Selling Holder, Transfer all (unless
reduced pursuant to the exercise of rights granted to other
Stockholders in Section 4(d)) of the Offered Shares, at a price which
is greater than the price specified in the Bain Offer Notice and on
other terms and conditions which are not in the aggregate more
favorable to the transferee thereof than those specified in the Bain
Offer Notice, to any Person(s), or
(C) if a Company Offer Notice has not been delivered to the
Selling Holder during the applicable Company Exercise Period and a
Bain Offer Notice has not been delivered to the Selling Holder during
the applicable Bain Exercise Period, then, provided the Selling Holder
has also complied with any applicable provisions of Section 4(d) and
no transferee is an Affiliate of the Selling Holder, Transfer all
(unless reduced pursuant to the exercise of rights granted to other
Stockholders in Section 4(d)) of the Offered Shares to any Person(s).
-9-
<PAGE>
(v) Upon the proper delivery of an Acceptance Notice, the Company or
the Bain Offering Holder, as the case may be, and the Selling Holder shall
be firmly bound (in the case of the Company, subject to financing but only
so long as such financing is obtained within 30 days after receipt of the
applicable Acceptance Notice) to consummate the purchase and sale of the
Offered Shares in accordance with the terms hereof and the applicable
Proposed Transfer Notice, Company or Bain Offer Notice, as the case may be,
and Acceptance Notice. Subject to the provisions hereof, within sixty (60)
days after the Company's or the Bain Offering Holder's, as the case may be,
receipt of the applicable Acceptance Notice, the Company or the Bain
Offering Holder, as the case may be, shall purchase and the Selling Holder
shall sell all of the Offered Shares at a mutually agreeable time and place
(the "Offered Shares Closing").
----------------------
(vi) At the Offered Shares Closing, the Selling Holder shall deliver
to the Company or the Offering Holder, as the case may be, certificates
representing the Offered Shares to be purchased by the Company or the Bain
Offering Holder, as the case may be, duly endorsed with signature
guaranteed, and the Company or the Bain Offering Holder, as the case may
be, shall deliver to the Selling Holder the Offered Price by wire transfer
of immediately available funds to an account designated by such Selling
Holder.
(vii) Any Offered Shares not Transferred within the applicable time
periods specified above will again be subject to the provisions of this
Section 4(c) upon any subsequent proposed Transfer.
(viii) The provision of this Section 4(c) shall terminate upon the
consummation of an initial Public Offering.
(d) Tag Along Rights.
----------------
(i) Tag Along Rights in the event of certain Transfers by the Bain
--------------------------------------------------------------
Investors. Subject to Section 4(e)(i), at least 10 business days prior to
---------
the Transfer (or series of Transfers) by any of the Bain Investors
(collectively, the "Bain Transferring Stockholder") of any Bain Shares
-----------------------------
representing more than 10% of the outstanding Bain Shares to a Person that
is not an Affiliate of any Bain Transferring Stockholder (other than
pursuant to a Public Sale, pursuant to the terms of Section 5, a Transfer
to any Harvard Investor pursuant to the terms of Section 4(b), or a
Transfer by any limited partner of any of the Bain Funds), the Bain
Transferring Stockholder shall deliver a written notice (the "Bain Sale
---------
Notice") to the Harvard Investors and the SILLC Investors (collectively,
------
the "HS Other Investors") and to the Company, specifying in reasonable
------------------
detail the identity of the prospective transferee(s), the class and the
number of the Stockholder Shares to be Transferred, and the other material
terms and conditions of such contemplated Transfer; provided, that such
--------
Bain Sale Notice may only be delivered after the applicable Exercise Period
referred to in Section 4(b) has expired or been waived. Any of the HS Other
Investors may elect to participate in such contemplated Transfer by
delivering written notice to the Bain Transferring Stockholder within 5
business days after its receipt of the Bain Sale Notice. If any of the HS
Other Investors elects to participate in such Transfer, each of the Bain
Transferring Stockholder
-10-
<PAGE>
and such HS Other Investors shall be entitled to sell in such contemplated
Transfer, at the same price and on the same terms, a number of each class
of Stockholder Shares to be Transferred equal to the product of (x) the
quotient determined by dividing the percentage of such class of Stockholder
Shares owned by such Stockholder by the aggregate percentage of such class
of Stockholder Shares owned by the Stockholders (including the Bain
Transferring Stockholder) participating in such contemplated Transfer and
(y) the aggregate number of Stockholder Shares of such class to be sold in
such contemplated Transfer. Each Stockholder Transferring Stockholder
Shares pursuant to this Section 4(d)(i) shall pay its pro rata share (based
on the number of Stockholder Shares to be sold) of the expenses incurred by
the Stockholders in connection with such Transfer and shall take all
necessary and desirable actions as reasonably directed by the Bain
Transferring Stockholder in connection with the consummation of such
Transfer, including without limitation executing the applicable purchase
agreement; provided, that, notwithstanding the foregoing, each Stockholder
--------
Transferring Stockholder Shares pursuant to this Section 4(d)(i) shall only
be responsible for its pro rata share (based upon the number of Stockholder
Shares to be Transferred) of any indemnification obligations of all such
Stockholders in connection with such Transfer.
(ii) Tag Along Rights in the event of certain Transfers by the SILLC
---------------------------------------------------------------
Investors. Subject to Section 4(e)(i), at least 10 business days prior to
---------
the Transfer (or series of Transfers) by any of the SILLC Investors
(collectively, the "SILLC Transferring Stockholder") of any SILLC Shares
------------------------------
representing more than 10% of the outstanding SILLC Shares to a Person that
is not an Affiliate of any SILLC Transferring Stockholder (other than
pursuant to a Public Sale, pursuant to the terms of Section 5, or a
Transfer to the Company or any Bain Investor pursuant to the terms of
Section 4(c)), the SILLC Transferring Stockholder shall deliver a written
notice (the "SILLC Sale Notice") to the Harvard Investors and the Bain
-----------------
Investors (collectively, the "HB Other Investors") and to the Company,
------------------
specifying in reasonable detail the identity of the prospective
transferee(s), the class and the number of the Stockholder Shares to be
Transferred, and the other material terms and condi tions of such
contemplated Transfer; provided, that such SILLC Sale Notice may only be
--------
delivered after the applicable Bain Exercise Period referred to in Section
4(c) has expired or been waived. Any of the HB Other Investors may elect
to participate in such contemplated Transfer by delivering written notice
to the SILLC Transferring Stockholder within 5 business days after its
receipt of the SILLC Sale Notice. If any of the HB Other Investors elects
to participate in such Transfer, each of the SILLC Transferring Stockholder
and such HB Other Investors shall be entitled to sell in such contemplated
Transfer, at the same price and on the same terms, a number of each class
of Stockholder Shares to be Transferred equal to the product of (x) the
quotient determined by dividing the percentage of such class of Stockholder
Shares owned by such Stockholder by the aggregate percentage of such class
of Stockholder Shares owned by the Stockholders (including the SILLC
Transferring Stockholder) participating in such contemplated Transfer and
(y) the aggregate number of Stockholder Shares of such class to be sold in
such contemplated Transfer. Each Stockholder Transferring Stockholder
Shares pursuant to this Section 4(d)(ii) shall pay its pro rata share
(based on the number of Stockholder Shares to be sold) of the expenses
incurred by the Stockholders in connection with such Transfer and shall
take all necessary
-11-
<PAGE>
and desirable actions as reasonably directed by the SILLC Transferring
Stockholder in connection with the consummation of such Transfer, including
without limitation executing the applicable purchase agreement; provided,
--------
that, notwithstanding the foregoing, each Stockholder Transferring
Stockholder Shares pursuant to this Section 4(d)(ii) shall only be
responsible for its pro rata share (based upon the number of Stockholder
Shares to be Transferred) of any indemnification obligations of all such
Stockholders in connection with such Transfer.
(iii) Tag Along Rights in the event of certain Transfers by the
---------------------------------------------------------
Harvard Investors. Subject to Section 4(e)(i), at least 10 business days
-----------------
prior to the Transfer (or series of Transfers) by any of the Harvard
Investors (collectively, the "Harvard Transferring Stockholder") of any
--------------------------------
Harvard Shares representing more than 10% of the outstanding Harvard Shares
to a Person that is not an Affiliate of any Harvard Transferring
Stockholder (other than pursuant to a Public Sale, pursuant to the terms of
Section 5, or a Transfer to the Company or any Bain Investor pursuant to
the terms of Section 4(c)), the Harvard Transferring Stockholder shall
deliver a written notice (the "Harvard Sale Notice") to the SILLC Investors
-------------------
and the Bain Investors (collectively, the "SB Other Investors") and to the
------------------
Company, specifying in reasonable detail the identity of the prospective
transferee(s), the class and the number of the Stockholder Shares to be
Transferred, and the other material terms and conditions of such
contemplated Transfer; provided, that such Harvard Sale Notice may only be
--------
delivered after the applicable Bain Exercise Period referred to in Section
4(c) has expired or been waived. Any of the SB Other Investors may elect
to participate in such contemplated Transfer by delivering written notice
to the Harvard Transferring Stockholder within 5 business days after its
receipt of the Harvard Sale Notice. If any of the SB Other Investors
elects to participate in such Transfer, each of the Harvard Transferring
Stockholder and such SB Other Investors shall be entitled to sell in such
contemplated Transfer, at the same price and on the same terms, a number of
each class of Stockholder Shares to be Transferred equal to the product of
(x) the quotient determined by dividing the percentage of such class of
Stockholder Shares owned by such Stockholder by the aggregate percentage of
such class of Stockholder Shares owned by the Stockholders (including the
Harvard Transferring Stockholder) participating in such contemplated
Transfer and (y) the aggregate number of Stockholder Shares of such class
to be sold in such contemplated Transfer. Each Stockholder Transferring
Stockholder Shares pursuant to this Section 4(d)(iii) shall pay its pro
rata share (based on the number of Stockholder Shares to be sold) of the
expenses incurred by the Stockholders in connection with such Transfer and
shall take all necessary and desirable actions as reasonably directed by
the Harvard Transferring Stockholder in connection with the consummation of
such Transfer, including without limitation executing the applicable
purchase agreement; provided, that, notwithstanding the foregoing, each
--------
Stockholder Transferring Stockholder Shares pursuant to this Section
4(d)(iii) shall only be responsible for its pro rata share (based upon the
number of Stockholder Shares to be Transferred) of any indemnification
obligations of all such Stockholders in connection with such Transfer.
(iv) Tag Along Rights granted to the Zell Holders. Subject to Section
--------------------------------------------
4(e)(i), at least 10 business days prior to the Transfer (or series of
related Transfers) by one or more
-12-
<PAGE>
of the Investors (collectively, the "Transferring Stockholder") of any
-------------------------
Stockholder Shares representing more than a majority of the voting
Stockholder Shares then owned by all Investors to an Unaffiliated Third
Party (other than pursuant to a Public Sale, pursuant to the terms of
Section 5, a Transfer to Harvard or any of its Affiliates pursuant to the
terms of Section 4(b), or a Transfer to the Company or any Bain Investor
pursuant to the terms of Section 4(c)), the Transferring Stockholder shall
deliver a written notice (the "Sale Notice") to the Zell Holders and to
-----------
the Company, specifying in reasonable detail the identity of the
prospective transferee(s), the class and the number of the Stockholder
Shares to be Transferred, and the other material terms and conditions of
such contemplated Transfer. Any of the Zell Holders may elect to
participate in such contemplated Transfer by delivering written notice to
the Transferring Stockholder within 5 business days after its receipt of
the Sale Notice. If any of the Zell Holders elects to participate in such
Transfer, each of the Transferring Stockholder and such Zell Holders shall
be entitled to sell in such contemplated Transfer, at the same price and on
the same terms, a number of each class of Stockholder Shares to be
Transferred equal to the product of (x) the quotient determined by dividing
the percentage of such class of Stockholder Shares owned by such
Stockholder by the aggregate percentage of such class of Stockholder Shares
owned by the Stockholders (including the Transferring Stockholder)
participating in such contemplated Transfer and (y) the aggregate number of
Stockholder Shares of such class to be sold in such contemplated Transfer.
Each Stockholder Transferring Stockholder Shares pursuant to this Section
4(d)(iv) shall pay its pro rata share (based on the number of Stockholder
Shares to be sold) of the expenses incurred by the Stockholders in
connection with such Transfer and shall take all necessary and desirable
actions as reasonably directed by the Transferring Stockholder in
connection with the consummation of such Transfer, including without
limitation executing the applicable purchase agreement; provided, that,
--------
notwithstanding the foregoing, each Stockholder Transferring Stockholder
Shares pursuant to this Section 4(d)(iv) shall only be responsible for its
pro rata share (based upon the number of Stockholder Shares to be
Transferred) of any indemnification obligations of all such Stockholders in
connection with such Transfer.
(v) For purposes of this Section 4(d), (x) Class A Common and Class B
Common shall be deemed to be the same class of Stockholder Shares and (y)
Class L Common and Class M Common shall be deemed to be the same class of
Stockholder Shares; provided, however, that, notwithstanding the foregoing,
-------- -------
Class B Common and Class M Common shall not be deemed voting Stockholder
Shares for purposes of clause (iv) above.
(vi) The provisions of this Section 4(d) shall terminate upon the
consummation of an initial Public Offering; provided that, notwithstanding
--------
the foregoing, Harvard Investors' rights pursuant to Section 4(d)(i) and
the Bain Investors' rights pursuant to Section 4(d)(iii) shall continue to
survive until Bain Fund V and Bain Fund V-B each has completed a
distribution of all Stockholder Shares held by such Bain Funds to their
respective partners.
(e) Permitted Transfers.
-------------------
-13-
<PAGE>
(i) The restrictions contained in Sections 4(a), 4(b), 4(c) and 4(d)
shall not apply with respect to any Transfer of Stockholder Shares by any
Stockholder (A) in the case of an individual Stockholder, pursuant to
applicable laws of descent and distribution or to any member of such
Stockholder's Family Group, (B) in the case of a non-individual
Stockholder, to its Affiliates, (C) in the case of any Bain Fund, after the
earlier to occur of the second anniversary of the date hereof and the
consummation of an initial Public Offering, to its partners in connection
with a distribution of all the Stockholder Shares held by each such Bain
Fund, (D) in the case of Zell to its partners in connection with a
distribution of all the Stockholder Shares held by Zell and (E) in the case
of any Regulated Stockholder (as such term is defined in Section 10)
pursuant to Section 10(b)(i); provided, in each case, that any such
--------
transferee shall have complied with the requirements of Section 4(e)(ii).
(ii) Prior to any proposed transferee's acquisition of Stockholder
Shares pursuant to a Transfer permitted by Section 4(a)(i)(A), 4(a)(ii)(B)
or 4(a)(iii)(B) or Section 4(e)(i), such proposed transferee must agree to
take such Stockholder Shares subject to and to be fully bound by the terms
of this Agreement applicable to such Stockholder Shares by executing a
joinder to this Agreement substantially in the form attached hereto as
Exhibit A and delivering such executed joinder to the Secretary of the
---------
Company prior to the effectiveness of such Transfer (unless such Transfer
is pursuant to applicable laws of descent and distribution, in which case,
such executed joinder shall be delivered to the Secretary of the Company as
soon as reasonably possible after such Transfer). All transferees
acquiring Stockholder Shares and executing a joinder in compliance with
this Section 4(e)(ii) are collectively referred to herein as "Permitted
---------
Transferees".
-----------
(f) If (i) any Transfer of any membership interests of SILLC 1, SILLC
2 or SILLC 3 occurs (unless such Transfer is to any Affiliate or SILLC Investor,
or such Transfer is by an administrative member), (ii) any Transfer of a
majority interest in the residual equity securities of a Stockholder (other than
SILLC 1, SILLC 2 or SILLC 3) owning Stockholder Shares occurs, or (iii) any
Stockholder or Permitted Transferee Transfers Stockholder Shares to an Affiliate
and an event occurs which causes such Affiliate to cease to be an Affiliate of
such Stockholder or Permitted Transferee, such Transfer or event shall be deemed
a Transfer of Stockholder Shares subject to all of the restrictions on Transfers
of Stockholder Shares set forth in this Agreement, including without limitation,
Sections 4 and 5 hereof.
5. Approved Sale.
-------------
(a) If the holders of a majority of the shares of voting Common Stock
then outstanding (the "Approving Stockholders") approve a sale of all or
----------------------
substantially all of the Company's assets determined on a consolidated basis or
a sale of all (or, for accounting, tax or other reasons, substantially all) of
the Company's outstanding capital stock (whether by merger, recapitalization,
consolidation, reorganization, combination or otherwise) to an Unaffiliated
Third Party or group of Unaffiliated Third Parties (each such sale, an "Approved
--------
Sale"), then each holder of Stockholder Shares will vote for, consent to and
- ----
raise no objections against such Approved Sale subject to the terms set forth
below. In connection with any Stockholders exercising their rights under this
Section 5(a), such Stockholders shall send a written notice to all other
Stockholders
-14-
<PAGE>
setting forth the principal terms of the proposed Approved Sale. If the Approved
Sale is structured as (i) a merger or consolidation, each holder of Stockholder
Shares will waive any dissenters' rights, appraisal rights or similar rights in
connection with such merger or consolidation or (ii) a sale of stock, each
holder of Stockholder Shares will agree to sell all of its Stockholder Shares
and rights to acquire Stockholder Shares on the same terms and conditions as
applicable to all of the Stockholder Shares held by the Approving Stockholders.
Each holder of Stockholder Shares will take all necessary or desirable actions
in connection with the consummation of the Approved Sale as reasonably requested
by the Investors approving such Approved Sale including without limitation
executing the applicable purchase agreement; provided, that, notwithstanding the
--------
foregoing, each Stockholder Transferring Stockholder Shares pursuant to an
Approved Sale shall only be responsible for its pro rata share (based upon the
number of Stockholder Shares to be Transferred) of any indemnification
obligations of all such Stockholders in connection with such Approved Sale.
(b) Each Stockholder will bear their pro-rata share (based upon the
number of shares sold) of the costs of any sale of Stockholder Shares pursuant
to an Approved Sale to the extent such costs are incurred for the benefit of all
holders of Stockholder Shares and are not otherwise paid by the Company or the
acquiring party. Costs incurred by any Stockholder on their own behalf will not
be considered costs of the transaction hereunder.
6. Financial Statements and Access to Information.
----------------------------------------------
(a) Financial Statements. The Company shall deliver to each
--------------------
Stockholder who holds more than 5% of the then outstanding shares of Common
Stock:
(i) within 60 days after the end of each quarterly accounting period
in each fiscal year of the Company, unaudited consolidated statements of income
and cash flows of the Company and its Subsidiaries for such quarterly period and
unaudited consolidated balance sheets of the Company and its Subsidiaries as of
the end of such quarterly period. Such financial statements shall be prepared
in accordance with generally accepted accounting principles, consistently
applied, subject to the absence of footnote disclosures and to normal year-end
adjustments; and
(ii) within 120 days after the end of each fiscal year of the Company,
audited consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and audited consolidated balance sheets of
the Company and its Subsidiaries as of the end of such fiscal year. Such
financial statement shall be prepared in accordance with generally accepted
accounting principles, consistently applied.
(b) Access to Information. The Company shall permit any Stockholder
---------------------
who holds more than 5% of the then outstanding shares of Common Stock, during
normal business hours and such other times as any such holder may reasonably
request, to (i) visit and inspect any of the properties of the Company and its
Subsidiaries, (ii) examine the corporate and financial records of the Company
and its Subsidiaries and make copies thereof or extracts therefrom and (iii)
discuss the affairs, finances and accounts of any such entities with any of the
executive officers of the Company.
-15-
<PAGE>
7. Legend; Additional Restriction on Transfer.
------------------------------------------
(a) Each certificate or instrument evidencing Stockholder Shares and
each certificate or instrument issued in exchange for or upon the Transfer of
any Stockholder Shares (if such securities remain Stockholder Shares, each as
defined herein after such Transfer) shall be stamped or otherwise imprinted with
a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION
THEREUNDER. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO A STOCKHOLDERS AGREEMENT DATED AS OF
DECEMBER 18, 1997, BY AND AMONG THE ISSUER AND CERTAIN OF THE ISSUER'S
STOCKHOLDERS. A COPY OF SUCH STOCKHOLDERS AGREEMENT WILL BE FURNISHED
WITHOUT CHARGE BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN
REQUEST."
The legend set forth above regarding the Stockholders Agreement shall be removed
from the certificates evidencing any securities which cease to be Stockholder
Shares. Upon the request of any holder of Stockholder Shares, the Company shall
remove the Securities Act legend set forth above from the certificate or
certificates for such Stockholder Shares; provided, that such Stockholder Shares
--------
are eligible for sale pursuant to Rule 144(k) (or any similar rule or rules then
in effect) under the Securities Act.
(b) No Stockholder may Transfer any Stockholder Shares (except
pursuant to an effective registration statement under the Securities Act)
without first delivering to the Company an opinion of counsel reasonably
acceptable in form and substance to the Company (which counsel will be
reasonably acceptable to the Company) that registration under the Securities Act
is not required in connection with such Transfer. If such opinion of counsel
reasonably acceptable in form and substance to the Company further states that
no subsequent Transfer of such Stockholder Shares will require registration
under the Securities Act, the Company will promptly upon such Transfer deliver
new certificates for such securities which do not bear the Securities Act legend
set forth in Section 7(a).
8. Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Stockholder Shares in violation of any provision of this
Agreement shall be null and void, and the Company shall not record such Transfer
on its books or treat any purported transferee of such Stockholder Shares as the
owner of such securities for any purpose.
9. Preemptive Rights.
-----------------
-16-
<PAGE>
(a) (i) If at any time on or prior to the consummation of an
initial Public Offering, the Company wishes to issue any equity securities
(whether preferred stock or Common Stock) or any options, warrants or other
rights to acquire equity securities or any notes or other securities convertible
or exchangeable into equity securities (all such equity securities and other
rights and securities, collectively, the "Equity Equivalents") to Bain Fund V,
------------------
Bain Fund V-B, BCIP and/or BCIP Trust or any of their respective Affiliates
(collectively, the "Bain Entities"), the Company shall promptly deliver a notice
-------------
of intention to sell (the "Bain Issuance Notice") to each Stockholder (other
--------------------
than the Bain Entities) (the "Non-Bain Stockholders") setting forth a
---------------------
description and the number of the Equity Equivalents proposed to be issued to
the Bain Entities and the proposed purchase price and terms of sale. Upon
receipt of the Bain Issuance Notice, each Non-Bain Stockholder shall have the
right to elect to purchase, at the price and on the terms stated in the Bain
Issuance Notice, a number of the Equity Equivalents equal to the product of (A)
such Non-Bain Stockholder's proportionate ownership (expressed as a fraction) of
the aggregate Stockholder Shares held by all Stockholders multiplied by (B) the
number of Equity Equivalents proposed to be issued to the Bain Entities (as
described in the applicable Bain Issuance Notice). Such election shall be made
by the electing Non-Bain Stockholder by written notice to the Company within ten
(10) business days after receipt by such Non-Bain Stockholder of the Bain
Issuance Notice (the "Issuance Acceptance Period").
--------------------------
(ii) To the extent an effective election to purchase shall not be
received from a Non-Bain Stockholder pursuant to paragraph (a)(i) above in
respect of the Equity Equivalents proposed to be issued to the Bain Entities
pursuant to the applicable Bain Issuance Notice, the Company may, at its
election, during a period of ninety (90) days following the expiration of the
applicable Issuance Acceptance Period, issue and sell the remaining Equity
Equivalents to be issued and sold to any Bain Entity at a price and upon terms
not more favorable to such Bain Entity than those stated in the applicable Bain
Issuance Notice (provided that the number of Equity Equivalents to be issued to
the Bain Entities in compliance with the foregoing shall not exceed the number
of Equity Equivalents proposed to be issued to the Bain Entities (as described
in the applicable Bain Issuance Notice) less the number of Equity Equivalents to
----
be issued to Non-Bain Shareholders pursuant to an effective election to purchase
by such Non-Bain Stockholders hereunder). In the event the Company has not sold
any Equity Equivalents covered by a Bain Issuance Notice to a Bain Entity, or
entered into a binding agreement to sell such Equity Equivalents to a Bain
Entity, within such ninety (90) day period, the Company shall not thereafter
issue or sell such Equity Equivalents to any Bain Entity without first offering
such Equity Equivalents to the Non-Bain Stockholders in the manner provided in
paragraph (a)(i) above.
(b) If a Non-Bain Stockholder gives the Company notice, pursuant to
the provisions of this Section 9, that such Non-Bain Stockholder desires to
purchase Equity Equivalents offered by the Company, payment therefor shall be
made by check or wire transfer of immediately available funds, against delivery
of the securities (which securities shall be registered in the name of such Non-
Bain Stockholder and shall be issued free and clear of any liens or
encumbrances) at the executive offices of the Company at the closing date fixed
by the Company for the sale of all such Equity Equivalents (including to any
Bain Entity). In the event that the proposed sale is for consideration other
than cash, the Non-Bain Stockholders may pay cash in lieu of all (but not part)
-17-
<PAGE>
of such other consideration, in the amount determined reasonably and in good
faith by the Board to represent the fair value of such consideration other than
cash.
(c) The preemptive rights contained in this Section 9 shall not apply
to (i) the issuance of shares of Equity Equivalents as a stock dividend or upon
any subdivision, split or combination of the outstanding shares of Common Stock;
(ii) the issuance of Equity Equivalents upon conversion, exchange or redemption
of any outstanding convertible or exchangeable securities; (iii) the issuance of
Equity Equivalents upon exercise of any outstanding options or warrants; or (iv)
the issuance of Equity Equivalents pursuant to an offering registered under the
Securities Act.
10. Regulatory Compliance Cooperation.
---------------------------------
(a) Definitions. For purposes of this Section 10, the following
-----------
terms have the following meanings:
"Applicable Law," with respect to any Person, means all provisions of
--------------
all laws, statutes, ordinances, rules, regulations, permits, certificates or
orders of any governmental authority applicable to such Person or any of its
assets of property or to which such Person or any of its assets or property is
subject, and all judgments, injunctions, orders and decrees of all courts and
arbitrators in proceedings or actions in which such Person is a party or by
which it or any of its assets or properties is or may be bound or subject.
"Regulated Stockholder" shall mean SILLC 1, SILLC 2, SILLC 3 or any
---------------------
other Stockholder (i) that is subject to the provisions of Regulation Y of the
Board of Governors of the Federal Reserve System, 12 C.F.R. Part 225 (or any
successor to such Regulations) and (ii) that holds Stockholder Shares and (iii)
that has provided written notice to the Company of its status as a "Regulated
Stockholder" hereunder.
"Regulatory Problem" means any set of facts or circumstance wherein it
------------------
has been asserted by any governmental regulatory agency (or a Regulated
Stockholder reasonably believes that there is a risk of such assertion) that
such Regulated Stockholder is not entitled to acquire, own, hold or control, or
exercise any significant right (including the right to vote) with respect to,
any Stockholder Shares.
(b) Regulatory Matters Generally.
----------------------------
(i) If a Regulated Stockholder determines that it has a Regulatory
Problem, the Company agrees to take all such actions, subject to Applicable Law,
as are reasonably requested by such Regulated Stockholder (1) to effectuate and
facilitate any Transfer by such Regulated Stockholder of any Stockholder Shares
then held by such Regulated Stockholder to any Affiliate of such Regulated
Stockholder designated by such Regulated Stockholder (provided such transferee
complies with the requirements of Section 4(e)(ii)), and (2) to permit such
Regulated Stockholder (or any Affiliate of such Regulated Stockholder) to
exchange all or any portion of the voting Stockholder Shares then held by such
Person on a share-for-share basis for shares of a class of nonvoting Stockholder
Shares, which nonvoting Stockholder Shares shall be identical in all
-18-
<PAGE>
respects to such voting Stockholder Shares, except that such new Stockholder
Shares shall be nonvoting and shall be convertible into voting Stockholder
Shares on such terms as are requested by such Regulated Stockholder in light of
regulatory considerations then prevailing. Such actions may include, without
limitation, (x) entering into such additional agreements as are reasonably
requested by such Regulated Stockholder to permit any Person(s) designated by
such Regulated Stockholder to exercise any voting power which is relinquished by
such Regulated Stockholder upon any exchange of voting Stockholder Shares for
nonvoting Stockholder Shares, and (y) entering into such additional agreements,
adopting such amendment to the charter documents of the Company and taking such
additional actions as are reasonably requested by such Regulated Stockholder in
order to effectuate the intent of the foregoing.
(ii) If a Regulated Stockholder has the right or opportunity to
acquire any of the Stockholder Shares from the Company, any Stockholder or any
other Person (as the result of a preemptive offer, pro rata offer or otherwise),
--- ----
at such Regulated Stockholder's request the Company will offer to sell (or if
the Company is not the seller, to cooperate with the seller and such Regulated
Stockholder to permit such seller to sell) non-voting Stockholder Shares on the
same terms as would have existed had such Regulated Stockholder acquired the
Stockholder Shares so offered and immediately requested their exchange for non-
voting Stockholder Shares pursuant to clause (i) above.
(iii) Each Stockholder agrees to cooperate with the Company in
complying with this Section 10, including without limitation, voting to approve
amending the Company's Certificate of Incorporation in a manner reasonably
requested by the Regulated Stockholder requesting such amendment.
(iv) The Company agrees not to amend or waive the voting or other
provisions of this Agreement or the Company's Certificate of Incorporation if
such proposed amendment or waiver would cause any Regulated Stockholder to have
a Regulatory Problem, provided that any such Regulated Stockholder notifies the
--------
Company that it would have a Regulatory Problem promptly after it has notice of
such amendment or waiver.
11. Amendment and Waiver. No modification, amendment or waiver of
--------------------
any provision of this Agreement shall be effective against the Company or the
Stockholders unless such modification, amendment or waiver is approved in
writing by, respectively, the Company or the holders of 75% of the Stockholder
Shares; provided, that no amendment shall be effective without the consent of
--------
a Stockholder to the extent that such amendment would adversely affect the
rights or obligations of such Stockholder hereunder in any material respect. The
failure of any party to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms. Each Stockholder shall remain a party to
this Agreement only so long as such person is the holder of record of
Stockholder Shares.
12. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law
-19-
<PAGE>
or rule in any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision or any other jurisdiction, but this
Agreement shall be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.
13. Entire Agreement. Except as otherwise expressly set forth
----------------
herein, this document embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
14. Termination. This Agreement will automatically terminate and be
-----------
of no further force or effect immediately after the consummation of an Approved
Sale.
15. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Stockholders and any subsequent
holders of Stockholder Shares and the respective successors, heirs and assigns
of each of them, so long as they hold Stockholder Shares.
16. Counterparts. This Agreement may be executed in separate
------------
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agree ment.
17. Remedies. The parties hereto shall be entitled to enforce their
--------
rights under this Agreement specifically to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that the Company and any Stockholder may in his, hers, or its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunc tive relief (without posting a bond or other
security) in order to enforce or prevent any violation of the provisions of this
Agreement.
18. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered if delivered
personally, sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient, or if sent by certified or registered mail, return
receipt requested, will be deemed to have been given two business days
thereafter. Such notices, demands and other communications will be sent to the
address indicated below:
To the Company:
--------------
Sealy Corporation
c/o Sealy, Inc.
1228 Euclid Avenue
Cleveland, OH 44115
-20-
<PAGE>
Attention: Chief Executive Officer
Telecopy No.: (216) 522-1976
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
To Zell:
-------
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 1500
Chicago, IL 60606
Attention: Rod F. Dammeyer
Telecopy No.: (312) 902-1512
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza
Suite 1601
Chicago, IL 60606
Attention: Alisa Singer, Esq.
Telecopy No.: (312) 454-0335
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: William A. Groll, Esq.
Telecopy No.: (212) 225-3999
-21-
<PAGE>
To any Bain Fund:
----------------
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
To Harvard:
----------
Harvard Private Capital Holdings, Inc.
c/o Harvard Management Company, Inc.
600 Atlantic Avenue, 26th Floor
Boston, MA 02210
Attention: Mark Rosen
Telecopy No.: (617) 523-1063
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Larry Jordan Rowe
Telecopy No.: (617) 951-7050
To SILLC 1:
----------
Sealy Investors 1, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
-22-
<PAGE>
Chase Capital Partners
380 Madison Avenue
New York, New York 10017
Attention: Jonas Steinman
Telecopy No.: (212) 622-3101
With a copy, which shall not constitute notice, to:
--------------------------------------------------
O'Sullivan Graev & Karabell LLP
30 Rockefeller Plaza, 24th Floor
New York, New York 10112
Attention: Daniel Rayner
Telecopy No.: (212) 728-5950
To SILLC 2:
----------
Sealy Investors 2, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
CIBC Wood Gundy Capital
425 Lexington Avenue
New York, New York 10017
Attention: Jay Levine
Telecopy No.: (212) 885-4998
With a copy, which shall not constitute notice, to:
--------------------------------------------------
O'Sullivan Graev & Karabell LLP
30 Rockefeller Plaza, 24th Floor
New York, New York 10112
Attention: Daniel Rayner
Telecopy No.: (212) 728-5950
To SILLC 3:
----------
Sealy Investors 3, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
BancBoston Investments, Inc.
100 Federal Street
Mail Stop 01-08-05
Boston, MA 02110
Attention: Brian Gerrity
Telecopy No.: (617) 434-4873
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Bingham Dana LLP
150 Federal Street
Boston, MA 02110
Attention: Malcolm Sandilands
Telecopy No.: (617) 951-8736
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
19. GOVERNING LAW. THE CORPORATE LAW OF THE STATE OF DELAWARE WILL
-------------
GOVERN ALL QUESTIONS CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS
STOCKHOLDERS. ALL OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
20. Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
* * * * *
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement as of the date first above written.
SEALY CORPORATION
By:
-------------------------------------
Name:
Title:
BAIN CAPITAL FUND V, L.P.
By: Bain Capital Partners V, L.P.,
its General Partner
By: Bain Capital Investors V, Inc.,
its General Partner
By:
-------------------------------------
Name:
Title:
BAIN CAPITAL FUND V-B, L.P.
By: Bain Capital Partners V, L.P.,
its General Partner
By: Bain Capital Investors V, Inc.,
its General Partner
By:
-------------------------------------
Name:
Title:
-24-
<PAGE>
CONTINUATION OF SIGNATURES FOR THIS STOCKHOLDERS AGREEMENT:
BCIP ASSOCIATES
By:
-------------------------------------
A General Partner
BCIP TRUST ASSOCIATES, L.P.
By:
-------------------------------------
A General Partner
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
SEALY INVESTORS 1, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
-------------------------------------
Name:
Title:
-25-
<PAGE>
CONTINUATION OF SIGNATURES FOR THIS STOCKHOLDERS AGREEMENT:
SEALY INVESTORS 2, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
-------------------------------------
Name:
Title:
SEALY INVESTORS 3, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
-------------------------------------
Name:
Title:
RANDOLPH STREET PARTNERS II
By:
-------------------------------------
A General Partner
-26-
<PAGE>
CONTINUATION OF SIGNATURES FOR THIS STOCKHOLDERS AGREEMENT:
ZELL/CHILMARK FUND, L.P.
By: ZC Limited Partnership, its General Partner
By: ZC Partnership, its General Partner
By: ZC, Inc., a Partner
By:
-------------------------------------
Name:
Title:
-27-
<PAGE>
EXHIBIT A
---------
FORM OF JOINDER TO
STOCKHOLDERS AGREEMENT
----------------------
THIS JOINDER to the Stockholders Agreement dated as of December 18,
1997 by and among Sealy Corporation, a Delaware corporation (the "Company"), and
-------
certain stockholders of the Company (the "Agreement"), is made and entered into
---------
as of _________ by and between the Company and _________________ ("Holder").
------
Capitalized terms used herein but not otherwise defined shall have the meanings
set forth in the Agreement.
WHEREAS, Holder has acquired certain Stockholder Shares and the
Agreement and the Company require Holder, as a holder of such Stockholder
Shares, to become a party to the Agreement, and Holder agrees to do so in
accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Joinder hereby agree as
follows:
1. Agreement to be Bound. Holder hereby agrees that upon execution
---------------------
of this Joinder, it shall become a party to the Agreement and shall be fully
bound by, and subject to, all of the covenants, terms and conditions of the
Agreement as though an original party thereto and shall be deemed a [BAIN
INVESTOR/HARVARD INVESTOR/SILLC INVESTOR/ZELL HOLDER] and a Stockholder for all
purposes thereof. In addition, Holder hereby agrees that all Common Stock held
by Holder shall be deemed [BAIN/HARVARD/SILLC/ZELL] Shares and Stockholder
Shares for all purposes of the Agreement.
2. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Joinder shall bind and inure to the benefit of and be enforceable by the
Company and its successors, heirs and assigns and Holder and any subsequent
holders of Stockholder Shares and the respective successors, heirs and assigns
of each of them, so long as they hold any Stockholder Shares.
3. Counterparts. This Joinder may be executed in separate
------------
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
4. Notices. For purposes of Section 18 of the Agreement, all
-------
notices, demands or other communications to the Holder shall be directed to:
[Name]
[Address]
[Facsimile Number]
5. GOVERNING LAW. THE CORPORATE LAW OF DELAWARE SHALL GOVERN ALL
--------------
ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS STOCKHOLDERS. ALL
OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
JOINDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS
OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT
OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW
-28-
<PAGE>
YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
6. DESCRIPTIVE HEADINGS. The descriptive headings of this Joinder
--------------------
are inserted for convenience only and do not constitute a part of this Joinder.
* * * * *
- 2 -
-29-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Joinder as
of the date first above written.
SEALY CORPORATION
By:
----------------------------------
Name:
Title:
[HOLDER]
By:
----------------------------------
Name:
Title:
- 3 -
-30-
<PAGE>
EXHIBIT 10.49
EXECUTION COPY
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT is dated as of December 18, 1997 by and
among Sealy Corporation, a Delaware corporation (the "Company"); Bain Capital
-------
Fund V, L.P. ("Bain Fund V"); Bain Capital Fund V-B, L.P. ("Bain Fund V-B");
----------- -------------
BCIP Associates ("BCIP"); BCIP Trust Associates, L.P. ("BCIP Trust"); Harvard
---- ----------
Private Capital Holdings, Inc. ("Harvard"); Sealy Investors 1, LLC ("SILLC 1");
------- -------
Sealy Investors 2, LLC ("SILLC 2"); Sealy Investors 3, LLC ("SILLC 3");
------- -------
Zell/Chilmark Fund, L.P. ("Zell"); and Randolph Street Partners II ("Randolph").
---- --------
As of the date hereof, Bain Fund V, Bain Fund V-B, BCIP, BCIP Trust,
Harvard, SILLC 1, SILLC 2, SILLC 3, Zell and Randolph each own a number of
shares of the Company's Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Agreement hereby agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings.
"Affiliate" means, when used with reference to a specified Person, any
---------
Person that directly or indirectly controls or is controlled by or is under
common control with the specified Person. As used in this definition, "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to direct
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise). With respect to any Person who is an individual, "Affiliates" shall
also include, without limitation, any member of such individual's Family Group.
Notwithstanding the foregoing, for purposes of this Agreement SILLC shall not be
deemed an "Affiliate" of any Bain Fund or any Affiliate of any Bain Fund, and
neither any Bain Fund nor any Affiliate of any Bain Fund shall be deemed an
"Affiliate" of SILLC.
"Bain Funds" means Bain Fund V, Bain Fund V-B, BCIP, BCIP Trust and
----------
Randolph.
"Bain Funds Registrable Securities" means (i) all Common Stock acquired by,
---------------------------------
or issued or issuable to, any of the Bain Funds or any of their respective
Affiliates on or after the date hereof and (ii) all equity securities issued or
issuable directly or indirectly with respect to any Common Stock described in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Bain Funds Registrable Securities, such
securities shall cease to be Bain Funds Registrable Securities when they have
been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public in compliance with Rule 144. For purposes
of this Agreement, a Person will be deemed to be a holder of Bain Funds
Registrable Securities whenever such Person has the right to acquire directly or
indirectly such Bain Funds Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or
<PAGE>
otherwise, but disregarding any restrictions or limitations upon the exercise of
such right), whether or not such acquisition has actually been effected.
"Class A Common" means the Company's Class A Common Stock, par value $.01
--------------
per share.
"Class B Common" means the Company's Class B Common Stock, par value $.01
--------------
per share.
"Class L Common" means the Company's Class L Common Stock, par value $.01
--------------
per share.
"Class M Common" means the Company's Class M Common Stock, par value $.01
--------------
per share.
"Common Stock" means, collectively, Class A Common, Class B Common, Class L
------------
Common, Class M Common and any other common stock authorized by the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Family Group" means, with respect to any Person who is an individual, (i)
------------
such Person's spouse, former spouse and descendants (whether natural or
adopted), parents and their descendants and any spouse of the foregoing persons
(collectively, "relatives") or (ii) the trustee, fiduciary or personal
representative of such Person and any trust solely for the benefit of such
Person and/or such Person's relatives.
"Harvard Registrable Securities" means (i) all Common Stock acquired by, or
------------------------------
issued or issuable to, Harvard or any of its Affiliates on or after the date
hereof and (ii) all equity securities issued or issuable directly or indirectly
with respect to any Common Stock described in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Harvard Registrable Securities, such securities shall cease to be
Harvard Registrable Securities when they have been distributed to the public
pursuant to an offering registered under the Securities Act or sold to the
public in compliance with Rule 144. For purposes of this Agreement, a Person
will be deemed to be a holder of Harvard Registrable Securities whenever such
Person has the right to acquire directly or indirectly such Harvard Registrable
Securities (upon conversion or exercise in connection with a transfer of
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a governmental entity or any
department, agency or political subdivision thereof or any other entity or
organization.
-2-
<PAGE>
"Registrable Securities" means, collectively, the Bain Funds Registrable
----------------------
Securities, the Harvard Registrable Securities, the SILLC Registrable Securities
and the Zell Registrable Securities.
"Registration Expenses" means all expenses incident to the Company's
---------------------
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
fees and expenses of custodians, internal expenses (including all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit or quarterly review, the expense of any
liability insurance and the expenses and fees for listing the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed or on the NASD automated quotation system, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding discounts and commissions) and other
Persons retained by the Company.
"Rule 144" means Rule 144 under the Securities Act (or any similar rule
--------
then in force).
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"SILLC Investors" means SILLC 1, SILLC 2 and SILLC 3.
---------------
"SILLC Registrable Securities" means (i) all Common Stock acquired by, or
----------------------------
issued or issuable to, any of the SILLC Investors or any of their respective
Affiliates on or after the date hereof and (ii) all equity securities issued or
issuable directly or indirectly with respect to any Common Stock described in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular SILLC Registrable Securities, such
securities shall cease to be SILLC Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public in compliance with Rule 144. For purposes
of this Agreement, a Person will be deemed to be a holder of SILLC Registrable
Securities whenever such Person has the right to acquire directly or indirectly
such SILLC Registrable Securities (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
"Zell Registrable Securities" means (i) all Common Stock acquired by, or
---------------------------
issued or issuable to, Zell or any of its Affiliates on or after the date hereof
and (ii) all equity securities issued or issuable directly or indirectly with
respect to any Common Stock described in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Zell Registrable Securities, such securities shall cease to be Zell
Registrable Securities when they have been distributed to the public pursuant to
an offering registered under the Securities Act or sold to the public in
compliance with Rule 144. For purposes of this Agreement, a Person will be
deemed to
-3-
<PAGE>
be a holder of Zell Registrable Securities whenever such Person has the right to
acquire directly or indirectly such Zell Registrable Securities (upon conversion
or exercise in connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise of such right),
whether or not such acquisition has actually been effected.
2. Demand Registrations.
--------------------
(a) Requests for Registration. At any time after the date hereof, the
-------------------------
holder(s) of a majority of the Bain Funds Registrable Securities may request
registration under the Securities Act of all or any portion of their Registrable
Securities on Form S-1 or any similar long-form registration (a "Long-Form
---------
Registration"), or on Form S-2 or S-3 or any similar short-form registration (a
- ------------
"Short-Form Registration") if such a short form is available. All registrations
-----------------------
requested pursuant to this Section 2(a) are referred to herein as "Demand
------
Registrations". Each request for a Demand Registration shall specify the
- -------------
approximate number of Registrable Securities requested to be registered, the
anticipated method or methods of distribution and the anticipated per share
price range for such offering. Within ten days after receipt of any such
request, the Company will give written notice of such requested registration
(which shall specify the intended method of disposition of such Registrable
Securities) to all other holders of Registrable Securities (a "Company Notice")
--------------
and the Company will include (subject to the provisions of this Agreement) in
such registration, all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 20 days after the
delivery of such Company Notice.
(b) Long-Form Registrations. The holders of Bain Funds Registrable
-----------------------
Securities will be entitled to only three Long-Form Registrations. A
registration will not count as one of the permitted Long-Form Registrations
unless and until it has become effective and no Long-Form Registration will
count as a Long-Form Registration unless the applicable Bain Funds and the
holders of Registrable Securities joining therein are able to register and sell
at least 75% of the Registrable Securities requested to be included by them in
such registration; provided that in any event the Company will pay all
--------
Registration Expenses in connection with any registration initiated as a Long-
Form Registration whether or not it has become effective, and whether or not
such registration has counted as one of the permitted Long-Form Registrations.
(c) Short-Form Registrations. The holders of Bain Funds Registrable
------------------------
Securities will be entitled to unlimited Short-Form Registrations. Demand
Registrations will be Short-Form Registrations whenever the Company is permitted
to use any applicable short form. After the Company has become subject to the
reporting requirements of the Exchange Act, the Company will use its best
efforts to make Short-Form Registrations on Form S-3 available for the sale of
Bain Funds Registrable Securities.
(d) Priority on Demand Registrations.
--------------------------------
(i) The Company will not include in any Demand Registration any securities
which are not Registrable Securities unless holder(s) of a majority of the Bain
Funds Registrable Securities otherwise consent.
-4-
<PAGE>
(ii) If a Demand Registration is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities, requested
to be included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to holder(s) of a majority of the Bain
Funds Registrable Securities and without adversely affecting the marketability
of the offering, then the Company will include in such registration (A) first,
the number of Registrable Securities requested to be included in such
registration, pro rata from among the holders of such Registrable Securities
according to the number of Registrable Securities requested by them to be so
included, and (B) second, any other securities of the Company requested to be
included in such registration, in such manner as the Company may determine.
(e) Restrictions on Demand Registrations.
------------------------------------
(i) The Company will not be obligated to file any registration statement
with respect to any Long-Form Registration within 180 days after the effective
date of a previous Long-Form Registration or a previous registration in which
the holders of Registrable Securities were given piggyback rights pursuant to
Section 3 and in which there were included not less than 80% of the number of
Registrable Securities requested to be included.
(ii) The Company may postpone for up to 90 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Company determines that such Demand Registration would reasonably be expected to
have a material adverse effect on any proposal or plan by the Company or any of
its Subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer,
reorganiza tion or similar transaction; provided that in such event the holders
--------
of Bain Funds Registrable Securities initially requesting such Demand
Registration will be entitled to withdraw such request and, if such request is
withdrawn, such Demand Registration will not count as one of the permitted
Demand Registrations hereunder and the Company will pay all Registration
Expenses in connection with such requested registration. The Company may delay
a Demand Registration under this clause (ii) only once during any twelve-month
period.
(f) Selection of Underwriters. In the case of a Demand Registration for an
-------------------------
underwritten offering, the holders of a majority of the Bain Funds Registrable
Securities to be included in such Demand Registration will have the right to
select the investment banker(s) and manager(s) to administer the offering (which
investment banker(s) and manager(s) will be nationally recognized) subject to
the Company's approval which will not be unreasonably withheld.
(g) Other Registration Rights. Except as provided in this Agreement, the
-------------------------
Company (i) will not grant to any Persons the right to request the Company to
register any equity or similar securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities, without the
prior written consent of the holders of a majority of the Bain Funds Registrable
Securities and (ii) will not grant to any Persons any such rights to the extent
such rights conflict with, or are adverse to, the rights of the holders of
Registrable Securities without the consent of holders of at least two-thirds of
the Registrable Securities (other than the Bain Registrable Securities) and a
majority of the holders of the Bain Registrable Securities.
-5-
<PAGE>
3. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes to register any of
------------------
its Common Stock under the Securities Act for its own account or for the account
of any holder of Common Stock (other than pursuant to a Demand Registration, and
other than pursuant to a registration statement on Form S-8 or S-4 or any
similar form) (a "Piggyback Registration"), the Company will give prompt written
----------------------
notice to all holders of Registrable Securities of its intention to effect such
a registration and will include in such registration (subject to the provisions
of this Agreement) all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 20 days after the
receipt of the Company's notice.
(b) Priority on Primary Registrations. If a Piggyback Registration is in
---------------------------------
part an underwritten primary registration on behalf of the Company and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in an orderly manner in such offering within a price
range acceptable to the Company and without adversely affecting the
marketability of the offering, then the Company will include in such
registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such
registration, pro rata from among the holders of such Registrable Securities
according to the number of Registrable Securities requested by them to be so
included, and (iii) third, any other securities requested to be included in such
registration, in such manner as the Company may determine.
(c) Priority on Secondary Registrations. If a Piggyback Registration is an
-----------------------------------
underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holders initially requesting
such registration and without adversely affecting the marketability of the
offering, then the Company will include in such registration (i) first, the
securities requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included in such
registration, pro rata from among such holders and the holders of such
Registrable Securities according to the number of Registrable Securities
requested by them to be so included, and (ii) second, any other securities
requested to be included in such registration, in such manner as the Company may
determine.
(d) Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to
Section 2 or pursuant to this Section 3, and if such previous registration has
not been withdrawn or abandoned, then all the parties hereto agree that the
Company will not file or cause to be effected any other registration of any of
its equity or similar securities or securities convertible or exchangeable into
or exercisable for its equity or similar securities under the Securities Act
(except on Forms S-4 or S-8 or any successor form or in connection with a Demand
Registration), whether on its own behalf or at the request of any holder or
holders of such securities, until a period of at least 180 days has elapsed from
the effective date of such previous registration.
-6-
<PAGE>
4. Holdback Agreements.
-------------------
(a) Each holder of Registrable Securities hereby agrees not to effect any
sale or distribution of equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven days prior to and the 180-day period beginning on the effective date of
any underwritten Demand Registration or any underwritten Piggyback Registration
(except as part of such underwritten registration), unless the underwriters
managing such underwritten registration otherwise agree (which agreement shall
be equally applicable to all holders of Registrable Securities).
(b) The Company (i) will not effect any sale or distribution of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such securities, during the seven days prior to and during the 180-day
period beginning on the effective date of any underwritten Demand Registration
or any underwritten Piggyback Registration (except as part of such underwritten
registration or pursuant to registrations on Forms S-4 or S-8 or any successor
form), unless the underwriters managing such underwritten registration otherwise
agree (which agreement shall be equally applicable to all holders of Registrable
Securities), and (ii) will cause each holder of at least 2% (on a fully diluted
basis) of Common Stock, or any securities convertible into or exchangeable or
exercisable for Common Stock, purchased from the Company at any time after the
date of this Agreement (other than in a registered public offering) to agree not
to effect any sale or distribution of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing such underwritten registration otherwise agree.
5. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
(a) prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, the Company
will furnish to the counsel selected pursuant to Section 6(b) below copies of
all such documents proposed to be filed, which documents will be subject to the
prompt review and reasonable comment of such counsel);
(b) prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 180 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus included in such
-7-
<PAGE>
registration statement (including each preliminary prospectus) and such other
documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable Securities
under such other securities or blue sky laws of such jurisdictions as any seller
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process (i.e., service of
process which is not limited solely to securities law violations) in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Company are then listed and,
if not so listed, to be listed on the Nasdaq National Market System ("Nasdaq
------
Market") and, if listed on the Nasdaq Market, use its best efforts to secure
- ------
designation of all such Registrable Securities covered by such registration
statement as a Nasdaq "National Market System security" within the meaning of
Rule 11Aa2-1 under the Exchange Act or, failing that, to secure Nasdaq Market
authorization for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the National
Association of Securities Dealers;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting agreements
in customary form) and take all such other actions as the holders of a majority
of the Registrable Securities being sold or the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities (including, without limitation, effecting a split or a combination of
stock or units);
(i) make available for inspection by any seller of Registrable Securities,
any underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by any such
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors, employees and independent accountants to supply all information
reasonably requested
-8-
<PAGE>
by any such seller, underwriter, attorney, accountant or agent in connection
with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at least
twelve months beginning with the first day of the Company's first full calendar
quarter after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 promulgated thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its best efforts promptly to obtain the
withdrawal of such order;
(l) use its best efforts to cause such Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities; and
(m) obtain a "cold comfort" letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by "cold comfort" letters as the holders of a majority of the
Registrable Securities being sold reasonably request.
If any such registration or comparable statement refers to any holder by name or
otherwise as the holder of any securities of the Company and if in such holder's
sole and exclusive judgment, such holder is or might be deemed to be an
underwriter or a controlling person of the Company, such holder shall have the
right to require (i) the insertion therein of language, in form and substance
satisfactory to such holder and presented to the Company in writing, to the
effect that the holding by such holder of such securities is not to be construed
as a recommendation by such holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such holder
will assist in meeting any future financial requirements of the Company, or (ii)
in the event that such reference to such holder by name or otherwise is not
required by the Securities Act or any similar Federal statute then in force, the
deletion of the reference to such holder; provided, that with respect to this
--------
clause (ii) such holder shall furnish to the Company an opinion of counsel to
such effect, which opinion and counsel shall be reasonably satisfactory to the
Company.
6. Registration Expenses.
---------------------
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation all Registration Expenses,
will be borne by the Company.
-9-
<PAGE>
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company will reimburse the holders of Registrable Securities
included in such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of a majority of the Registrable Securities
initially requesting such registration.
7. Indemnification.
---------------
(a) By the Company. The Company agrees to, and will cause each of its
--------------
subsidiaries to agree to, indemnify, to the fullest extent permitted by law,
each holder of Registrable Securities, its officers, directors, trustees,
employees, stockholders and general and limited partners and each Person who
controls such holder (within the meaning of the Securities Act and Exchange Act)
against any and all losses, claims, damages, liabilities and expenses, joint or
several, arising out of or based upon any untrue or alleged untrue statement of
material fact contained in any registration statement, reports required and
other documents filed under the Exchange Act, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, together with any
documents incorporated therein by reference, or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation or alleged violation by the
Company or any of its subsidiaries of any federal, state, foreign or common law
rule or regulation and relating to action or inaction in connection with any
such registration, disclosure document or other document and shall reimburse
such holder, officer, director, trustee, employee, stockholder, partner or
controlling Person for any legal or other expenses, including any amounts paid
in any settlement effected with the consent of the Company, which consent will
not be unreasonably withheld or delayed, incurred by such holder, officer,
director, trustee, employee, stockholder, partner or controlling Person in
connection with the investigation or defense of such loss, claim, damage,
liability or expense, except insofar as the same are caused by or contained in
any information furnished in writing to the Company by such holder expressly for
use therein. In connection with an underwritten offering, the Company will
indemnify such underwriters, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the holders
of Registrable Securities.
(b) By the Holders. In connection with any registration statement in which
--------------
a holder of Registrable Securities is participating, each such holder will
furnish to the Company in writing such information and affidavits about such
holder as the Company reasonably requests for use in connection with any such
registration statement or prospectus and, to the extent permitted by law, will
indemnify the Company, its directors and officers and each Person who controls
the Company (within the meaning of the Securities Act) and the other holders of
Registrable Securities against any losses, claims, damages, liabilities and
expenses resulting from any untrue or alleged untrue statement of material fact
contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; provided, that the obligation to indemnify
--------
will be individual, not joint and several, for each holder and will be limited
to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
-10-
<PAGE>
(c) Claim Procedures. Any Person entitled to indemnification hereunder
----------------
will (i) give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification (provided that the failure to give
prompt notice will not impair any Person's right to indemnification hereunder to
the extent such failure has not prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
will not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will not be obligated to pay
(i) the fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim or (ii) any settlement made by any indemnified party without such
indemnifying party's consent (but such consent will not be unreasonably
withheld).
(d) Survival; Contribution. The indemnification provided for under this
----------------------
Agreement will remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified party or any officer, director or
controlling Person of such indemnified party and will survive the transfer of
securities. The Company also agrees to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the event
the Company's indemnification is unavailable for any reason.
8. Participation in Underwritten Registrations. No Person may participate
-------------------------------------------
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements (with terms customary in underwriting agreements for
secondary distributions) approved by the Person or Persons entitled hereunder to
approve such arrangements and (b) completes and executes all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements;
provided, that no holder of Registrable Securities included in any underwritten
- --------
registration shall be required to make any representations or warranties to the
Company or the underwriters (other than representations and warranties regarding
such holder and such holder's intended method of distribution) or to undertake
any indemnification or contribution obligations to the Company or the
underwriters with respect thereto, except as otherwise provided in Section 7.
9. Rule 144 Reporting. With a view to making available to the holders of
------------------
Registrable Securities the benefits of certain rules and regulations of the SEC
which may permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) make and keep current public information available, within the meaning
of Rule 144 or any similar or analogous rule promulgated under the Securities
Act, at all times after it has become subject to the reporting requirements of
the Exchange Act;
-11-
<PAGE>
(b) file with the SEC, in a timely manner, all reports and other documents
required of the Company under the Securities Act and Exchange Act (after it has
become subject to such reporting requirements); and
(c) so long as any party hereto owns any Registrable Securities, furnish to
such Person forthwith upon request, a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time
commencing 90 days after the effective date of the first registration filed by
the Company for an offering of its securities to the general public), the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); a copy of the most recent annual or quarterly
report of the Company; and such other reports and documents as such Person may
reasonably request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration.
10. Notices. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered if delivered
personally, sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient, or if sent by certified or registered mail, return
receipt requested, will be deemed to have been given two business days
thereafter. Such notices, demands and other communications will be sent to the
address indicated below:
To the Company:
--------------
Sealy Corporation
c/o Sealy, Inc.
1228 Euclid Avenue
Cleveland, OH 44115
Attention: Chief Executive Officer
Telecopy No.: (216) 522-1976
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
-12-
<PAGE>
To any Bain Fund:
----------------
Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: Lance C. Balk, Esq.
Telecopy No.: (212) 446-4900
To Harvard:
----------
Harvard Private Capital Holdings, Inc.
c/o Harvard Management Company, Inc.
600 Atlantic Avenue, 26th Floor
Boston, MA 02210
Attention: Mark Rosen
Telecopy No.: (617) 523-1063
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Larry Jordan Rowe
Telecopy No.: (617) 951-7050
To SILLC 1:
----------
Sealy Investors 1, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
Chase Capital Partners
380 Madison Avenue
New York, New York 10017
-13-
<PAGE>
Attention: Jonas Steinman
Telecopy No.: (212) 622-3101
With a copy, which shall not constitute notice, to:
--------------------------------------------------
O'Sullivan Graev & Karabell LLP
30 Rockefeller Plaza, 24th Floor
New York, New York 10112
Attention: Daniel Rayner
Telecopy No.: (212) 728-5950
To SILLC 2:
----------
Sealy Investors 2, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
CIBC Wood Gundy Capital
425 Lexington Avenue
New York, New York 10017
Attention: Jay Levine
Telecopy No.: (212) 885-4998
With a copy, which shall not constitute notice, to:
--------------------------------------------------
O'Sullivan Graev & Karabell LLP
30 Rockefeller Plaza, 24th Floor
New York, New York 10112
Attention: Daniel Rayner
Telecopy No.: (212) 728-5950
To SILLC 3:
----------
Sealy Investors 3, LLC
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Attention: Josh Bekenstein and Paul Edgerley
Telecopy No.: (617) 572-3274
BancBoston Investments, Inc.
100 Federal Street
Mail Stop 01-08-05
-14-
<PAGE>
Boston, MA 02110
Attention: Brian Gerrity
Telecopy No.: (617) 434-4873
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Bingham Dana LLP
150 Federal Street
Boston, MA 02110
Attention: T. Malcolm Sandilands
Telecopy No.: (617) 951-8736
To Zell:
-------
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza
Suite 1500
Chicago, IL 60606
Attention: Rod F. Dammeyer
Telecopy No.: (312) 902-1512
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Rosenberg & Liebentritt, P.C.
Two North Riverside Plaza
Suite 1601
Chicago, IL 60606
Attention: Alisa Singer, Esq.
Telecopy No.: (312) 454-0335
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: William A. Groll, Esq.
Telecopy No.: (212) 225-3999
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company will not enter into any
--------------------------
agreement which is inconsistent with or violates the rights granted to the
holders of Registrable Securities in this Agreement.
-15-
<PAGE>
(b) Remedies. Any Person having rights under any provision of this
--------
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(c) Amendments and Waivers. The provisions of this Agreement may be
----------------------
amended or waived only upon the prior written consent of the Company and holders
of at least 75% of the Registrable Securities; provided, that no amendment shall
--------
be effective without the consent of a holder of Registrable Securities to the
extent that such amendment would adversely affect the rights or obligations of
such holder of Registrable Securities hereunder in any material respect, and any
amendment to which such written consent is obtained will be binding upon the
Company and all holders of Registrable Securities.
(d) Successors and Assigns. All covenants and agreements in this Agreement
----------------------
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not. In addition, whether or not any express assignment has been
made, the provisions of this Agreement which are for the benefit of purchasers
or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(e) Severability. Whenever possible, each provision of this Agreement will
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
(f) Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together will constitute one and the
same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this Agreement.
(H) GOVERNING LAW. THE CORPORATE LAW OF THE STATE OF DELAWARE WILL GOVERN
-------------
ALL QUESTIONS CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS
STOCKHOLDERS. ALL OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK,
-16-
<PAGE>
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE
(WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW
YORK.
* * * * *
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written.
SEALY CORPORATION
By:
----------------------------
Name:
Title:
BAIN CAPITAL FUND V, L.P.
By: Bain Capital Partners V, L.P.,
its General Partner
By: Bain Capital Investors V, Inc.,
its General Partner
By:
----------------------------
Name:
Title:
BAIN CAPITAL FUND V-B, L.P.
By: Bain Capital Partners V, L.P.,
its General Partner
By: Bain Capital Investors V, Inc.,
its General Partner
By:
----------------------------
Name:
Title:
<PAGE>
CONTINUATION OF SIGNATURES FOR THIS REGISTRATION RIGHTS AGREEMENT:
BCIP ASSOCIATES
By:
----------------------------
A General Partner
BCIP TRUST ASSOCIATES, L.P.
By:
----------------------------
A General Partner
HARVARD PRIVATE CAPITAL HOLDINGS, INC.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
SEALY INVESTORS 1, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
----------------------------
Name:
Title:
<PAGE>
CONTINUATION OF SIGNATURES FOR THIS REGISTRATION RIGHTS AGREEMENT:
SEALY INVESTORS 2, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
----------------------------
Name:
Title:
SEALY INVESTORS 3, LLC
By: Bain Capital Partners V, L.P.,
its Administrative Member
By: Bain Capital Investors V, Inc.
Its General Partner
By:
----------------------------
Name:
Title:
RANDOLPH STREET PARTNERS II
By:
----------------------------
A General Partner
ZELL/CHILMARK FUND, L.P.
By: ZC Limited Partnership, its General Partner
By: ZC Partnership, its General Partner
By: ZC, Inc., a Partner
By:
----------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.50
EXECUTION COPY
MANAGEMENT SERVICES AGREEMENT
-----------------------------
THIS AGREEMENT dated as of December 18, 1997 between Sealy
Corporation, a Delaware corporation ("Sealy Corporation") and Sealy Mattress
-----------------
Company, an Ohio corporation ("Sealy Mattress"; and together with Sealy
--------------
Corporation, the "Companies"), and Bain Capital, Inc. ("Bain").
--------- ----
WHEREAS, the Companies desire to retain Bain and Bain desires to
perform for the Companies certain services;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. Term. This Agreement shall be in effect for an initial term of
----
five (5) years commencing on the date hereof (the "Term"), and shall be
----
automatically extended thereafter on a year to year basis unless Sealy
Corporation or Bain provides written notice of its desire to terminate this
Agreement to the other party 90 days prior to the expiration of the Term or any
extension thereof.
2. Services. Bain shall perform or cause to be performed such
--------
services for Sealy Corporation and its direct and indirect subsidiaries
(including Sealy Mattress) as directed by Sealy Corporation's board of
directors, which may include, without limitation, the following:
(a) general management services;
(b) identification, support, negotiation and analysis of acquisitions
and dispositions;
(c) support, negotiation and analysis of financing alternatives,
including, without limitation, in connection with acquisitions, capital
expenditures and refinancing of existing indebtedness;
(d) finance functions, including assistance in the preparation of
financial projections, and monitoring of compliance with financing agreements;
(e) strategic planning functions, including evaluating major strategic
alternatives; and
(f) other services for Sealy Corporation and its subsidiaries
(including Sealy Mattress) upon which Sealy Corporation's board of directors and
Bain agree.
3. Advisory Fees and Transaction Fees.
----------------------------------
(a) Payment to Bain for services rendered in connection with the
performance of services pursuant to this Agreement shall be $2,000,000 per year
or such other amount as the parties hereto shall agree ("Advisory Fees") plus
-------------
reasonable out-of-pocket expenses of Bain. The
<PAGE>
Advisory Fees shall be payable quarterly in advance by the Companies in
immediately available funds, the first such payment to be made promptly after
the date hereof.
(b) During the term of this Agreement, Bain shall be entitled to
receive from the Companies a transaction fee in connection with the consummation
by Sealy Corporation or any of its subsidiaries (including Sealy Mattress) of
(i) each material acquisition of an additional business (ii) each material
divestiture and (iii) each material financing or refinancing, in each case, in
an amount equal to 1% of the aggregate value of such transaction (each such
payment, a "Transaction Fee").
---------------
(c) Upon the consummation of the merger of Sandman Merger Corporation,
a transitory Delaware merger corporation ("Sandman") with and into Sealy
-------
Corporation as contemplated by the Agreement and Plan of Merger dated October
30, 1997, by and among Sealy Corporation, Sandman and Zell/Chilmark Fund, L.P.,
a Delaware limited partnership, the Companies shall pay to Bain a transaction
fee of $8,300,000 (the "Closing Fee") in immediately available funds, to an
-----------
account designated by Bain; it being understood that the Closing Fee shall be in
lieu of the Transaction Fee with respect to such merger.
4. Personnel. Bain shall provide and devote to the performance of
---------
this Agreement such partners, employees and agents of Bain as Bain shall deem
appropriate to the furnishing of the services required.
5. Liability. Neither Bain nor any of its affiliates, partners,
---------
employees or agents shall be liable to either Company or any of their respective
subsidiaries or affiliates for any loss, liability, damage or expense arising
out of or in connection with the performance of services contemplated by this
Agreement, unless such loss, liability, damage or expense shall be proven to
result directly from gross negligence, willful misconduct or bad faith on the
part of Bain, its affiliates, partners, employees or agents acting within the
scope of their employment or authority.
6. Indemnity. Each Company and its respective subsidiaries shall
---------
defend, indemnify and hold harmless Bain, its affiliates, partners, employees
and agents from and against any and all loss, liability, damage, or expenses
arising from any claim (a "Claim") by any person with respect to, or in any way
-----
related to, the performance of services contemplated by this Agreement
(including attorneys' fees) (collectively, "Claims") resulting from any act or
------
omission of Bain, its affiliates, partners, employees or agents, other than for
Claims which shall be proven to be the direct result of gross negligence, bad
faith or willful misconduct by Bain, its affiliates, partners, employees or
agents. Each Company and its respective subsidiaries shall defend at its own
cost and expense any and all suits or actions (just or unjust) which may be
brought against any Company, and/or any of its respective subsidiaries and any
of Bain, its officers, directors, affiliates, partners, employees or agents or
in which any of Bain, its affiliates, partners, employees or agents may be
impleaded with others upon any Claim or Claims, or upon any matter, directly or
indirectly, related to or arising out of this Agreement or the performance
hereof by Bain, its affiliates, partners, employees or agents, except that if
such damage shall be proven to be the direct result of gross negligence, bad
faith or willful misconduct by Bain, its affiliates, partners, employees or
agents, then Bain shall reimburse the Companies for the costs of defense and
other costs incurred by the Companies.
2
<PAGE>
7. Notices. All notices or other communications required or
-------
permitted by this Agreement shall be effective upon receipt and shall be in
writing and delivered personally or by overnight courier, or sent by facsimile,
as follows:
To either Company:
------------------
Sealy Corporation
Sealy Mattress Company
1228 Euclid Avenue
Cleveland, Ohio 44115
Attention: President
Telecopy No.: (216) 522-1976
To Bain:
--------
Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Attention: Josh Bekenstein
Paul Edgerley
Telecopy No.: (617) 572-3274
8. Assignment. No party hereto may assign any obligations hereunder
----------
to any other party without the prior written consent of all other parties
hereto, which consent shall not be unreasonably withheld; provided, however,
-------- -------
that, notwithstanding the foregoing, Bain may assign its rights and obligations
under this Agreement to any of its affiliates without the consent of the
Companies.
9. Successors. This Agreement and all the obligations and benefits
----------
hereunder shall inure to the successors and assigns of the parties hereto.
10. Counterparts. This Agreement may be executed and delivered by
------------
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original and both of which taken together shall
constitute but one and the same agreement.
11. Entire Agreement; Modification; Governing Law. The terms and
---------------------------------------------
conditions hereof constitute the entire agreement between the parties hereto
with respect to the subject matter of this Agreement and supersede all previous
communications, either oral or written, representations or warranties of any
kind whatsoever, except as expressly set forth herein. No modifications of this
Agreement nor waiver of the terms or conditions hereof shall be binding upon any
party hereto unless approved in writing by an authorized representative of such
party. All issues concerning this Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York or any other jurisdiction) that would cause the application of the law
of any jurisdiction other than the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Management Services
Agreement as of the date first written above.
SEALY CORPORATION
By:
----------------------------------
Name:
Title:
SEALY MATTRESS COMPANY
By:
----------------------------------
Name:
Title:
BAIN CAPITAL, INC.
By:
----------------------------------
Name:
Title:
4
<PAGE>
EXHIBIT 23.1
The Board of Directors
Sealy Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Cleveland, Ohio
May 5, 1998
