<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: May 31, 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
incorporation or organization) Identification No.)
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 July 6,
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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1 - Financial Statements
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED QUARTER ENDED
MAY 31, 1998 JUNE 1, 1997
------------ ------------
<S> <C> <C>
Net sales $ 213,572 $ 180,625
--------- ---------
Costs and expenses:
Cost of goods sold 121,167 100,432
Selling, general and administrative 74,033 60,387
Amortization of intangibles 3,336 3,198
Interest expense, net 17,517 8,206
--------- ---------
216,053 172,223
--------- ---------
(Loss) income before income tax
and extraordinary item (2,481) 8,402
(831) 5,120
--------- ---------
Income tax (benefit) expense
(Loss) income before
extraordinary item (1,650) 3,282
Extraordinary item - loss from early
extinguishment of debt (net of income
tax benefit of $57) 82 --
--------- ---------
Net (loss) income $ (1,732) $ 3,282
========= =========
(Loss)/earnings per common share - basic:
(Loss) income before extraordinary item $ (0.06) $ 0.11
Extraordinary item -- --
--------- ---------
Net (loss) income $ (0.06) $ 0.11
========= =========
(Loss)/earnings per common share - diluted:
(Loss) income before extraordinary item $ (0.06) $ 0.11
Extraordinary item -- --
--------- ---------
Net (loss) income $ (0.06) $ 0.11
========= =========
Weighted average number of common shares outstanding:
Basic 30,345 29,934
Diluted 30,345 30,276
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 1998 JUNE 1, 1997
------------ -------------
<S> <C> <C>
Net sales $ 422,831 $ 349,529
--------- ---------
Costs and expenses:
Cost of goods sold 242,651 197,130
Selling, general and administrative 161,630 115,961
Amortization of intangibles 6,498 6,678
Interest expense, net 33,045 15,006
--------- ---------
443,824 334,775
--------- ---------
(Loss) income before income tax and
extraordinary item (20,993) 14,754
Income tax (benefit) expense (1,578) 8,284
--------- ---------
(Loss) income before
extraordinary item (19,415) 6,470
Extraordinary item - loss from early
extinguishment of debt (net of income
tax benefit of $9,693 and $1,353, respectively) 14,537 2,030
--------- ---------
Net (loss) income $ (33,952) $ 4,440
========= =========
(Loss)/earnings per common share - basic:
(Loss) income before extraordinary item $ (0.64) $ 0.22
Extraordinary item (0.48) (0.07)
--------- ---------
Net (loss) income $ (1.12) $ 0.15
========= =========
(Loss)/earnings per common share - diluted:
(Loss) income before extraordinary item $ (0.64) $ 0.21
Extraordinary item (0.48) (0.06)
--------- ---------
Net (loss) income $ (1.12) $ 0.15
========= =========
Weighted average number of common shares outstanding:
Basic 30,345 29,830
Diluted 30,345 30,171
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
SEALY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MAY 31, NOVEMBER 30,
1998 1997
----------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,755 $ 6,057
Accounts receivable, less allowance for doubtful
accounts (1998 - $8,445; 1997 - $7,696) 101,759 93,918
Inventories 50,818 46,007
Prepaid expenses and deferred taxes 9,286 22,529
--------- ---------
165,618 168,511
Property, plant and equipment - at cost 184,369 169,603
Less: accumulated depreciation (48,919) (43,995)
--------- ---------
135,450 125,608
Other assets:
Goodwill and other intangibles - net of
accumulated amortization
(1998 - $70,299; 1997 - $63,801) 404,771 411,269
Debt issuance costs, net, and other assets 37,319 15,679
--------- ---------
442,090 426,948
--------- ---------
$ 743,158 $ 721,067
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term obligations $ 4,000 $ --
Accounts payable 37,516 49,676
Accrued interest 13,601 2,038
Accrued incentives and advertising 33,684 30,704
Accrued compensation 9,625 17,771
Other accrued expenses 24,015 20,098
--------- ---------
122,441 120,287
Long-term obligations 707,021 330,000
Other noncurrent liabilities 35,463 35,713
Deferred income taxes 8,184 30,001
Stockholders' (deficit) equity:
Common stock 303 299
Additional paid-in capital 134,414 257,320
Retained deficit (262,012) (50,614)
Foreign currency translation adjustment (2,656) (1,939)
--------- ---------
(129,951) 205,066
Commitments and contingencies -- --
--------- ---------
$ 743,158 $ 721,067
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
SEALY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 1998 JUNE 1, 1997
------------ ------------
<S> <C> <C>
Net cash used in operating activities $ (14,128) $ (5,167)
--------- ---------
Investing activities:
Proceeds from sale of subsidiary -- 35,000
Proceeds from sale of insulator pad operation assets -- 5,150
Purchase of property and equipment, net (15,531) (10,584)
--------- ---------
Net cash (used in) provided by investing activities (15,531) 29,566
--------- ---------
Financing activities:
Treasury stock repurchase (413,078) --
Proceeds from long-term obligations, net 350,872 69,048
Equity contributions 121,317 --
Dividend -- (99,776)
Debt issuance costs (31,754) (6,130)
--------- ---------
Net cash provided by (used in) financing activities 27,357 (36,858)
--------- ---------
Change in cash and cash equivalents (2,302) (12,459)
Cash and cash equivalents:
Beginning of period 6,057 16,619
--------- ---------
End of period $ 3,755 $ 4,160
========= =========
Supplemental disclosures:
- -------------------------
Cash paid for:
Taxes paid, net $ 2,966 $ 10,236
Cash interest paid $ 14,491 $ 13,885
Selected noncash items:
Depreciation $ 5,427 $ 6,093
Issuance of Junior Notes $ 25,000 $ --
Rollover Equity $ 15,235 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 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 May 31, 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>
MAY 31, NOVEMBER, 30
1998 1997
--------- ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials $25,822 $26,251
Work in process 20,031 12,594
Finished goods 4,965 7,162
----- -----
$50,818 $46,007
======= =======
</TABLE>
NOTE C - RECAPITALIZATION
On October 30, 1997, Sealy Corporation ("Parent") entered into an
agreement and plan of merger (the "Merger Agreement") with Sandman Merger
Corporation, a transitory Delaware merger corporation ("Sandman"), and
Zell/Chilmark Fund, L.P., a Delaware limited partnership ("Zell"). Zell owned
approximately 87% of the issued and outstanding common stock of Parent (the
"Existing Common Stock"). Pursuant to the Merger Agreement, upon the
satisfaction of certain conditions, Sandman was merged with and into Parent with
Parent being the surviving corporation effective on December 18, 1997 (the
"Closing Date") and the Company was recapitalized (the "Recapitalization")
whereby certain equity investors, including members of management, acquired an
approximate 90.0% economic equity stake (85.3% voting equity stake) in the
Company. A portion of the issued and outstanding shares of common stock of the
Company was converted into the right to receive aggregate cash equal to $419.3
million less (i) certain seller fees and expenses and (ii) certain costs in
connection with the extinguishment of certain outstanding options and warrants
of the Company and the remaining portion was converted into voting preferred
stock and then reconverted into $25.0 million in aggregate principal amount of a
junior subordinated note of the Company ("Junior Note") and a retained voting
common stock interest in the Company of approximately 14.7%. Concurrent with the
Recapitalization, the Company refinanced existing indebtedness (the
"Refinancing") by Sealy Mattress Company (the "Issuer"), a wholly owned
6
<PAGE> 7
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
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.
After the Recapitalization, the issued and outstanding capital stock of
the Company consists of Class A common stock, par value $0.01 per share ("Class
A Common"), Class B common stock, par value $0.01 per share ("Class B Common"),
Class L common stock, par value $0.01 per share ("Class L Common"), and Class M
common stock, par value $0.01 per share ("Class M Common" and collectively with
the Class A Common, Class B Common and Class L Common, "Common Stock"). The
Class L Common and the Class M Common are senior in right of payment to the
Class A Common and Class B Common. Holders of Class B Common and Class M Common
have no voting rights except as required by law. The holders of Class A Common
and Class L Common are entitled to one vote per share on all matters to be voted
upon by the stockholders of the Company, including the election of directors.
The Board of Directors of the Company is authorized to issue preferred stock,
par value $0.01 per share, with such designations and other terms as may be
stated in the resolutions providing for the issue of any such preferred stock
adopted from time to time by the Board of Directors.
Upon the consummation of the Recapitalization, Parent and certain of its
stockholders, including the Bain Funds, Harvard Private Capital, Inc.
("Harvard"), Sealy Investors 1, LLC, Sealy Investors 2, LLC, Sealy Investors 3,
LLC (the "LLCs") and Zell (collectively, the "Stockholders") entered into a
stockholders agreement (the "Stockholders Agreement"). The Stockholders
Agreement (i) required that each of the parties thereto vote all of its voting
securities of Parent and take all other necessary or desirable actions to cause
the size of the Board of Directors of Parent to be established at seven members
and to cause three designees of the Bain Funds and one designee of Harvard to be
elected to the Board of Directors; (ii) granted Parent and the Bain Funds a
right of first offer on any proposed transfer of shares of capital stock of
Parent held by Zell, Harvard or the LLCs, (iii) granted Harvard a right of first
offer on any proposed transfer of shares of capital stock of Parent held by Bain
Funds; (iv) granted tag-along rights on certain transfers of shares of capital
stock of Parent; (v) required the Stockholders to consent to a sale of Parent to
an independent third party if such sale is approved by holders constituting a
majority of the then outstanding shares of voting common stock of Parent; and
(vi) except in certain instances, prohibits Zell from transferring any shares of
capital stock of Parent until the tenth anniversary of the date of the
consummation of the Recapitalization. Certain of the foregoing provisions of the
Stockholders Agreement terminate upon the consummation of an Initial Public
Offering or an Approved Sale (as each is defined in the Stockholders Agreement).
Immediately prior to the closing of the Recapitalization (the "Closing"),
Parent contributed (the "Capital Contribution") all of the issued and
outstanding stock of Sealy, Inc., an Ohio corporation, the Stearns & Foster
Bedding Company, a Delaware corporation, Advanced Sleep Products, a California
corporation, Sealy Components-Pad, Inc., a Delaware corporation and Sealy
Mattress Company of San Diego, a California corporation, to the capital of the
Issuer. Immediately after the Capital Contribution, the Issuer became the only
direct subsidiary of Parent and owns 100% of the operations of Parent. At the
Closing, Sandman was merged with and into Parent with Parent the surviving
corporation.
The Recapitalization transaction resulted in an aggregate direct net
charge to APIC and retained deficit totaling $421.7 million primarily comprised
of the costs associated with the purchase of the then outstanding Class A and
Class B Common Stock, the repurchase of Merger Warrants and the repurchase of
Series A and Series B Restructure Warrants. The Recapitalization transaction
also resulted in a pretax charge within selling, general and administrative
expense of $18.8 million comprised of accelerated vesting of stock options and
restricted stock and other incentive based compensation payments to employees in
connection with the transaction. The Company recorded a $14.5 million charge,
net of income tax benefit of $9.6 million, representing the writeoff of the
remaining unamortized debt issue costs related to long-term obligations repaid
in connection with the Recapitalization as well as consent fees and premiums
paid related to the Tender Offer of the Parent Notes (each of which as defined
in Note D) in connection with the Recapitalization.
7
<PAGE> 8
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
NOTE D - LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1998 1997
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Senior AXELs Credit Agreement $329,625 $ --
Senior Revolving Credit Agreement:
Tranche A Term Loans 120,000 --
Revolving Credit Facility 30,800 --
Senior Subordinated Notes 125,000 --
Senior Subordinated Discount Notes 79,200 --
Junior Subordinated Note 26,396 --
$275,000,000 Second Restated Secured
Credit Agreement - Revolving Credit
Facility -- 130,000
10 1/4% Senior Subordinated Notes Due 2003 -- 200,000
-------- ---------
711,021 330,000
Less current portion 4,000 --
-------- --------
$707,021 $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.
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 $2.5 million, was paid on May 1, 1998, after which time interest
ceased to accrue on the Notes.
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 inclusive of 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
8
<PAGE> 9
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
and will bear interest at a floating rate. See Note J 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 contain covenants which, among
other things, limit capital expenditures, indebtedness and/or the incurrence of
additional indebtedness, investments, dividends, transactions with affiliates,
asset sales, mergers and consolidations, prepayments of other indebtedness
(including the Notes), liens and encumbrances and other matters customarily
restricted in such agreements.
Indebtedness under the Senior Credit Agreements bears interest at a
floating rate. Indebtedness under the Revolving Credit Facility and the Term
Loans initially bears interest at a rate (subject to reduction based on
attainment of certain leverage ratio levels) 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
or (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 to 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.
To mitigate its exposure to interest rate fluctuations, in January 1998 the
Company effected a $350 million notional value interest rate protection program
consisting of five year caps at a cost of $0.6 million and three year collars
tied to three month Eurodollar rates at no net cost to the Company.
The Tranche A Term Loans mature in December 2002. The AXELs Series B
mature in December 2004. The AXELs Series C mature in December 2005. The AXELs
Series D mature in December 2006. The Tranche A Term Loans are subject to
quarterly amortization payments commencing in March 1999, the AXELs Series B,
the AXELs Series C and the AXELs Series D are subject to quarterly amortization
payments commencing in March 1998 with the AXELs Series B amortizing in nominal
amounts until the maturity of the Tranche A Term Loans, the AXELs Series C
amortizing in nominal amounts until the maturity of the AXELs Series B and the
AXELs Series D amortizing in nominal amounts until the maturity of the AXELs
Series C. The Revolving Credit Facility matures in December 2002. In addition,
the Senior Credit Agreements provide for mandatory repayments, subject to
certain exceptions, of the Term Loans, and reductions in the Revolving Credit
Facility, based on the net proceeds of certain asset sales outside the ordinary
course of business of the Issuer and its subsidiaries, the net proceeds of
insurance, the net proceeds of certain debt and equity issuances, and excess
cash flow (as defined in the Senior Credit Agreements).
The Junior Note has an initial principal balance outstanding of $25.0
million and matures on December 18, 2008. Interest on the Junior Note accrues at
10% per annum if paid within ten days of the end of each calendar quarter or at
12% if the Company elects to add accrued interest for such quarter to the then
outstanding principal balance. The Company has the option, at each quarter end,
to elect to pay the interest due for the quarter or add such interest to the
principal balance through the term of the Note.
The Notes were issued pursuant to an Indenture (the "Senior Subordinated
Note Indenture") among the Issuer, the Guarantors and The Bank of New York, as
trustee (the "Senior Subordinated Note Trustee"). The Senior Subordinated
Discount Notes were issued pursuant to an Indenture (the "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 accrues 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
9
<PAGE> 10
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
from time to time after the date of the Senior Subordinated Note Indenture,
subject to the provisions of the Senior Subordinated Note Indenture.
Except as provided below, the Senior Subordinated Notes are not redeemable
at the Company's option prior to December 15, 2002. Thereafter, the Senior
Subordinated Notes are subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL
YEAR AMOUNT
---- ------
<S> <C>
2002 ..................................... 104.937%
2003 ..................................... 103.292%
2004 ..................................... 101.646%
2005 and thereafter ...................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December
11, 1997, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Senior Subordinated Notes originally issued under
the Senior Subordinated Note Indenture at a redemption price of 109.875% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date, with the net cash proceeds of
any Equity Offerings; (as defined in the Indentures) provided that at least
$80.0 million in aggregate principal amount of Senior Subordinated Notes remain
outstanding immediately after the occurrence of such redemption (excluding
Senior Subordinated Notes held by the Company and its Subsidiaries); and
provided further that such redemption shall occur within 120 days of the date of
closing of any such Equity Offering.
The Senior Subordinated Discount Notes are limited in aggregate principal
amount at maturity to $275.0 million, of which $128.0 million were issued in the
Offering, and mature on December 15, 2007. The Senior Subordinated Discount
Notes were offered at a substantial discount from their principal amount at
maturity. Until December 15, 2002 (the "Full Accretion Date"), no interest
(other than liquidated damages, if applicable) will accrue or be paid in cash on
the Senior Subordinated Discount Notes, but the Accreted Value will accrete
(representing the amortization of original issue discount) between the issuance
date and the Full Accretion Date, on a semi-annual bond equivalent basis.
Beginning on the Full Accretion Date, interest on the Senior Subordinated
Discount Notes will accrue at the rate of 10-7/8% per annum and will be payable
in cash semi-annually in arrears on June 15 and 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)
SIX MONTHS ENDED MAY 31, 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 PRINCIPAL
YEAR AMOUNT
---- ------
<S> <C>
2002 ..................................... 105.437%
2003 ..................................... 103.625%
2004 ..................................... 101.812%
2005 and thereafter ...................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after December
11, 1997, the Company may on any one or more occasions redeem up to 35% of the
Accreted Value of Senior Subordinated Discount Notes originally issued under the
Senior Subordinated Discount Note Indenture at a redemption price of 110.875% of
the Accreted Value, plus accrued and unpaid liquidated damages thereon, if any,
to the redemption date, with the net cash proceeds of any Equity Offerings; (as
defined in the Indentures) provided that at least $50.0 million in aggregate
Accreted Value of Senior Subordinated Discount Notes remain outstanding
immediately after the occurrence of such redemption (excluding Senior
Subordinated Discount Notes held by the Company and its Subsidiaries); and
provided, further, that such redemption shall occur within 120 days of the date
of the closing of any such Equity Offering.
NOTE E - CONTINGENCIES
In accordance with procedures established under the Environmental Cleanup
Responsibility Act (now known as the Industrial Site Recovery Act), Sealy and
one of its subsidiaries are parties to an Administrative Consent Order ("ACO")
issued by the New Jersey Department of Environmental Protection ("DEP").
Pursuant to the ACO, the Company and such subsidiary agreed to conduct soil and
groundwater investigation and remediation at the plant previously owned by the
subsidiary in South Brunswick, New Jersey. The Company does not believe that its
manufacturing processes were a source of the contaminants found to exist above
regulatorily acceptable levels in the groundwater. The Company and its
subsidiary have retained primary responsibility for the investigation and any
necessary clean up plan approved by the DEP under the terms of the ACO.
Since issuance of the ACO, the DEP has approved the Company's soil
remediation plans and its initial groundwater remediation plan. Further
investigation in 1996 revealed certain additional areas of 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 was submitted in May, 1998 to the DEP for
approval.
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.
11
<PAGE> 12
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
In March, 1994, the Company filed a claim in the U.S. District Court for
the District of New Jersey against former owners of the site and their lenders
under the Comprehensive Environmental Response, Compensation and Liability Act
seeking contribution for site investigation and remedial costs. In March, 1997,
the Company received $1.7 million from a former owner of the site and one of the
lenders to the former owner in the final settlement of this litigation which was
recorded as an increase to other noncurrent liabilities.
In January 1997, the Company filed a claim in the U.S. District Court of
New Jersey against former insurance companies for the Company under the
Comprehensive Environmental Response, Compensation and Liability Act seeking
contribution for site investigation and remedial costs. A parallel case seeking
a judgment of non-liability was filed by some (but not all) of these insurance
companies in the U.S. District Court for the Northern District of Ohio. Both the
New Jersey and Ohio District Courts have ruled that New Jersey law applies and
the Company has filed a motion seeking a favorable decision holding the
insurance companies liable for investigation and remediation costs without the
need for trial.
The Company also has begun to remediate soil and groundwater contamination
at an inactive facility located in Oakville, Connecticut. Although the Company
is conducting the remediation voluntarily, it obtained Connecticut Department of
Environmental Protection approval of the remediation plan. The Company believes
the contamination is attributable to the manufacturing operations of previous
unaffiliated occupants of the facility. In 1994, the Company filed a cost
recovery action in U.S. District Court to require these entities to complete the
remediation and reimburse the Company for its cleanup costs. This litigation is
pending. Based on the facts currently known, management does not believe that
resolution of this matter will have a material adverse effect on the Company's
financial position or future operations.
On May 22, 1997 the Company filed in the United States District Court for
the Northern District of Illinois a motion to terminate certain antitrust final
judgments (the "Judgments") entered on December 30,1964 and December 26, 1967.
These Judgments, among other things, prohibited the Company from suggesting
resale prices to its dealers. During the pendency of the Company's motion to
terminate the Judgments the Department of Justice (the "Department") on
September 8, 1997, issued to the Company a Civil Investigative Demand ("CID")
seeking documents relating to, among other things, communications between the
Company and dealers concerning the retail prices of mattresses. In response to
the CID, 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.
The Company is currently negotiating with the Department concerning its response
to the CID, and is cooperating with the Department in its investigation.
12
<PAGE> 13
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
NOTE F - STOCK OPTION PLAN
On December 18, 1997, the Company's Board of Directors adopted the 1998
Stock Option Plan ("1998 Plan") and reserved 5,000,000 shares of Class A Common
Stock of the Company for issuance. Options under the 1998 Plan may be granted
either as Incentive Stock Options as defined in Section 422A of the Internal
Revenue Code or Nonqualified Stock Options subject to the provisions of Section
83 of the Internal Revenue Code. On March 18, 1998, the Company granted ten-year
stock options to acquire 2,072,250 shares of Class A Common Stock at an exercise
price of $0.50 per share (representing fair market value at the time of grant),
and 1,175,000 shares of Class A Common Stock at an exercise price of $4.18 per
share (representing a premium to fair market value at the time of grant). The
options vest 40% upon the second anniversary, and 20% on the third, fourth and
fifth anniversary dates of the grant. Due to employee resignations, 100,250 and
50,000 of the options with an exercise price of $0.50 and $4.18 per share,
respectively, were cancelled during the quarter ended May 31, 1998.
On June 17, 1998, the Company's Board of Directors granted additional
ten-year stock options, under the 1998 Plan, to acquire 27,000 shares of Class A
Common Stock at an exercise price of $0.50 per share (representing fair market
value at the time of grant).
NOTE G - YEAR 2000 ISSUE
The Company believes that the new Business Systems, including appropriate
software, being installed both alongside and as part of an upgrade of its
existing computer system will address the dating system flaw inherent in most
operating systems (the "Year 2000 Issue"). There can be no assurance, however,
that the new Business Systems will be installed and fully operational at all
locations and for all applications prior to the turn of the century, and
management has therefore deemed it necessary to convert its current system to be
Year 2000 compliant. The Company has conducted a comprehensive impact analysis
to determine what computing platforms and date-aware functions with respect to
its existing computer operating systems will be disrupted by the Year 2000
Issue. In January 1998, the Company completed a prioritization of the impacted
areas identified to date and commenced the detailed program code changes through
a contracted third party vendor which has experience in Year 2000 conversions
for the Company's existing system including the same release of such system. The
Company is currently in the process of replacing personal computers and phone
systems that are not Year 2000 compliant. The Company has confirmed that its
primary manufacturing equipment is Year 2000 compliant. Major suppliers to the
Company have been contacted and the Company has received confirmation of Year
2000 compliance or a timetable to be compliant from such suppliers. The Company
is in the preliminary stages of assessment of its customer status with respect
to the Year 2000 Issue. The required code changes, testings and implementation
necessary to address the Year 2000 Issue are projected to be completed by May,
1999, and are expected to cost approximately $4.0 million.
NOTE H - HEADQUARTERS AND RESEARCH & DEVELOPMENT CENTER RELOCATION
On March 10, 1998, the Company announced its plans to relocate its
Corporate headquarters and Research & Development Center from Cleveland, Ohio to
High Point, North Carolina. The Company purchased a property, on April 13, 1998,
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 also relocated its Lexington, North
Carolina manufacturing plant to High Point, North Carolina on June 22, 1998. The
Company established permanent financing for the property purchase and
construction project on June 23, 1998 (See Note I). 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.
NOTE I - SUBSEQUENT EVENT
On June 23, 1998, the Company secured permanent financing for the
property, manufacturing facility and office building in High Point, North
Carolina as purchased on April 13, 1998 and to fund the construction of the new
Corporate headquarters facility at this site. The initial purchase price of $8.4
13
<PAGE> 14
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
million was paid at closing and was financed on a temporary basis with a draw
from the Revolving Credit Facility. The permanent loan arrangement provides for
borrowings not to exceed $14.5 million and the Company made an initial draw of
$8.2 million. The loan arrangement requires monthly principal payments based on
a twenty year amortization with a balloon payment at the end of year seven of
all then outstanding principal and interest. Interest accrues at a LIBOR plus
3.25% and is payable monthly.
NOTE J - 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. The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company.
Substantially all of the Issuer's operating income and cash flow 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. The Notes contain certain
convenants that, among other things, limit the ability of the Issuer and its
Restricted Subsidiaries (as defined in the Senior Credit Agreement) to incur
additional indebtedness and issue Disqualified Stock (as defined in the Senior
Credit Agreement), pay dividends or distributions or make investments or make
certain other Restricted Payments (as defined in the Senior Credit Agreement),
enter into certain transactions with affiliates, dispose of certain assets,
incur liens and engage in mergers and consolidations. 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 May 31, 1998
and November 30, 1997, consolidating condensed statements of
operations for the quarters and six months ended May 31,
1998 and June 1, 1997, and consolidating condensed
statements of cash flows for the six months ended May 31,
1998 and June 1, 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
Issuer or Guarantor Subsidiaries are material to investors in the Notes.
14
<PAGE> 15
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 19,888 $ 376,016 $ 35,444 $ (8,517) $ 422,831
Costs and expenses:
Cost of goods sold -- 12,851 216,073 22,244 (8,517) 242,651
Selling, general and
administrative 17,752 6,023 127,719 10,136 -- 161,630
Amortization of intangibles -- 199 5,822 477 -- 6,498
Interest expense, net 3,088 30,117 (84) (76) -- 33,045
Loss (income) from equity investees 772 (25,687) -- -- 24,915 --
Loss (income) from
non-guarantor equity investees -- -- (982) -- 982 --
Capital charge and
intercompany interest allocation -- 276 (1,131) 855 -- --
--------------------------------------------------------------------------------------
Income/(loss) before income
taxes and extraordinary item (21,612) (3,891) 28,599 1,808 (25,897) (20,993)
Income taxes (2,197) (3,119) 2,912 826 -- (1,578)
--------------------------------------------------------------------------------------
Income/(loss) before
extraordinary item (19,415) (772) 25,687 982 (25,897) (19,415)
Extraordinary item 14,537 -- -- -- -- 14,537
--------------------------------------------------------------------------------------
Net income/(loss) $ (33,952) $ (772) $ 25,687 $ 982 $ (25,897) $ (33,952)
======================================================================================
</TABLE>
15
<PAGE> 16
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 1, 1997
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 16,826 $ 305,474 $ 35,245 $ (8,016) $ 349,529
Costs and expenses:
Cost of goods sold -- 10,568 170,477 24,101 (8,016) 197,130
Selling, general and administrative 602 5,094 102,530 7,735 -- 115,961
Amortization of intangibles -- 190 5,890 598 -- 6,678
Interest expense, net 15,555 -- (35) (514) -- 15,006
Loss (income) from equity investees (13,573) (15,283) -- -- 28,856 --
Loss (income) from
non-guarantor equity investees -- 2,039 (3,250) -- 1,211 --
Capital charge and
intercompany interest allocation -- 224 (789) 565 -- --
-----------------------------------------------------------------------------------------
Income/(loss) before income
taxes and extraordinary item (2,584) 13,994 30,651 2,760 (30,067) 14,754
Income taxes (9,054) 421 15,368 1,549 -- 8,284
-----------------------------------------------------------------------------------------
Income/(loss) before
extraordinary item 6,470 13,573 15,283 1,211 (30,067) 6,470
Extraordinary item 2,030 -- -- -- -- 2,030
-----------------------------------------------------------------------------------------
Net income/(loss) $ 4,440 $ 13,573 $ 15,283 $ 1,211 $ (30,067) $ 4,440
=========================================================================================
</TABLE>
16
<PAGE> 17
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1998
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 10,107 $ 190,481 $ 17,422 $ (4,438) $ 213,572
Costs and expenses:
Cost of goods sold -- 6,593 108,061 10,944 (4,431) 121,167
Selling, general and administrative 326 3,143 66,388 4,176 -- 74,033
Amortization of intangibles -- 100 2,908 328 -- 3,336
Interest expense, net 891 16,722 (43) (53) -- 17,517
Loss (income) from equity investees 1,831 (12,168) -- -- 10,337 --
Loss (income) from non-guarantor
equity investees -- -- (801) -- 801 --
Capital charge and
intercompany interest allocation -- 142 (550) 408 -- --
-----------------------------------------------------------------------------------------
Income/(loss) before income
taxes and extraordinary item (3,048) (4,425) 14,518 1,619 (11,145) (2,481)
Income taxes (1,405) (2,594) 2,350 818 -- (831)
-----------------------------------------------------------------------------------------
Income/(loss) before
extraordinary item (1,643) (1,831) 12,168 801 (11,145) (1,650)
Extraordinary item 82 -- -- -- -- 82
-----------------------------------------------------------------------------------------
Net income/(loss) $ (1,725) $( 1,831) $ 12,168 $ 801 $ (11,145) $ (1,732)
=========================================================================================
</TABLE>
17
<PAGE> 18
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 1, 1997
(in thousands)
Sealy Combined Combined
Sealy Mattress Guarantor Non-Guarantor
Corporation Company Subsidiaries Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ 9,276 $ 160,212 $ 16,146 $ (5,009) $ 180,625
Costs and expenses:
Cost of goods sold -- 5,743 89,319 10,379 (5,009) 100,432
Selling, general and administrative 348 2,833 53,519 3,687 -- 60,387
Amortization of intangibles -- 91 2,860 247 -- 3,198
Interest expense, net 8,256 -- (19) (31) -- 8,206
Loss (income) from equity investees (6,593) (7,435) -- -- 14,028 --
Loss (income) from
non-guarantor equity investees -- 1,031 (1,627) -- 596 --
Capital charge and intercompany
interest allocation -- 139 (468) 329 -- --
----------------------------------------------------------------------------------------
Income/(loss) before income
taxes and extraordinary item (2,011) 6,874 16,628 1,535 (14,624) 8,402
Income taxes (5,294) 282 9,193 939 -- 5,120
----------------------------------------------------------------------------------------
Income/(loss) before
extraordinary item 3,283 6,592 7,435 596 (14,624) 3,282
Extraordinary item -- -- -- -- -- --
----------------------------------------------------------------------------------------
Net income/(loss) $ 3,283 $ 6,592 $ 7,435 $ 596 $ (14,624) $ 3,282
========================================================================================
</TABLE>
18
<PAGE> 19
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
MAY 31, 1998
(in thousands)
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 $ -- $ 19 $ 1,581 $ 2,155 $ -- $ 3,755
Accounts receivable, net -- 3,094 87,520 11,145 -- 101,759
Inventories -- 1,722 43,866 5,230 -- 50,818
Prepaid expenses and
deferred taxes (9,237) 294 16,767 1,462 -- 9,286
-----------------------------------------------------------------------------------
(9,237) 5,129 149,734 19,992 -- 165,618
Property, plant and equipment -at cost -- 4,804 166,774 12,791 -- 184,369
Less: accumulated depreciation -- (1,413) (45,219) (2,287) -- (48,919)
-----------------------------------------------------------------------------------
-- 3,391 121,555 10,504 -- 135,450
Other assets:
Goodwill and other intangibles, net -- 14,263 356,152 34,356 -- 404,771
Net investment in and advances
to (from) subsidiaries and
affiliates (97,500) 550,335 (355,138) (29,539) (68,158) --
Debt issuance costs, net and
other assets -- 30,435 6,853 31 -- 37,319
-----------------------------------------------------------------------------------
(97,500) 595,033 7,867 4,848 (68,158) 442,090
-----------------------------------------------------------------------------------
Total assets $(106,737) $ 603,553 $ 279,156 $ 35,344 $ (68,158) $ 743,158
===================================================================================
LIABILITIES AND STOCKHOLDER'S
(DEFICIT) EQUITY
Current liabilities:
Current portion -long-term obligations $ -- $ 4,000 $ -- $ -- $ -- $ 4,000
Accounts payable -- 2,063 30,831 4,622 -- 37,516
Accrued interest -- 13,590 11 -- -- 13,601
Accrued incentives and advertising -- 1,494 30,042 2,148 -- 33,684
Accrued compensation -- 249 8,423 953 -- 9,625
Other accrued expenses 1,950 977 22,347 (1,259) -- 24,015
-----------------------------------------------------------------------------------
1,950 22,373 91,654 6,464 -- 122,441
Long-term obligations 26,396 680,625 -- -- -- 707,021
Other noncurrent liabilities 3,585 -- 31,878 -- -- 35,463
Deferred income taxes (8,717) (2,223) 14,502 4,622 -- 8,184
Stockholders' (deficit) equity (129,951) (97,222) 141,122 24,258 (68,158) (129,951)
-----------------------------------------------------------------------------------
Total liabilities and
stockholders' (deficit) equity $(106,737) $ 603,553 $ 279,156 $ 35,344 $ (68,158) $ 743,158
===================================================================================
</TABLE>
19
<PAGE> 20
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
NOVEMBER 30, 1997
(in thousands)
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 deferred
taxes (9,206) 294 29,819 1,622 -- 22,529
-----------------------------------------------------------------------------------------
(9,206) 5,660 150,271 22,121 (335) 168,511
Property, plant and equipment
-at cost -- 4,664 152,045 12,894 -- 169,603
Less: accumulated depreciation -- (1,254) (40,603) (2,138) -- (43,995)
-----------------------------------------------------------------------------------------
-- 3,410 111,442 10,756 -- 125,608
Other assets:
Goodwill and other
intangibles, net -- 14,461 361,976 34,832 -- 411,269
Net investment in and advances
to (from) subsidiaries and affiliates 543,783 2,636 (357,823) (28,591) (160,005) --
Debt issuance costs, net and
other assets 8,918 35 6,641 85 -- 15,679
-----------------------------------------------------------------------------------------
552,701 17,132 10,794 6,326 (160,005) 426,948
-----------------------------------------------------------------------------------------
Total assets $ 543,495 $ 26,202 $ 272,507 $ 39,203 $(160,340) $ 721,067
=========================================================================================
LIABILITIES AND STOCKHOLDER'S
EQUITY
Current liabilities:
Current portion - long-term
obligations $ -- $ -- $ -- $ -- $ -- $ --
Accounts payable -- 2,086 40,743 6,847 -- 49,676
Accrued interest 1,973 -- 65 -- -- 2,038
Accrued incentives and
advertising -- 1,473 26,782 2,449 -- 30,704
Accrued compensation -- 246 16,244 1,281 -- 17,771
Other accrued expenses 314 222 18,107 1,573 (118) 20,098
-----------------------------------------------------------------------------------------
2,287 4,027 101,941 12,150 (118) 120,287
Long-term obligations 330,000 -- -- -- -- 330,000
Other noncurrent liabilities 2,969 -- 32,744 -- -- 35,713
Deferred income taxes 3,173 896 22,693 3,239 -- 30,001
Stockholders' equity 205,066 21,279 115,129 23,814 (160,222) 205,066
-----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 543,495 $ 26,202 $ 272,507 $ 39,203 $(160,340) $ 721,067
=========================================================================================
</TABLE>
20
<PAGE> 21
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 1998
(in thousands)
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 $ (18,750) $ (11,435) $ 15,451 $ (2,523) $ 3,129 $ (14,128)
----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property
and equipment, net -- (143) (15,282) (106) -- (15,531)
Net activity in investment
in and advances to (from)
subsidiaries and affiliates 640,511 (637,425) (722) 948 (3,312) --
----------------------------------------------------------------------------------------
Net proceeds provided by
(used in) investing activities 640,511 (637,568) (16,004) 842 (3,312) (15,531)
Cash flows from financing activities:
Treasury stock repurchase costs (413,078) -- -- -- -- (413,078)
Proceeds from (repayment of)
long-term obligations, net (330,000) 680,872 -- -- -- 350,872
Equity contributions 121,317 -- -- -- -- 121,317
Debt issuance costs -- (31,754) -- -- -- (31,754)
Net equity activity with Parent -- (116) 72 (139) 183 --
----------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (621,761) 649,002 72 (139) 183 27,357
----------------------------------------------------------------------------------------
Change in cash and cash equivalents -- (1) (481) (1,820) -- (2,302)
Cash and cash equivalents:
Beginning of period -- 20 2,062 3,975 -- 6,057
----------------------------------------------------------------------------------------
End of period $ -- $ 19 $ 1,581 $ 2,155 $ -- $ 3,755
========================================================================================
</TABLE>
21
<PAGE> 22
SEALY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEALY CORPORATION
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 1, 1997
(in thousands)
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 $(18,935) $ 513 $ 12,424 $ 810 $ 21 $ (5,167)
-----------------------------------------------------------------------------------------
Cash flows from investing
activities:
Proceeds from sale of
subsidiary -- 35,000 -- -- -- 35,000
Proceeds from sale of
insulator pad operation assets -- 5,150 -- -- -- 5,150
Purchase of property and
equipment, net -- (83) (10,499) (2) -- (10,584)
Net activity in investment in
and advances to (from)
subsidiaries and affiliates 55,759 12,259 (2,004) (13,265) (52,749) --
-----------------------------------------------------------------------------------------
Net proceeds provided by
(used in) investing
activities 55,759 52,326 (12,503) (13,267) (52,749) 29,566
Cash flows from financing activities:
Proceeds from (repayment of)
long-term obligations, net 69,082 -- 1 (35) -- 69,048
Dividend (99,776) -- -- -- -- (99,776)
Debt issuance costs (6,130) -- -- -- -- (6,130)
Net equity activity with Parent -- (52,893) (42) 207 52,728 --
-----------------------------------------------------------------------------------------
Net cash used in
financing activities (36,824) (52,893) (41) 172 52,728 (36,858)
-----------------------------------------------------------------------------------------
Change in cash and cash
equivalents -- (54) (120) (12,285) -- (12,459)
Cash and cash equivalents:
Beginning of period -- 54 3,118 13,447 -- 16,619
-----------------------------------------------------------------------------------------
End of period $ -- $ -- $ 2,998 $ 1,162 $ -- $ 4,160
=========================================================================================
</TABLE>
22
<PAGE> 23
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2 -
QUARTER ENDED MAY 31, 1998 COMPARED WITH QUARTER ENDED JUNE 1, 1997
NET SALES Net sales increased $32.9 million, or 18.2% for the quarter ended
May 31, 1998, when compared to the quarter ended June 1, 1997 attributable to
increased conventional bedding sales.
The conventional bedding sales increase over the prior year was driven by a
13.0% or $23.5 million increase in conventional bedding unit shipments and a
4.6% or $9.4 million increase in average unit selling price. These increases
were due to sales growth in Posturepedic, Stearns & Foster and promotional
product lines, in addition to continued positive results from successful
strategic distribution initiatives that included sole-source, multi-year
arrangements of varying lengths with several retailers. The increase in average
unit selling price is primarily attributable to the introduction of new or
re-engineered higher-end products.
COST OF GOODS Sold Cost of goods sold for the quarter, as a percentage of
net sales, increased 1.1 percentage points to 56.7%. This increase is primarily
attributable to higher start-up costs associated with the integration of new
products into production partially offset by production economies of scale from
increased volume.
SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $13.6 million due to increases in marketing spending, $8.6
million, Corporate Headquarters and Research and Development Center relocation
expenses, $2.2 million and delivery expenses, $1.6 million. Increased marketing
spending was due to increased sales volume, along with an increased spending
rate for cooperative advertising and promotions partially offset by lower
national advertising. Increased delivery expenses were due to increased sales
volume, along with an increased spending rate.
INTEREST EXPENSE Interest expense, net of interest income, increased $9.3
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 $6.0 million
to a benefit of $0.8 million, due to a loss before income tax and extraordinary
item of $2.5 million as compared to $8.4 million pretax income, for the quarters
ended May 31, 1998 and June 1, 1997, respectively, partially offset by a lower
effective tax rate. The effective income tax rate for the quarter ended May 31,
1998 is approximately 33.5% as compared to 60.9% for the quarter ended June 1,
1997. The relatively low effective tax rate is due to low full year projected
pretax income resulting from increased leverage and compensation charges
associated with the Recapitalization, as well as the charges related to the
Corporate Headquarters, Research & Development Center and Lexington plant
relocation to High Point, North Carolina.
EXTRAORDINARY ITEM . The Company recorded a $82 thousand charge, net of
income tax benefit of $57 thousand, representing the premiums paid related to
the call for redemption of all outstanding Parent Notes paid on May 1, 1998.
NET (LOSS) INCOME For the reasons set forth above, the Company recorded a
net loss of $1.7 million for the quarter ended May 31, 1998 versus net income of
$3.3 million for the quarter ended June 1, 1997.
23
<PAGE> 24
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
SIX MONTHS ENDED MAY 31, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 1, 1997
NET SALES Net sales increased $73.3 million, or 21.0% for the six months
ended May 31, 1998, when compared to the six months ended June 1, 1997. The
increase is attributable to a $78.6 million increase in conventional bedding
sales offset by a $5.3 million decrease in sales of wood bedroom furniture.
Conventional bedding sales increased 22.8% over the prior year, driven by a
18.8% or $64.6 million increase in conventional bedding unit shipments and a
3.4% or $14.0 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 six months, as a percentage
of net sales, increased 1.0 percentage point to 57.4%. This increase is
primarily attributable to higher start-up costs associated with the integration
of new products into production, the introduction of lower price point products,
partially offset by production economies of scale from increased volume.
SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased $45.7 million due to increased operating expenses of $26.9
million and compensation related costs associated with the Recapitalization of
$18.8 million. Increased operating costs were primarily due to increases in
marketing spending, $17.5 million, delivery expenses, $4.1 million and Corporate
Headquarters and Research and Development Center relocation expenses, $2.2
million. Increased marketing spending was due to increased sales volume, along
with an increased spending rate for cooperative advertising and promotions
partially offset by lower national advertising. Increased delivery expenses were
due to increased sales volume, along with an increased spending rate.
Recapitalization costs of $18.8 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 $18.0
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 $9.9 million
to a benefit of $1.6 million, due to a loss before income tax and extraordinary
item of $21.0 million as compared to income before income tax and extraordinary
item of $14.8 million, for the six months ended May 31, 1998 and June 1, 1997,
respectively, partially offset by a lower effective tax rate. The effective
income tax rate for the six months ended May 31, 1998 is approximately 7.5% as
compared to the six months ended June 1, 1997 rate of 56.1%. The relatively low
effective tax rate is due to low full year projected pretax income resulting
from increased leverage and compensation charges associated with the
Recapitalization as well as the charges related to the Corporate Headquarters,
Research & Development Center and Lexington plant relocation to High Point,
North Carolina.
EXTRAORDINARY ITEM The Company recorded a $14.5 million charge, net of
income tax benefit of $9.7 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
24
<PAGE> 25
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
related to the Tender Offer of the Parent Notes in connection with the
Recapitalization and the call for redemption of all remaining outstanding Parent
Notes paid on May 1, 1998.
NET (LOSS) INCOME For the reasons set forth above, the Company recorded a
net loss of $34.0 million for the six months ended May 31, 1998 versus net
income of $4.4 million for the six months ended June 1, 1997.
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 $15.7 million for the six months ended May 31, 1998
and are projected to be $33.8 million for fiscal 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. On
June 23, 1998, the Company secured permanent financing for the property,
manufacturing facility and office building in High Point, North Carolina as
purchased on April 13, 1998 and to fund the construction of the new Corporate
headquarters facility at this site. The initial purchase price of $8.4 million
was paid at closing and was financed on a temporary basis with a draw from the
Revolving Credit Facility. The permanent loan agreement provides for borrowings
not to exceed $14.5 million and the Company made an initial draw of $8.2
million. In conjunction with the permanent financing senior lenders approved an
amendment to the senior credit facilities and related covenants to permit the
transaction. Additionally, the Company estimates total costs associated with the
Corporate Headquarters, Research & Development Center and Lexington plant
relocation to High Point, North Carolina 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 May 31, 1998, the Company had approximately
$57 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 May 31, 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 relocation costs, 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 currently in the process of replacing personal computers and phone
systems that are not Year 2000 compliant. The Company has confirmed that its
primary manufacturing equipment is Year 2000 compliant. Major suppliers to the
Company have been contacted and the Company has received confirmation of Year
2000 compliance or a timetable to be compliant from such suppliers. The Company
is in the preliminary stages of assessment of its customer status with respect
to the Year 2000 Issue. The required code changes, testings and implementation
necessary to address the Year 2000 Issue are projected to be completed by May,
1999, and are expected to cost approximately $4.0 million.
25
<PAGE> 26
SEALY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
INFLATION
The Company maintains operations in Mexico which has experienced high
inflation levels. Neither the operations of Mexico nor the effects of the
inflation are material to the results of operations of the Company.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements. Although the Company
believes its plans are based upon reasonable assumptions as of the current date,
it can give no assurances that such expectations can be attained. Factors that
could cause actual results to differ materially from the Company's expectations
include: general business and economic conditions, competitive factors, raw
materials pricing, and fluctuations in demand.
26
<PAGE> 27
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
See Note E to the Condensed Consolidated Financial Statements,
Part I, Item 1 included herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
27
<PAGE> 28
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)
Date: July 15, 1998
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<FISCAL-YEAR-END> NOV-29-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
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0
0
<COMMON> 303
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