<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 1, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to __________________
Commission file number 1-8738
------
SEALY CORPORATION *
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3284147
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 PIKE STREET, SEATTLE, WASHINGTON 98101
---------------------------------------- ----------------------
(Address of principal executive offices)* (Zip Code)
Registrant's telephone number, including area code (206) 625-1233
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ---------
The number of shares of the registrant's common stock outstanding as of April
10, 1998 was 30,344,756.2711.
* All Corporate and administrative services are provided by Sealy, Inc., 10th
Floor Halle Building, 1228 Euclid Avenue, Cleveland, Ohio 44115.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 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,
respectively) 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 common shares outstanding:
Basic 30,345 29,726
Diluted 30,345 30,035
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 1, NOVEMBER 30,
1998 1997
------ ----
ASSETS
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 1, NOVEMBER 30,
1998 1997
------ ------
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
<S> <C> <C>
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.
4
<PAGE> 5
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 1, MARCH 2,
1998 1997
------ ------
<S> <C> <C>
Net cash (used in) provided by operating activities $ (39,797) $ 27
--------- ---------
Investing activities:
Proceeds from sale of subsidiary -- 35,000
Purchase of property and equipment, net (5,300) (3,955)
--------- ---------
Net cash provided by (used in) investing activities (5,300) 31,045
--------- ---------
Financing activities:
Treasury stock repurchase (410,027) --
Proceeds from long-term obligations, net 351,648 68,348
Equity contributions 134,717 --
Dividend -- (99,776)
Debt issuance costs (31,128) (6,130)
--------- ---------
Net cash provided by (used in) financing activities 45,210 (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 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
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 $419.4
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 ("Junior 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, 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.
6
<PAGE> 7
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 $435.1 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 $18.5 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 $14.5 million charge,
net of income tax benefit of $9.6, 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.
7
<PAGE> 8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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 Terms Loans 120,000 --
Revolving Credit Facility 29,000 --
Senior Subordinated Notes 125,000 --
Senior Subordinated Discount Notes 77,153 --
Junior Subordinated Notes 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 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 H 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.
8
<PAGE> 9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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 Notes have an initial principal balance outstanding of $25.0
million and mature on December 18, 2008. Interest on the Junior Notes 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 "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.
9
<PAGE> 10
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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>
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
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 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.
10
<PAGE> 11
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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.
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 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.
11
<PAGE> 12
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 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.
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 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.
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
12
<PAGE> 13
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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 -- 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 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 H -- GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
As discussed in Note D, 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.
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 in the Notes.
13
<PAGE> 14
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
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 other assets (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) 664,097 (368,021) (28,562) (174,456) --
Debt issuance costs, net and
other assets -- 30,878 7,621 31 -- 38,530
----------------------------------------------------------------------------------
(92,054) 709,337 (1,341) 5,151 (174,456) 446,637
----------------------------------------------------------------------------------
Total assets ($101,291) $ 718,722 $ 270,020 $ 38,145 ($174,893) $ 750,703
==================================================================================
LIABILITIES AND STOCKHOLDER'S 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) 24,070
----------------------------------------------------------------------------------
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' equity (127,819) 22,227 128,497 24,080 (174,804) (127,819)
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity ($101,291) $ 718,722 $ 270,020 $ 38,145 ($174,893) $ 750,703
==================================================================================
</TABLE>
14
<PAGE> 15
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
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 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>
15
<PAGE> 16
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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 -- 6,252 108,012 11,300 (4,079) 121,484
Selling, general and administrative 17,426 2,880 61,331 5,960 -- 87,597
Amortization of intangibles -- 99 2,914 149 -- 3,162
Interest expense, net 2,197 13,395 (41) (23) -- 15,528
Income from equity investees (1,065) (13,519) -- -- 14,584 --
Loss (income) from nonguarantor
equity investees -- -- (181) -- 181 --
Capital charge and intercompany
interest allocation -- 134 (581) 447 -- --
--------------------------------------------------------------------------------------
Income/(loss) before income taxes and
extraordinary item (18,557) 540 14,081 189 (14,765) (18,512)
Income taxes (792) (525) 562 8 -- (747)
--------------------------------------------------------------------------------------
Income/(loss) before extraordinary item (17,765) 1,065 13,519 181 (14,765) (17,765)
Extraordinary item 14,455 -- -- -- -- 14,455
--------------------------------------------------------------------------------------
Net income/(loss) $ (32,220) $ ( 1,065) $ 13,519 $ 181 $ (14,765) $ (32,220)
======================================================================================
</TABLE>
16
<PAGE> 17
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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
Income from equity investees (6,991) (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>
17
<PAGE> 18
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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 $(33,298) $ 13,970 ($7,022) $1,183 $(14,630) ($39,797)
--------------------------------------------------------------------------------
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 635,837 (661,441) 10,182 971 14,451 --
--------------------------------------------------------------------------------
Net proceeds provided by (used in)
investing activities 635,837 (661,615) 5,151 876 14,451 (5,300)
Cash flows from financing activities:
Treasury stock repurchase costs (410,020) -- -- -- (7) (410,027)
Proceeds from (repayment of) long-
term obligations, net (327,799) 679,447 -- -- -- 351,648
Equity contributions 134,717 -- -- -- -- 134,717
Debt issuance costs 563 (31,691) -- -- -- (31,128)
Net equity activity with Parent -- (111) (160) 85 186 --
Net cash provided by (used in) --------------------------------------------------------------------------------
financing activities (602,539) 647,645 (160) 85 -- 45,210
--------------------------------------------------------------------------------
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>
18
<PAGE> 19
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED MARCH 1, 1998
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
Purchase of property and
equipment, net -- (175) (3,703) (77) -- (3,955)
Net activity in investment in and
advances to (from) subsidiaries and
affiliates 27,494 5,642 10,413 (6,105) (39,444) --
-----------------------------------------------------------------------------------------
Net proceeds provided by (used in)
investing activities 27,494 40,467 6,710 (6,182) (39,444) 31,045
Cash flows from financing activities:
Proceeds from (repayment of) long-
term obligations, net 68,382 -- -- (35) -- 68,348
Dividend (99,776) -- -- -- -- (99,776)
Debt issuance costs (6,130) -- -- -- -- (6,130)
Net equity activity with Parent -- (47,200) (10,140) (5,203) 62,544 --
-----------------------------------------------------------------------------------------
Net cash provided by (used in)
financing 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)
Cash and cash equivalents:
Beginning of period -- 54 3,118 13,447 -- $ 16,619
-----------------------------------------------------------------------------------------
End of period $ -- $ 81 $ 6,138 $ 3,914 $ -- $ 10,133
=========================================================================================
</TABLE>
19
<PAGE> 20
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 -
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. 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.
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.
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 projected full year income
before income tax and extraordinary item adjusted for permanent differences.
This low estimated income is due to 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.
20
<PAGE> 21
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
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 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. 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 million
available under its Revolving Credit Facility with Letters of Credit issued
totaling approximately $12 million. The weighted average interest rate on the
Revolving Credit Facility at March 1, 1998 was 8.7%.
On January 15, 1997, the Company sold its subsidiary that manufactured
wood bedroom furniture under the Samuel Lawrence brand name. Gross proceeds from
the sale of $35.0 million were used to reduce amounts outstanding under the 1994
Restated Credit Agreement.
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 costs associated with the relocation to Archdale,
North Carolina, obligations under its credit agreement and subordinated note
indentures, environmental liabilities, and for other needs required to manage
and operate its business.
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.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. 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.
21
<PAGE> 22
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
See Note E to the Condensed Consolidated Financial Statements,
Part I, Item 1 included herein.
Item 4. Submission of Matters to a Vote of Security Holders
On December 18, 1997, the Company's shareholders executed a
written consent approving and adopting the Company's 1998 Stock
Option Plan (See Item 6, Exhibit Number 10.48) providing
for the use of up to 5,000,000 shares of Class A Common Stock of
the Company for issuance as either Incentive Stock Options or
Nonqualified Stock Options, as defined by the Internal Revenue
Code.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.48 Sealy Corporation 1998 Stock Option Plan
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K during the
second quarter of its 1998 fiscal year on March 17, 1998,
announcing a change in independent accountants.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Sealy Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SEALY CORPORATION
Signature Title
--------- -----
By: /s/ Ronald L. Jones President and Chief Executive Officer
--------------------------------- (Principal Executive Officer)
Ronald L. Jones
By: /s/ Richard F. Sowerby Vice President of Finance
--------------------------------- (Principal Financial and
Richard F. Sowerby Accounting Officer)
23
<PAGE> 1
SEALY CORPORATION
1998 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF PLAN
The 1998 Stock Option Plan (the "PLAN") of Sealy Corporation (the
"COMPANY"), adopted by the Board of Directors and shareholders of the Company
effective December 18, 1997, is intended to advance the best interests of the
Company by providing executives and other key employees of the Company or any
Subsidiary (as defined below) who have substantial responsibility for the
management and growth of the Company or any Subsidiary with additional
incentives by allowing such employees to acquire an ownership interest in the
Company. The Plan is a compensatory benefit plan within the meaning of Rule 701
under the Securities Act of 1933, as amended (the "SECURITIES ACT") and, unless
and until the Class A Common (as defined below) is publicly traded, the issuance
of stock purchase options ("OPTIONS") for shares of Class A Common pursuant to
the Plan and the issuance of shares of Class A Common pursuant to such Options
is intended to qualify for the exemption from registration under the Securities
Act provided by Rule 701.
ARTICLE II
DEFINITIONS
For purposes of the Plan the following terms have the indicated 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.
"BOARD" means the Company's Board of Directors.
"CLASS A COMMON" means the Company's Class A Common Stock, par value $.01
per share.
"CODE" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
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"COMMITTEE" means the Compensation Committee or such other committee of the
Board as the Board may designate to administer the Plan or, if for any reason
the Board has not designated such a committee, the Board. The Committee, if
other than the Board, shall be composed of two or more directors as appointed
from time to time by the Board.
"COMMON STOCK" means, collectively, the Class A Common and any other common
stock authorized by the Company.
"FAIR MARKET VALUE" per share of any class of Common Stock as of any given
date shall be as determined by the Board based on such factors as the members
thereof, in the exercise of their business judgment, consider relevant.
"FAMILY GROUP" means Executive's spouse and descendants (whether natural or
adopted) and any trust solely for the benefit of Executive and/or Executive's
spouse and/or descendants.
"INDEPENDENT THIRD PARTY" means any Person who, immediately prior to the
contemplated transaction, does not own in excess of 5% of the Common Stock on a
fully diluted basis, who is not controlling, controlled by or under common
control with any such 5% owner of the Common Stock and who is not the spouse or
descendant (by birth or adoption) of any such 5% owner of the Common Stock.
"ISSUED STOCK" shall mean (i) all shares of Common Stock issued upon the
proper exercise of an Option and (ii) all shares of Common Stock issued with
respect to the Common Stock referred to in clause (i) above by way of stock
dividend or stock split or in connection with any conversion, merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock. Unless provided otherwise herein or in the Participant's Option
Agreement, Issued Stock will continue to be Issued Stock in the hands of any
holder other than the Participant (except for the Company), and each such
transferee thereof will succeed to the rights and obligations of a holder of
Issued Stock hereunder.
"MEASUREMENT DATE" means the date on which any taxable income resulting
from the exercise of an Option is determined under applicable federal income tax
law.
"OPTION SHARES" shall mean (i) all shares of Class A Common issuable upon
the exercise of an Option and (ii) all shares of any other class of Common Stock
issuable upon the exercise of an Option as a result of an adjustment to such
Option pursuant to any provision hereof.
"PARTICIPANT" means any executive or other key employee of the Company or
any Subsidiary who has been selected to participate in the Plan by the Committee
or the Board.
"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.
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"PUBLIC OFFERING" means a 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.
"QUALIFIED INITIAL PUBLIC OFFERING" means the initial sale by the Company
of any class or classes of the Common Stock in an offering registered under the
Securities Act, other than an offering made solely in connection with a business
acquisition or combination or an employee benefit plan, but only if the
aggregate gross proceeds received by the Company and/or its majority stockholder
in such initial sale or series of such sales in the aggregate are in excess of
$100 million.
"SALE OF THE COMPANY" means any transaction involving the Company and an
Independent Third Party or affiliated group of Independent Third Parties
pursuant to which such party or parties acquire (i) a majority of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of the Board (whether by merger, consolidation, sale of the
Company's capital stock or otherwise) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
"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.
"TERMINATION DATE" shall mean, with respect to any Participant, the date
that such Participant ceases to be employed by the Company or any of its
Subsidiaries for any reason.
"VALUATION DATE" shall mean, with respect to any Repurchase Option, the
date, if any, that the Company delivers a Repurchase Notice to a holder of
Issued Stock.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. Subject to the limitations
of the Plan, the Committee shall have the sole and complete authority to: (i)
select Participants, (ii) grant Options to Participants in such forms and
amounts and with such exercise price as it shall
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determine, (iii) impose such limitations, restrictions and conditions upon
such Options as it shall deem appropriate, (iv) interpret the Plan and adopt,
amend and rescind administrative guidelines and other rules, procedures and
regulations relating to the Plan, (v) correct any defect or omission or
reconcile any inconsistency in the Plan or in any Options granted under the Plan
and (vi) make all other determinations and take all other actions necessary or
advisable for the implementation and administration of the Plan. The Committee's
determinations on matters within its authority shall be conclusive and binding
upon the Participants, the Company and all other Persons. All expenses
associated with the administration of the Plan shall be borne by the Company.
The Committee may, as approved by the Board and to the extent permissible by
law, delegate any of its authority hereunder to such Persons as it deems
appropriate.
ARTICLE IV
LIMITATION ON AGGREGATE SHARES
The number of shares of Class A Common with respect to which Options may be
granted under the Plan shall not exceed, in the aggregate, 5,000,000 shares,
subject to adjustment in accordance with Section 6.4 and 6.5. To the extent any
Options expire unexercised or are canceled, terminated or forfeited in any
manner without the issuance of Class A Common thereunder, the shares with
respect to which such Options were granted shall again be available under the
Plan. Similarly, if any shares of Class A Common issued hereunder upon exercise
of the Options are repurchased hereunder, such shares shall again be available
under the Plan for reissuance as Options. The shares of Class A Common available
under the Plan may be either authorized and unissued shares, treasury shares or
a combination thereof, as the Committee shall determine.
ARTICLE V
AWARDS
5.1 GRANT OF OPTIONS. The Committee may grant Options to Participants from
time to time in accordance with this Article V. Options granted under the Plan
may be nonqualified stock options or "incentive stock options" within the
meaning of Section 422 of the Code or any successor provision as specified by
the Committee; PROVIDED, HOWEVER, that no incentive stock option may be granted
to any Participant who, at the time of grant, owns stock of the Company (or any
Subsidiary) representing more than 10% of the total combined voting power of all
classes of capital stock of the Company (or any Subsidiary), unless such
incentive stock option shall at the time of grant (a) have a termination date
not later than the fifth anniversary of the issuance date and (b) have an
exercise price per share equal to at least 110% of the Fair Market Value of a
share of Class A Common on the date of grant. The exercise price per share of
Class A Common under each Option shall be determined by the Committee or the
Board at the time of grant; PROVIDED, HOWEVER, that the exercise price per share
of Class A Common under each incentive stock option shall be fixed by the
Committee at the time of grant of the Option and shall equal at least 100% of
the Fair Market Value of a share of Class A Common on the date of grant, but not
less than the par value per share (as adjusted pursuant to Section 6.4 or 6.5).
Subject to
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Section 5.6, Options shall be exercisable at such time or times as the
Committee shall determine; PROVIDED, HOWEVER, that any Option intended to be an
incentive stock option shall be treated as an incentive stock option only to the
extent that the aggregate Fair Market Value of the Class A Common (determined as
of the date of Option grant) with respect to which incentive stock options (but
not nonqualified options) are exercisable for the first time by any Participant
during any calendar year (under all stock option plans of the Company and its
Subsidiaries) does not exceed $100,000. The Committee shall determine the term
of each Option, which term shall not exceed ten years from the date of grant of
the Option.
5.2 EXERCISE PROCEDURE. Options shall be exercisable, to the extent they
are vested, by written notice to the Company (to the attention of the Company's
Secretary) accompanied by payment in full of the applicable exercise price.
Payment of such exercise price shall be made in cash (including check, bank
draft, money order or wire transfer of immediately available funds).
5.3 WITHHOLDING TAX REQUIREMENTS.
(a) AMOUNT OF WITHHOLDING. It shall be a condition of the exercise of
any Option that the Participant exercising the Option make appropriate payment
or other provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "WITHHOLDING AMOUNT") shall be
determined by the Treasurer or other appropriate officer of the Company, and the
Participant shall furnish such information and make such representations as such
officer requires to make such determination.
(b) WITHHOLDING PROCEDURE. If the Company determines that withholding
tax is required with respect to any Option exercise, the Company shall notify
the Participant of the Withholding Amount, and the Participant shall pay to the
Company an amount not less than the Withholding Amount. All amounts paid to the
Company pursuant to this Section 5.3 shall be deposited in accordance with
applicable law by the Company as withholding tax for the Participant's account.
If the Treasurer or other appropriate officer of the Company determines that no
withholding tax is required with respect to the exercise of any Option (because
such option is an incentive stock option or otherwise), but subsequently it is
determined that the exercise resulted in taxable income as to which withholding
is required (as a result of a disposition of shares or otherwise), the
Participant shall promptly, upon being notified of the withholding requirement,
pay to the Company, by means acceptable to the Company, the amount required to
be withheld; and at its election the Company may condition the transfer of any
shares issued upon exercise of an incentive stock option upon receipt of such
payment.
5.4 NOTIFICATION OF INQUIRIES AND AGREEMENTS. Each Participant and each
Permitted Transferee shall notify the Company in writing within 10 days after
the date such Participant or Permitted Transferee (i) first obtains knowledge of
any Internal Revenue Service inquiry, audit, assertion, determination,
investigation, or question relating in any manner to the value of Options
granted hereunder; (ii) includes or agrees (including, without limitation, in
any settlement, closing or other similar agreement) to include in gross income
with respect to any Option granted under this Plan (A) any amount in excess of
the amount reported on Form 1099 or Form W-2 to such Participant by the Company,
or (B) if no such Form was received, any amount; and/or (iii) exercises, sells,
disposes of, or otherwise transfers an Option acquired pursuant to this Plan.
Upon
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request, a Participant or Permitted Transferee shall provide to the Company
any information or document relating to any event described in the preceding
sentence which the Company (in its sole discretion) requires in order to
calculate and substantiate any change in the Company's tax liability as a result
of such event.
5.5 CONDITIONS AND LIMITATIONS ON EXERCISE. At the discretion of the
Committee, exercised at the time of grant, Options may vest, in one or more
installments, upon (i) the fulfilment of certain conditions, (ii) the passage of
a specified period of time, and/or (iii) the achievement by the Company or any
Subsidiary of certain performance goals. In the event of a proposed Sale of the
Company, the Committee may provide, in its discretion, by written notice to each
applicable Participant, that any or all Options shall become immediately vested
and that any or all Options shall terminate if not exercised as of the date of
such Sale of the Company or any other designated date (the "DESIGNATED DATE") or
that any such Options shall thereafter represent only the right to receive such
consideration as the Committee shall deem equitable in the circumstances.
5.6 EXPIRATION OF OPTIONS.
(a) NORMAL EXPIRATION. In no event shall any part of any Option be
exercisable after the stated date of expiration thereof.
(b) EARLY EXPIRATION UPON TERMINATION OF EMPLOYMENT. Any part of any
Option that was not vested on a Participant's Termination Date shall expire and
be forfeited on such date, and any part of any Option that was vested on the
Termination Date shall also expire and be forfeited to the extent not
theretofore exercised on the sixtieth (60th) day following the Termination Date
(180 days if the Termination Date occurs as a result of the death of a
Participant), but in no event after the stated date of expiration thereof.
5.7 RIGHT TO PURCHASE ISSUED STOCK UPON TERMINATION OF EMPLOYMENT.
(a) REPURCHASE RIGHT. If a Participant ceases to be employed by the
Company or any of its Subsidiaries for any reason, then such Participant's
Issued Stock (whether held by such Participant or one or more transferees and
including any shares of Issued Stock acquired subsequent to such termination of
employment) will be subject to repurchase by the Company pursuant to the terms
and conditions set forth in this Section 5.7 (the "REPURCHASE OPTION") at a
price per share equal to the Fair Market Value per share of such Issued Stock
determined as of the Valuation Date, LESS the amount of any cash distributed by
the Company with respect to such share between the applicable Valuation Date and
the closing of the applicable repurchase.
(b) REPURCHASE PROCEDURES. The Repurchase Option is exercisable by the
Company delivering written notice (the "REPURCHASE NOTICE") to the holder or
holders of the applicable Issued Stock within 240 days after the applicable
Termination Date. The Repurchase Notice will set forth the number of shares of
Issued Stock to be acquired from such holder(s), an estimate of the aggregate
consideration to be paid for such holder's shares of Issued Stock and the time
and place for the closing of the transaction. If any shares of Issued Stock are
held by any transferees of the applicable Participant, the Company will purchase
such shares of Issued Stock elected to be purchased from such holder(s), pro
rata according to the number of shares of Issued Stock held
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by such holder(s) at the time of delivery of such Repurchase Notice (determined
as nearly as practicable to the nearest share).
(c) CLOSING OF REPURCHASE. The closing of any such repurchase
transaction will take place on the date designated by the Company in the
Repurchase Notice, which date will not be more than 60 days after the delivery
of such notice. The Company will pay for any shares of Issued Stock to be
purchased by the Company pursuant to a Repurchase Option by delivery (i) of a
check payable to the holder(s) of such shares of Issued Stock in an aggregate
amount equal to one-third of the aggregate repurchase price ("Repurchase
Price") for such shares of Issued Stock and (ii) of a note or notes for an
aggregate principal amount equal to the remaining unpaid Repurchase Price and
payable in two equal annual installments beginning on the first anniversary of
the closing of such purchase and bearing interest at a rate per annum equal to
the then prevailing "prime rate". Any notes issued by the Company pursuant to
this Section 5.7(c) will be subject to any restrictive covenants to which the
Company is subject at the time of such purchase. Notwithstanding anything to the
contrary contained in this Plan, all repurchases of shares of Issued Stock by
the Company will be subject to applicable restrictions contained in the Delaware
General Corporation Law and in the Company's and its Subsidiaries' debt and
equity financing agreements. If any such restrictions prohibit the repurchase of
shares of Issued Stock hereunder which the Company is otherwise entitled to
make, the Company may make such repurchases as soon as it is permitted to do so
under such restrictions. The Company will receive customary representations and
warranties from each seller regarding the sale of shares of Issued Stock,
including, but not limited to, the representation that such seller has good and
marketable title to such shares of Issued Stock to be transferred free and clear
of all liens, claims and other encumbrances.
(d) Notwithstanding anything contained herein to the contrary, the
Company shall not have a Repurchase Option with respect to any Issued Stock
issued to or on behalf of a Participant who ceases to be employed by the Company
or any of its Subsidiaries after the first to occur of a Sale of the Company or
a Qualified Initial Public Offering.
5.8 RESTRICTIONS ON TRANSFER OF ISSUED STOCK.
(a) TRANSFER OF ISSUED STOCK. No Participant will sell, pledge,
transfer or otherwise dispose of (a "TRANSFER") any interest in any shares
of Issued Stock, except (i) pursuant to the provisions of Sections 5.7 or 5.10
hereof, (ii) pursuant to applicable laws of descent and distribution, or (iii)
among such Participant's Family Group; PROVIDED, that the restrictions contained
in this Section 5.8 will continue to be applicable to shares of Issued Stock
after any Transfer of the type referred to in clause (ii) or (iii) above and, as
a condition to any such Transfer, the transferees of such shares of Issued Stock
must agree in writing to be bound by the provisions of this Plan. Any transferee
of shares of Issued Stock pursuant to a Transfer in accordance with clause (ii)
or (iii) above is herein referred to as a "PERMITTED TRANSFEREE." Upon the
Proposed Transfer of any shares of Issued Stock pursuant to clause (ii) or (iii)
above, such Participant or such Permitted Transferee Transferring such shares of
Issued Stock will deliver a written notice (a "TRANSFER NOTICE") to the Company,
which discloses in reasonable detail the identity of the Permitted
Transferee(s).
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(b) TERMINATION OF TRANSFER RESTRICTIONS. The provisions of this
Section 5.8 will terminate upon a Qualified Initial Public Offering.
5.9 ADDITIONAL RESTRICTIONS ON TRANSFER.
(a) The certificates representing shares of Issued Stock will bear the
following legend:
"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 SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE
OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN THE
ISSUER'S 1998 STOCK OPTION PLAN, A COPY OF WHICH MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above regarding the Plan shall be removed from the
certificates evidencing any securities which cease to be Issued Stock.
(b) No holder of Issued Stock may Transfer any shares of Issued Stock
(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 Issued Stock 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 5.9(a).
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5.10 APPROVED SALE OF THE COMPANY
(a) If the holders of a majority of the shares of voting Common Stock
then outstanding 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 Independent Third Party or group
of Independent Third Parties (each such sale, an "APPROVED SALE"), then each
holder of shares of Issued Stock will vote for, consent to and raise no
objections against such Approved Sale. If the Approved Sale is structured as (i)
a merger or consolidation, each holder of shares of Issued Stock 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 shares of Issued
Stock will agree to sell all of his or her Issued Stock on the terms and
conditions approved by the holders of a majority of the shares of voting Common
Stock then outstanding. Each holder of Issued Stock will take all necessary or
desirable actions in connection with the consummation of the Approved Sale as
requested by the Company.
(b) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule
then in effect) promulgated by the Securities and Exchange Commission may be
available with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Issued Stock will, at the
request of the Company, appoint a purchaser representative (as such term is
defined in Rule 501) reasonably acceptable to the Company. If any holder of
Issued Stock appoints a purchaser representative designated by the Company, the
Company will pay the fees of such purchaser representative, but if any holder of
Issued Stock declines to appoint the purchaser representative designated by the
Company, such holder will appoint another purchaser representative, and such
holder will be responsible for the fees of the purchaser representative so
appointed.
(c) Each holder of Issued Stock will bear their pro-rata share (based
upon the number of shares sold) of the costs of any sale of Issued Stock
pursuant to an Approved Sale to the extent such costs are incurred for the
benefit of all holders of Common Stock and are not otherwise paid by the Company
or the acquiring party. Costs incurred by any holder of Issued Stock on his or
her own behalf will not be considered costs of the transaction hereunder.
5.11 HOLDBACK AGREEMENT. No holder of Issued Stock will effect any sale or
distribution of Common Stock during the seven days prior to or the 180-day
period beginning on the effective date of any underwritten Public Offering
(except as part of such underwritten registration), unless the underwriters
managing such underwritten Public Offering otherwise agree.
ARTICLE VI
GENERAL PROVISIONS
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6.1 WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied in a
written agreement (the "OPTION AGREEMENT") which shall be signed by the
Participant to whom the Option is granted and shall be subject to the terms and
conditions set forth herein.
6.2 LISTING, REGISTRATION AND LEGAL COMPLIANCE. If at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other Persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may at any time impose any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to comply with such Section 16(b) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise, finds it desirable because of federal or state regulatory
requirements to reduce the period during which any Options may be exercised, the
Committee may, in its discretion and without the consent of the holder of any
such Option, so reduce such period on not less than 15 days' written notice to
the holders thereof.
6.3 OPTIONS NOT TRANSFERRABLE. Options (including the right to receive
Option Shares) may not be Transferred or assigned by the Participant to whom
they were granted, other than by will or the laws of descent and distribution
and, during the lifetime of such Participant, Options may be exercised only by
such Participant (or, if such Participant is incapacitated, by such
Participant's legal guardian or legal representative). In the event of the death
of a Participant, Options which are not vested on the date of death shall
terminate; and the exercise of Options granted hereunder to such Participant,
which are vested as of the date of death, may be made only by the executor or
administrator of such Participant's estate or the Person or Persons to whom such
Participant's rights under the Options pass by will or the laws of descent and
distribution.
6.4 ORGANIC CHANGE. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
or other transaction which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "ORGANIC CHANGE." Except as otherwise provided herein,
after the consummation of any Organic Change, each Option shall thereafter be
exercisable for, rather than the applicable Option Shares immediately
theretofore acquirable and receivable upon exercise of such Option, such shares
of stock, securities or assets (including cash) as may be issued or payable
with respect to or in exchange for the number and class of Option Shares
immediately theretofore acquirable and receivable upon exercise of such Option
had such Organic Change not taken place. Notwithstanding the foregoing, in the
event of any proposed Organic Change, the Board may, in its discretion, by
written notice to the Executive, terminate the Options subject to the payment of
such consideration, if any, as the Board shall deem equitable in the
circumstances.
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6.5 ADJUSTMENT FOR CHANGE IN COMMON STOCK. In the event of a
recapitalization, reorganization, stock split, stock dividend, combination of
shares, consolidation, merger or other change in any class of Common Stock, the
Board or the Committee may, in order to prevent the dilution or enlargement of
rights under the Plan or outstanding Options, adjust (1) the number and type of
shares or other consideration as to which options may be granted under the Plan,
(2) the number and type of shares covered by outstanding Options, (3) the
exercise prices specified therein and (4) other provisions of this Plan which
specify a number of shares, all as such Board or Committee determines to be
appropriate and equitable.
6.6 RIGHTS OF PARTICIPANTS. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time (with or without cause), or confer upon any
Participant any right to continue in the employ of the Company or any Subsidiary
for any period of time or to continue to receive such Participant's current (or
other) rate of compensation. No employee shall have a right to be selected as a
Participant or, having been so selected, to be selected again as a Participant.
6.7 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; PROVIDED, HOWEVER, that no such amendment shall be
made without shareholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby, except as provided below. No Options shall be
granted hereunder after the tenth anniversary of the adoption of the Plan.
6.8 AMENDMENT OF OUTSTANDING OPTIONS. The Committee may amend or modify any
Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant such Option; provided that, except
as expressly contemplated elsewhere herein or in any agreement evidencing such
Option, no such amendment or modification shall impair the rights of any
Participant under any outstanding Option without the consent of such
Participant.
6.9 INDEMNIFICATION. In addition to such other rights of indemnification as
they may have as members of the Board or the Committee, the members of the Board
and Committee shall be indemnified by the Company against (i) all costs and
expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted under the Plan, and (ii) all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding; PROVIDED, HOWEVER, that any such Board or
Committee member shall be entitled to the indemnification rights set forth in
this Section 6.9 only if such member (1) acted in good faith and in a manner
that such member reasonably believed to be in, and not opposed to, the best
interests of the Company, and (2) with respect to any criminal action or
proceeding, (A) had no reasonable cause to believe that such conduct was
unlawful, and (B) upon the institution of any such action, suit or proceeding a
Board
-11-
<PAGE> 12
or Committee member shall give the Company written notice thereof and an
opportunity to handle and defend the same before such Board or Committee member
undertakes to handle and defend it on his own behalf.
6.10 RESTRICTED SECURITIES. All Common Stock issued upon the exercise of
any Options issued pursuant to the terms of this Plan shall constitute
"restricted securities," as that term is defined in Rule 144 promulgated by the
Securities and Exchange Commission pursuant to the Securities Act, and may not
be Transferred except in compliance with the registration requirements of the
Securities Act or an exemption therefrom.
6.11 ARBITRATION. In the event of any dispute over any Fair Market Value
determination, such dispute will be resolved by and through an arbitration
proceeding to be conducted under the auspices of the American Arbitration
Association (or any like organization successor thereto) at Cleveland, Ohio.
Such arbitration proceeding will be conducted in as expedited a manner as is
then permitted by the commercial arbitration rules (formal or informal) of the
American Arbitration Association, and the arbitrator or arbitrators in any such
arbitration will be individuals who are expert in the subject matter of the
dispute. The arbitration will be conducted before a panel of arbitrators
selected in accordance with the rules of the American Arbitration Association.
The costs of said arbitrators and the arbitration will be borne equally by the
parties to the arbitration. Both the foregoing provisions to arbitrate any and
all such disputes, and the results, determination, finding, judgment and/or
award rendered through such arbitration, will be final and binding on all
applicable parties and may be specifically enforced by legal proceedings.
* * * * *
-12-
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